Finance 330 5th EditionExam # 2 Study Guide chapters 5-8Chapter 5- Money MarketsMoney Markets: short term debt instruments are issued by economic agents that require short-term funds and are purchased by economic agents that have an excess of fundsOpportunity Cost: cost in the form of forgone interest that result from excessive holdings of cash balancesDefault Risk: the risk of late or non- payment of principal interestMoney Market Instruments:Treasury bills: short term obligations issued by the U.S. governmentFederal Funds: short term fund transferred between financial institutions usually for no more than one dayRepurchase agreements: agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a special date and priceNegotiable certificate of deposit: bank-issued time deposit that specifies an interest create and maturity and is negotiableBanker’s acceptance: time draft payable to a seller of goods, with payment guaranteed by a bankTreasury Bill Auctions: the formal process by which the U.S. treasury sells new issues of TreasuryBillsFederal Funds: Short-term transferred between financial insitutions, usually for a period of one dayFederal Funds Rate: the interest rate for borrowing fed fundsCorrespondent Banks: banks with reciprocal accounts and agreementsRepurchase agreements: agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a special date and price- Repurchase agreements are arranged either directly or indirectly between two parties orwith the help of brokers and dealersReverse Repurchase Agreements: an agreement involving the purchase of securities by one party from another party with the promise to sell them backCommercial Paper: is an unsecured short-term promissory note issued by a corporation to raise short-term cash, often to finance working capital requirements- Commercial paper is sold to investors either directly using the investors own sales force, or indirectly through brokers and dealers such as major banks and subsidiaries that specialize in investment banking activities and investment banks underwriting the issuesNegotiable certificate of deposit: bank-issued time deposit that specifies an interest rate and maturity date is negotiable in the secondary market-Banks issue negotiable CDs post a daily set of rates for the most popular maturities of their negotiable CDs, normally 1,2,3,6, and 12 monthsBearer Instrument: an instrument in which the holder at maturity receives the principal and interestBanker’s acceptance: time draft payable to a seller of goods, with payment guaranteed by a bank- Many banker’s acceptances arise from international trade transactions and the underlying letters of credit that are used to finance trade in goods that have yet to be shipped from a foreign exporter to domestic importerEurodollar Market: Market where Eurodollars are tradedLondon Interbank Offered Rate: The rate paid on EurodollarsEurodollar CDs: Dollar denominated deposits in non US banksChapter 6- Bond MarketsCapital Markets: markets that trade debt and equity instruments with maturities of more than ayearBonds: long-term debt obligations issued by corporations and government unitsBond Markets: markets in which bonds are issued and tradedTreasury Notes and Bonds: are issued by the U.S. treasury to finance the national debt and other debt and other federal government expenditures Strip: Treasury security in which the periodic interest payment is separated from the final principal payment Accrued Interest: that portion of the coupon payment accrued between the last coupon payment and the settlement dayMunicipal Bonds: securities issued by state and local county, city, school, and governments Two types of Municipal bonds: General Obligation Bonds: bonds backed by full faith and credit of the issuer Revenue Bonds: Bonds sold to finance a specific revenue-generating project backed by cash flows from that projectFirm Commitment Underwriting: the issue of securities by an investment bank in which the investment bank guarantees the issuer a price for newly issued securities by buying the whole issue at a fixed price from the issuer. It then seeks to resell these securities to suppliers of funds (investors) at a higher price.Best Efforts Offering: the issue of securities in which the investment bank does not guarantee a price to the issuer and acts more as a placing or distribution agent on a fee basis related to its success in placing the issue.Private Placement: a security issue placed with one of a few large institutional buyersCorporate Bonds: long-term bonds issued by corporationsBond Indenture: the legal contract that specifies the rights and obligations of the bond issuer and the bond holdersBearer Bonds: bonds with coupons attached to the bond. The holder presents the coupons to the issuer for payments of interest when they come dueTerm Bonds: Bonds in which the entire issue matures on a single dateSerial Bonds: bonds that mature on a series of dates, with a portion of the issue paid off on eachMortgage Bonds: bonds issued to finance specific projects which are pledged as collateral for the bond issuerDebentures: bonds backed solely by the general credit worthiness of the issuing firm, unsecuredby specific assets or collateralSubordinated Debentures: bonds that are unsecured and are junior in their rights to mortgage bonds and regular debenturesConvertible Bonds: bonds that may be exchanged for another security of the issuing firm at the discretion of the bond holderStock Warrants: bonds issued with stock warrants attached giving the bond holder an opportunity to purchase common stock at a specified price up to a specific dateCall Provision: a provision on a bond issue that allows the issuer to force the bond holder to sell the bond back to the issuer at a price above the par valueCall premium: the difference between the call price and the face value on a bondSinking fund provision: a requirement that the issuer retire a certain amount of the bond issue each yearJunk Bond: bond rated as speculative or less that investment grade by bond rating agenciesSovereign Bonds: government-issued foreign currency-denominated debtChapter 7- Mortgage MarketsMortgages: Loan to individuals or businesses to purchase a home, land, or other real propertySecuritized: Securities packages and