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Please list the five primary financial markets?
· Money market
· Bond Market
· Stock Market
· Mortgage Market
· Foreign Exchange Market
Please explain the following to your grandmother: The Wall Street Journal reported 11/1/11 on
LIBOR: Various European banks are
currently bidding to pay higher rates for short-term money than what they post
to the British Bankers' Association's daily survey of participants in the
interbank market, people who trade in that market say. That means their real
cost of borrowing is considerably higher than the London interbank offered
rate. Libor, as the rate is known, is a widely quoted composite number that is
derived from the BBA survey and against which a variety of loans and bonds are
- LIBOR is the London lending rate between banks. Banks often need short-term financing. And some
- banks have excess cash, so they lend short-term. If the rates are higher, it means that the cost of borrowing by banks is higher. (CH: Why would the actual rate be higher than what they are reporting? That is not known. It might be games. The WSJ says that they are supposed to report what they are willing to pay, not what they actually pay. And that may reflect the credit conditions in Europe … OK, no news clip like this in your exam … but it is interesting…)
Banks are increasing utilizing ‘sweeps ‘, which move a
customer’s funds from accounts subject to _________________________
requirements to customer accounts that are not subject to
_________________________ requirements. This is because they would prefer
not to have 10% of their demand and
checking account funds not deployable.
True or False A Eurocurrency is a deposit of Euros in a
False – Too specific. A euro currency is a holding of a currency in any other denomination that that of the home country of the deposit’s currency. E.g., Yes a deposit of Euros in a U.S. bank would be considered a Euro currency. However, a Japanese Yen deposit in a U.S. bank would be also.
U.S. Treasury bills are sold at a discount using 360 days.
Yet their maturity is always based on a 365 day year. The discount is also calculated using the
face value as the denominator for the return, versus the purchase price, which
we use to evaluate the investment.
Please calculate the discount interest rate and the investment interest
rate for a 26-week T-Bill with a price
per $100 of 97. HINT: you are calculating a
return, and then converting it into an annual return.
- Discount Interest
- ((FV – Price ) / FV) * (360 days / days to maturity)
- (100 – 97)/100
- * 360 / 182
.03 * 1.978
=.0593 = 5.93%
- ((FV – Price )/Price
- ) * (365 days/days to maturity)
.030928 * 2
= .0619 = 6.19%
What is the primary distinction
between why investors and borrowers
go to the Money Market versus going to the Bond Market or Stock Market?
It is the holding period – or time. Folks will turn to the money market with excess cash to earn some return while waiting for an investment opportunity. Folks will borrow from the money market to support cash flow imbalances – borrowing now, knowing that they will have the cash coming in soon to repay.
- Bond and stock markets
- are for long-term investments or borrowing, where one invests or borrows with
- the intent of gaining a return/paying off obligation over a long period of
You are evaluating mortgage options, particularly should you take advantage of mortgage points.
Your Mortgage is $100,000. If the mortgage rate for a 30 year fixed is 12%, but you can pay two points, reducing your starting principal to $98,000 and pay 11.5%. Given the information below, should you
choose the mortgage rate with the points?
no point: $1,029
Effective Annual Rate
It depends upon how long you plan on owning the house. If you hold it for 30 years, definitely. If you hold it for fewer years, you will need to calculate your effective annual rate for that holding
Much harder than on the test! According to The Economist’s Hamburger Standard, on average, a Big Mac costs Won 3,700 in South Korea, which
at current exchange rates is USD $3.50. Yet a Big Mac, on average costs $4.07, in the United States. True or False: The theory of Purchasing Price Parity suggests that the Won should strengthen.
True. In this fun example, more people would want to purchase a Big Mac in South Korea, exchanging their USD for Won—so selling USD and buying Won. To understand through example: On can divide the Won price by the US Big mac price and get what “should” be the exchange rate at Purchasing Price Parity: Won 3,700/$4.07 = Won 909.1 / 1 USD – which means one gets fewer Won per $1 than at the current FX rate … or it takes fewer Won to purchase 1 USD than at the current exchange rate. Of course, there are externalities that are affecting the differences in prices.
11/1/11 The Bond Buyer:
“Triple-A Rated Hennepin County, the richest county in Minnesota, will take competitive bids Tuesday on $60 million of new-money general obligation bonds in its first borrowing of the year.”
1. What does the AAA rating indicate?
2. What are General Obligation bonds?
AAA indicates a the highest credit rating ranking regarding the ability to pay principal and interest as contractually agreed to.
- GO bonds mean that the county is promising to repay based on
- no specific pledge of assets or income, rather its ability to raise revenue
- through taxes and general revenue to the county.
11/1/11 Wall Street Journal “Bond Markets Tank” LONDON—Greek Prime Minister George Papandreou's call for a referendum on the country's
second bailout package has badly shaken Europe's weaker government bond markets Tuesday, pushing yields on 10-year Italian bonds perilously close to their highest levels since the inception of the euro.
If bond market rates increase, what happens to the value of the bonds?
If a year ago, a market basket of British goods worth £1,000 was $1,605 in the U.S., but today that same basket of British goods worth £1,000, is $1,597 has the USD strengthened or weakened over the past year?
The dollar has strengthened - it takes fewer USD to purchase the same goods.
Please explain the difference between the Wholesale FX Market and the Retail FX Market
The wholesale market is the ‘interbank’ market, where financial institutions are executing transactions between themselves. The currencies are sold usually in blocks of $1MM equivalent.
- The retail market is
- for transactions between the banks and customers needing exact amounts of
- foreign exchange.
True or False Both speculators and arbitragers are
looking at expected changes in foreign exchange rates and seeking disequilibrium. The difference between the two is that speculators are making transactions based on disequilibrium between the spot rate and contracts available for future exchange rates.
- This is the case for the Arbitrager. He/She is locking in the rates.
You are provided with the following data on exchange rates from The Wall Street Journal 2:37 PM Eastern on November 1, 2011.
1) Looking at the second column and scanning down to Hong Kong Dollar, what does the 7.7712 represent?
2) Using FX market terminology, what has occurred between October 31 and November 1?
It represents the spot rate at which 1 USD can be converted to 7.7712 HKD “now” and visa versa
The spot rate was $1USD for 7.7681 HKD the prior day, meaning that the USD strengthened 11/1 relative to 10/31 (– One gets more HKD for 1 USD 11/1 than the prior day.)