CH 2.

Secondary Market

ALREADY ISSUED stocks or bonds NYSE (New York Stock Exchange)

SPOT FX rates Supply side?

SUPPLY -so when the foreigner increase demand for US products -US Exports INCREASE -the $ becomes more valuable to foreigners - strengthens the $

Government agency Bonds (govt. agency securities)

-Fannie Mae (FNMA -Freddie Mac -Ginnie Mae -Sallie Mae

Equity Market

-an ownership in a company -stock

Debt Market

-borrowed amount -asset to lender and liability to the borrower - IOU, or Bond

OTC Market

-over-the-counter, -unregulated, -among principals of trade -IPO's start in this market

What are the two way borrowers and lenders can be connected?

1) Financial intermediaries (INDIRECT Financing) 2) Financial Markets (DIRECT Financing)

Financial market Instruments

1) US Treasury Bills (T-bills) 2) Certificates of Deposit (CD's) 3) Commercial Papers 4) Bankers acceptances 5) Repurchase agreements (Repos) 6) Federal Funds 7) Eurodollars

Capital Market instruments?

1) corporate stocks 2) corporate bonds 3) govt. securities 4) government agency bonds 5) municipal bonds 6) bank loans

Currency rules

1) the strength of one currency moves inversely with that of another country. ex: if the pound strengthens then US $ weakens 2) the more a country imports from other countries the WEAKER the currency of the IMPORTING country and the STRONGER the currency for the foreign country ex: If US imports increases from China , then the $ weakens against the foreign currency. 3) the more a country exports to foreign countries the STRONGER the currency for the EXPORTING country. ex: if the US exports increases to China, the $ strengthens against the foreign currency

What are two theoretical ways to determine the FORWARD FX rates?

1. Purchasing Power Parity 2. Interest Rate Parity

Capital Market

LONG TERM debt market where debt with a maturity More than 1 year AND equity market where stocks are traded.

FX Market: Quotation methods of FX Rates

American v. European Direct v. Indirect

Banker's acceptances

Corporate checks who payment terms are guaranteed by an endorsing bank (predominantly used in international business by importers)

Commercial Papers

Debt instruments issued by corporations for a maturity less than or equal to 1 year

Financial institution

Depository Institution; Banks or depository institutions can take deposits form customers and make loans to them ex: a. commercial banks b. credit unions c. savings and loans associations (S&L)

Direct quotation

Domestic/Foreign

Primary Market

FIRST ISSUED stock or bonds through IPO

European terms

FX>US$>>BP0.8>$

Indirect Quotations

Foreign/Domestic

Eurobond

LONG TERM debts sold outside the home country; denominated in a currency other than that of the hosts country's Euro-dollar bonds, Euro-yen bonds -borrowers usually have the FX rate risk ex: a US citizen borrows US $1000 from a London bank for 5 years>>> 5 yr. euro-dollar bond; the borrower must pay the London bank back in US $

Non-bank Financial Institutions

Non-bank Banks, Shadow banks; when a financial institution can only either take deposits from customers or make loans to them. -its often less regulated; operate in a shadow away from the public and regulatory scrutiny

Money Market

SHORT-TERM debt market where debt with a maturity less than or equal to 1 year is traded

Debt instrument issued by the US Treasury for maturity greater than 1 year but less than or equal to 10 years are: a. treasury bills b. treasury notes c. treasury 10 yr stock d. Treasury bonds

Treasury notes.

Sallie Mae (SLMA)

US govt. -sponsored student loan companies

American terms

US> FX>>$1.25>BP

Korea Fx currency

WON

Japanese FX currency

YEN

China FX currency

Yuan

Which of the following are govt. sponsored enterprises (GSE) a. Fannie Mae b. Sandy Mae c. Johnny Mac d. only a and b e. only a and c

a. Fannie Mae

Debt instruments issued by the US treasury for a maturity less or equal to 1 year are: a. Treasury bills b. treasury certificates of deposit c. treasury paper d. treasury bonds.

a. Treasury bills

Equity of US co. can be purchase by a.US Citizens and foreign citizens b.US mutual funds only c. Foreign citizens only d. US. citizens only

a. US citizens and foreign citizens

The financial intermediaries that the average person interacts with most frequently are: a. banks b. OTC markets c. exchanges d. finance companies

a. banks

stock represents ______and ______ in a company. a. equity; ownership b. debt; ownership c. equity; debt d. dividend; interest payments

a. equity; ownership

Adverse selection is a problem associated with equity and debt contracts arising from: a. the lenders relative lack of info about the borrowers potential returns and risks of his investment b. the borrower's lack of incentive to seek a loan for highly risky investments. c. the lender's inability to legally require sufficient collateral to cover a 100% loss of the borrowers default d. the borrower's lack of good options for obtaining funds

a. lenders relative lack of info about the borrowers potential returns and risks of investment

A financial market in which only short term debt instruments are traded is call the __________ market. a. money b. stock c. bond d. capital

a. money

If you need to exchange your US. dollars in to British pounds at a London airport to go on a day trip, you need to use: a.the spot FX market b. the forward FX market c. the futures FX market d. none of the above

a. the spot FX market.

