99 Cards in this Set
| Front | Back |
|---|---|
|
Primary Market
|
The market in which newly issued securities are sold for the first time from corps to investors through a bank
|
|
Secondary Market
|
Markets that trade financial instruments after they are issued between investors through brokers
|
|
money markets
|
trade securities that mature at less than 1 year. (OTC-electronic)
|
|
capital markets
|
trade equity that matures at more than 1 year
|
|
foreign exchange markets
|
denominated in foreign currency
|
|
derivative market
|
payoffs linked to another asset due to agreement to exchange at predetermined price.
(transfers risk, acts as insurance)
|
|
Roles of Financial Institutions
|
1. monitor costs2. liquidity and price risk
3. reduce transaction cost
4. maturity intermediation
5. denomination intermediation
|
|
delegated monitor
|
collect info and trade funds on investor's behalf
|
|
asset transformers
|
financial claims issued by financial institution that are more attractive than company claims
|
|
diversify
|
FIs transfer risk to itself to reduce liquidity risk of investor's funds
(offer highly liquid, low price risk bonds)
ex) mortgages transformed into savings because cash is liquid
|
|
economies of scale
|
increase output, lower total cost results from increased efficiency
|
|
maturity intermediation
|
reduce risk savers face of matching asset and liability maturities
ex) convert LT mortgages to ST so investors can invest while still making payments
|
|
denomination intermediation
|
pooling funds of small savers and creating smaller assets that are more diversified
|
|
Economic Functions of FIs
|
1. transmission of monetary policy
2. credit allocation
3. intergenerated wealth transfers/time intermediation
4. payment services
|
|
Risks of FIs
|
1. credit/default risk
2. country/sovereign risk
3. IR risk
4. insolvency
5. liquidity risk
6. tech
|
|
Trends in US
|
1. More investors in equity
2. More people taking money out of banks
3. Savers prefer diversified portfolios over transformed financial claims
|
|
financial service modernization act
|
allows companies to be in more than one financial sector
(increases systematic risk, "originate and distribute" mortgage backed securities)
|
|
Loanable Funds Theory
|
IR results from supply and demand of loanable funds
(IR determines value of financial instruments)
|
|
Relationship of QS/QD and IR
|
IR rises as QS rises
IR falls as QD rises
|
|
QS determinants
|
1. IR and tax policy
2. income and wealth
3. savings vs. borrowing
4. credit availability
5. job security
|
|
QS shifters
|
1. wealth
2. risk
3. ST spending needs
4. monetary expansion
5. economic condition
|
|
QD shifters
|
1. economic condition
2. nonprice conditions
3. utility
|
|
Yield Curve
|
shows relations ship between YTM and time to maturity
|
|
unbiased expectations theory
|
yield curve reflects markets expectations of function
|
|
liquidity premium theory
|
investors only hold securities at premium to compensate for future uncertainty
|
|
market segmentation theory
|
investors and institutions have preferences and to change them, require higher IR
|
|
IR determinants
|
1. inflation
2. real IR
3. default/credit risk
4. liquidity risk
5. covenants
6. term to maturity
|
|
IR measures
|
1. coupon rate
2. required rate of return
3. expected rate of return
4. realized rate of return
|
|
required rate of return
|
finds fair PV.
compensations should receive for taking on more risk
|
|
market efficiency
|
speed that security prices adjust unexpectedly to maintain equality with fair PV
|
|
Premium
|
Market Rate < State Rate
sells higher than face value
|
|
Discount
|
Market > Stated
sells less than face value
|
|
zero coupon bonds
|
dont pay interest
|
|
equity valuation
|
finding PV of infinite cash flows discounted at appropriate rate
|
|
nonconstant growth steps
|
1. Find PV of divs during period of nonconstant growth
2. Find price at end of period 1 of nonconstant growth
3. Find PV of divs after period of nonconstant growth
4. Add components of stock price together
|
|
pull to par
|
bond prices and fair values approach par
|
|
Bond relationships
|
As time and IR rise, PV and payment fall
|
|
Duration
|
weighted average time to maturity using PV of CF as weights.
measures IR sensitivity.
When will you be paid back value of bond?
|
|
Duration Relationships
|
Duration falls as ROR rises.
Duration rises with maturity at decreasing rate.
Higher payment, Lower Duration.
|
|
FOMC
|
monetary policy making body of the fed
|
|
open market operations
|
purchases and sales of t bills by the fed
|
|
discount rate
|
interest rate on loans fed charges banks
|
|
reserve requirement
|
minimum amount of cash banks must hold
|
|
Quantitative Easing
|
creating money to buy bonds which decrease interest rates
|
|
Treasury Bills and Fed Funds Rate Relationship
|
To lower interest rates, the fed injects money into the market. Banks then give up t bills to make price go up.
