Lecture 10: Financial Markets IIStocksMisc-Secondary markets-Two special debt instruments-securitizationReal vs. nominal interest rateStock owner: own part of the firmshare price number of sharesmarket valueIf no secondary market for an asset, the asset isvery risky.Secondary market offer investment opportunitiesall over the world.Two special debt instruments1. US Treasury bondsBonds used to fund national debtVery low default risk.US: The least riskyUsed in monetary policy2. Home mortgages-Like a bond-Typically mature in 30 years.-Difficult to rate (answers are different due tospecific person)SecuritizationCreate a new security: combine other financialassets together.Mortgage backed securitiesIndividual people’s homesLast thing on the test:Real vs nominal interest ratesR: nominal interest rater: real interest rateFisher equitionr=R-iR I r5 0 55 3 2%5 6
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