Fin. 141

3-Month LIBOR

(London Interbank Offered Rate) benchmark rate that global banks charge each other for short-term loans.

Money Markets

-Consists of CD's, US Treasury Bills, commercial paper, federal funds, municipal notes -Segment in which financial instruments with high liquidity and short maturities are traded

Capital Markets

-FOREX, commodities, equity, derivatives -buying/selling equity and debt instruments -Channel savings and investment between suppliers of capital (retail/institutional investors) and users of capital (business/individuals) -includes primary and secondary markets

7 main functions of Fed

-balance inflation -maintain stability through controlling monetary policy -coordination of monetary policy with foreign banks -FOREX market intervention -Bank regulation and supervision -lender of last resort -System for check clearance

Flight to Quality

-invest in high quality assets -Gold, Tbills, US Dollar -caused by uncertainty in the market.

Stretch for Yield

-low interest rate environment -Investors willing to increase risk -invest in lower quality assets to enhance returns

Eurodollar

A U.S dollar denominated bond issued by an overseas company and held in a foreign institution

CDO

A collection of debt i.e mortgages that are made into a security. Then a collection of these securities are put together to form a CDO.

10-Year US Treasury Note

A debt obligation issued by the US government that matures in 10 years. It is used as a proxy for many other rates in the market. MOST IMPORTANT RATE

Derivatives

A security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets.

VIX-Index

Also considered the fear index, it measures volatility and the price of puts and calls trading on the Chicago Exchange.

Future Contract

An agreement between a buyer and a seller to buy or sell something at a future date. These contracts trade on exchanges called futures markets.

Forward Contract

An agreement between a buyer and a seller to purchase or sell something at a later date at an agreed upon price without the right of cancelation.

Financial Depth

Captures the financial sector relative to the economy. It is the size of banks, other financial institutions, and financial markets in a country, taken together and compared to a measure of economic output.

Structure of the Fed

Chairperson, Board of Governors, FOMC, District Banks

DJ Corporate Double-A-Rated

Considered safe investments

Fixed-Rate Mortgage Backed Securities

Created through securitization, pooling of illiquid assets (mortgage loans) and selling off ownership interest as a bond

What does the Money Market deal with?

Deals with the lending of short term funds, has high liquidity and short maturities. It includes, treasury bills, commercial bills, and promissory notes.

What are two ways money can be exchanged in the money and capital markets?

Directly through retail and institutional investors and indirectly through financial intermediation.

EMBI Global Index

Emerging market bond index, a benchmark for measuring the total return performance of international government bonds issued by sovereign countries.

Federal Funds

Excess reserves that commercial banks and other financial institutions deposit at regional Fed banks These funds can be let to other market participants

What composes the money and capital markets?

Fixed Income, Equity and Deriviatives

Call Option

Gives the buyer the right to buy a given quantity of an underlying asset at a given price before a given date

Credit Default Swaps

It is a swap in fixed income where the buyer agrees to pay the seller all of the interest payments on the debt, but if the debt issuer defaults the seller has to pay all of the interest and the premiums until the maturity.

Why is the New York Fed considered the most powerful of the district banks?

It is the largest (by assets), and most active (by volume). It controls the foreign exchange rates, conducts open market operations, and stores gold for foreign central banks.

High Yield 100

Junk bond index

Benefits of Financial Intermediation

Low risk, greater liquidity and convenience

Easing

Lower interest rates by increasing the money supply in the market

Types of Rates

Market Rates- set by forces of supply and demand Administered Rates- set by someone (banks, Fed, etc.)

What does the Capital Market deal with?

Market is where bonds and equities are traded. Its main goal is to make investments for investors who have surplus funds. It includes equity, insurance, and foreign exchange instruments.

Muni Master

Municipal bond index, issued by state and local governments

Tools of Monetary Policy

Open-market operations, Fed funds rate, discount window, reserve requirements

Swap

Private agreement between two parties to exchange cash flows in the future according to a prearranged formula.

Dual Mandate

Promote Maximum employment and keep prices stable

Tightening

Raise interest rates by decreasing the money supply in the market

3-Month Prime Commercial Paper

Short-term promissory notes which sell at discount to institutional investors by large corporations to raise cash. This is the rate that corporations pay to borrow money in the commercial paper market.

10-Year Foreign Government Bonds

Similar to the 10-Year note, but for Japan, Germany, and Spain.

Currency Swap

Swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction

Credit differentials

The difference between the interest rates of debt obligations offered by two parties of different creditworthiness that engage in the swap

Yield Curve

The graphical representation between the short term and long term interest rates

Feds-Funds Rate

The interest rate at which commercial banks charge to each other to borrow reserves for short periods of time. Monetary policy is formulated as a target or target range for the federal funds rate.

Prime Rate

The lowest rate of interest at which money may be borrowed commercially. It is the interest rate that commercial banks charge their most creditworthy customers (often large corporations).

What is the purpose of money and capital markets?

The main purpose is to facilitate the efficient flow of money in the economy

Discount Rate

The minimum interest rate set by the Federal Reserve for lending to other banks. It is the interest rate the Federal Reserve charges commercial banks and other depository institutions

Securitization

The process of taking an illiquid asset, or group of assets, and through financial engineering, transform them into a security. Then ownership is sold off to investors

Importance of credit differentials

They show the return people expect for the risk they are taking by investing their money. A wide spread shows riskier investing. A narrow spread shows more conservative investing.

What is the role of banks as financial intermediaries?

They take deposits and provide loans. Depositors are conservative with no risk. Borrowers have some elements of risk

Interest Rate Swaps

When someone exchanges their variable interest rate for a fixed rate and vice-versa

Synthetic CDOs

a CDO with no underlying asset

Pass-throughs

bonds issued by housing agencies

30-Year US Treasury Bond

debt obligation with a maturity rate of 30 years. Otherwise known as THE LONG BOND.

Components of financial assets

equity, government bonds, financial bonds, corporate bonds, securitized loans and non-securitized loans

Put Option

gives the buyer to sell a given quantity of an underlying asset at a given price before a given date.

3-Month Treasury Bill

i. A debt obligation backed by the US government with a maturity of less than one year. Low-risk, low-return investments. known as the RISK FREE RATE.

Repurchase Agreement

ontracts for the sale and future repurchase of a finical asset. (Usually overnight and backed by some sort of asset)

Short-term rates

prime, discount, fed-funds, fed-funds target, LIBOR, T-bill

Spread Banking

purpose is to maximize the NIM.

Federal Funds Target

range that the fed sets to help control the federal funds rate due to the supply and demand of the market

Treasury Bill

short term debt obligation backed by the U.S. government with a maturity less than one year

International Interest Rate Differentials

shows the relative attractiveness of the US treasury to the bonds of other industrialized countries

Term Structure of Interest Rates

the relationship between interest rates or bond yields and different terms of maturities. It is also known as a yield curve

Comercial Paper

unsecured, short term debt instrument issued by a corporation with a maturity normally less than 270 days

When-issued trading

when participants contract the sale or purchase of a new security before the security has been auctioned

Quantitive Easing

where the fed buys long term securities from the market place especially treasuries and MBS.