(expansionary policy)
|
|
treasury bills
|
short term debt securities that government issues to cover debt
|
|
competitive bids
|
bidder specifies quantity and price, can make multiple bids. typically banks and government
|
|
noncompetitive bids
|
always get what you want. allows small investors to participate in market without large risk
|
|
federal funds
|
short term funds transferred between institutions. no collateral
|
|
repurchase agreement
|
sale of securities with promise to repurchase at specific time. with collateral.
|
|
commercial paper
|
short term unsecured promissory notes issued by company to raise short term cash
|
|
negotiable CD
|
bank issued time deposits that specify interest rate and maturity date and is negotiable
|
|
bond
|
long term debt instruments that raise funds for projects
|
|
bankers acceptance
|
time draft payable to seller of goods with guaranteed payment of bank on specified date
|
|
LIBOR
|
The London Interbank Offered Rate, the rate for interbank dollar loans in the foreign or Eurodollar market of a given maturity.
|
|
STRIP
|
security in which periodic interest payment is separate from principal payment
|
|
accrued interest
|
portion of coupon payment accrued between last coupon payment and settlement day
|
|
TIPs
|
inflation indexed bond
|
|
firm commitment underwriting
|
investment banker purchases offering from bond issuer and resells it to public
|
|
best efforts offering
|
investment banker acts as a placement agent for bond offering
|
|
private placement
|
securty issue placed withi few large bankers
|
|
municipal bonds
|
securities issued by local governments. no income tax
|
|
bearer bond
|
coupon attached, if you have bond you receive cash
|
|
registered bond
|
owner recorded by issuer. payments mailed to owner
|
|
term bond
|
entire issue matures on single date
|
|
serial bond
|
mature on series of dates, portion paid on each
|
|
debenture
|
backed solely by creditworthiness of firm
|
|
dirty price
|
full price with accrued interest
|
|
clean price
|
price without accrued interest (newspaper quotes)
|
|
mortgage
|
loans to purchase home, land, or other property. no set denomination. single investors. less extensive unaudited info
|
|
discount points
|
payments made when loan is issued at closing. 1% of 1% of principal mortgage value
|
|
jumbo mortgages
|
can't be securitized. exceed conventional limits
|
|
subprime mortgages
|
made out to borrowers with low credit ratings
|
|
option ARM mortgage
|
offer borrower different amount to pay each month
|
|
home equity loan
|
lets borrowers borrow on a line of credit secured with a second mortgage on their home
|
|
reverse annuity mortgage
|
borrower receives regular monthly payments from FI rather than making them
|
|
securitized
|
packaged and sold as assets backing debt instruments. increases liquidity, reduce interest rate and credit risk and effects of regulation
|
|
dividends
|
cash payments to shareholders taxed twice as income
|
|
prospectus
|
provides detail about investment for sale
|
|
program trading
|
simultaneous trading of stocks using computer programs to initiate trading
|
|
stock index
|
number that represents what's going on in industry
(Dow Jones, S&P 500)
|
|
market efficiency
|
speed at which financial security prices adjust to unexpected news pertaining to interest rates. Degree to which information that gives traders advantage
|
|
spot rate
|
immediate exchange of currencies at current exchange rate
|
|
forward rate
|
exchange rate agreed but currency exchanged in future
|
|
purchasing power parity
|
estimates amount of adjustment needed in order for equal purchasing power between countries
|
|
interest rate parity
|
relationship that links spot exchange rates, forward rates, and interest raate
|
|
net exposure
|
extent to which funds trading portfolio is exposed to market flunctuations
|
|
Forwards
|
An agreement to buy or sell a specific amount of an asset at a future date for a set price. involves non standardized assets
|
|
futures
|
agreement to exchange standardized asset for cash at later date and traded on organized exchange. little default risk and set price.
|
|
options
|
contract that gives holder right to buy/sell underlying asset at prespecified price and time period. (call or put options)
|
|
swaps
|
agreement to exchange specified periodic cash in future based on some underlying instrument or price
|
|
caps and floors
|
hedge risk by buying a call option to restrict changes in interest rates
|
|
collar
|
hedge risk by taking cap and floor position
|
|
security firms and investment bank services
|
transferring funds
low cost efficient middlemen
consulting
underwriting
security is retail.
investment is comercial
|
|
venture capital
|
professionally managed pool of money used to finance promising high risk firms
|
|
mutual funds
|
provide small investor the opportunity to invest in a liquid and diversified portfolio. more regulated.
|
|
hedge funds
|
invest for wealthy individuals and have less regulation and are less liquid. management and performance costs.
|
|
exchange traded funds
|
long term mutual funds that also replicate stock index prices every second. can be traded during the day
|
|
Financial crisis
|
interest rates dropped to 1% to stimulate economy which pushed demand and prices for housing up and mortgages down
banks financing houses lost $500 billion whne bubble burst
|
FIN 330: FINAL