FX Market (FORWARD)

an exchange of currencies occurs in the future but the price of the exchange (Exchange rate) is agreed and determined now.

FX Market ( SPOT)

an immediate exchange of one currency with another -buyers and sellers decide on the pricing and quantity right on the spot and make the transactions

Debt instruments issued by depository institutions such as banks for a maturity less than or equal to 1 year are________ a. deposit paper b. certificate of deposits c. checking account d. savings account e. commercial paper

b. certificate of deposits

A short-term debt instrument issue by well-known corporations is called a. corporate bond b. commercial paper c. commercial mortgages d. municipal bonds

b. commercial papers.

Channeling funds from individuals with surplus fund to those desiring funds when the saver does not purchase the borrowers security is known as: a. taxation b. financial intermediation c. redistribution d. barter

b. financial intermediation

Which of the following instruments is not traded in a money market: a. commercial paper b. residential mortgages c. negotiable bank certificates of deposit d. US. Treasury bills

b. residential mortgages

Which of the following statements about the characteristics of debt and equities is TRUE: a. the income from bonds is typically more variable than that from equities b. they can both be long-term financial instruments c. bond holders are residual claimants d. bonds pay dividends

b. they can both be long-term financial instruments

Financial Market (DIRECT Financing

because the buyers of bonds know who the counter-party sellers of the bonds are. 5 markets 1) Debt v. Equity 2) Primary v. Secondary 3) Exchange v. OTC (over-the-counter) 4) Money v. Capital 5) FX (Foreign exchange): SPOT v. FORWARD

Financial Intermediaries (INDIRECT Financing )

because they lenders do not know who the counter party borrowers are because of financial intermediaries acting in the middle: - can be grouped in Financial Institutions and Non-bank Financial institutions

Foreign Bonds

bonds denominated in a host country's currency and issued by a foreign entity>> borrowers have risk ex: Japanese citizen borrows US $1000 from a NY bank for 3 years (3 yr Yankee bond) -borrower (Japanese citizen) receives fund in U$ and must pay the bank back in U$. - foreigner bares FX risk

Fannie Mae (FNMA) and Freddie Mac

both are privately owned by shareholders but the US govt. provides implicit guarantee for their survival know as government sponsored enterprise (GSE) specializing mortgages.

What is the role of a financial system?

to link lenders to borrowers and borrowers to lenders.

What Japanese merchant quotes the US dollar as 2 British pounds per dollar, this is known as: a. British quotations or terms b. Japanese quotation or terms c. European quotation or terms d. an American quotation or terms

c. European quotations or terms.

_______markets transfer funds from people who have an excess of available funds to people who have a shortage a. derivative exchange b. commodity c. Financial d. Fund-available

c. Financial

Euro-yen bonds are bonds denominated in ______and sold or issued ______ Japan: a. Japanese yen: inside b. European euro: outside c. Japanese yen: outside d. European euro: inside

c. Japanese yen: outside

Securities are________ for the person who buys them, but are_______for the individual or firm that issues them a. nonnegotiable, negotiable b.negotiable; nonnegotiable c. assets; liabilities d. liabilities; assets

c. assets; liabilities

A debt instrument sold by a bank to its depositors that pay annual interest of a given amount and at maturity pays back the original purchase price is called a. federal funds b. municipal bond c. certificate of deposit d. commercial paper

c. certificate of deposit

Which of the following gives an owner a voting right and a dividend payment if any a. preferred stock b. corporate bond c. common stock] d. commercial paper

c. common stock

US treasure bills are considers the safest of all money market instruments because there is a low probability of a. desertion b. defeat c. default d. demarcation.

c. default

US dollar deposits in foreign bank outside the US or in foreign branches of US banks are called a. atlantic dollars b. outside dollars c. eurodollars d. foreign dollar

c. eurodollars

Which of the following financial intermediaries is NOT a depository institution ? a. credit union b. commercial bank c. finance company d. a savings and loan association

c. finance company

Which of the following are non bank financial institution: a. commercial papers b. credit unions c. insurance companies d. all of the above e.only a and b.

c. insurance companies.

Which of the following are investment intermediaries? a. state and local govt. retirement funds b. pension funds c. mutual funds d. life insurance companies

c. mutual funds

With direct finance, funds are channeled through the financial market from the _______ directly to the _______ a. spenders, investors b. investors, savors c. savers, spenders d. borrowers, savers

c. savers, spenders

The money Market trades_______financial instruments a. intermediate-term b. an time length c. short term d. long term

c. short-term

If China exports more to the US the US dollar will _____against Chinese yuan and the Chinese Yuan will ______ against the US dollar. a. weaken; weaken b. strengthen; weaken c. weaken; strengthen d. strengthen; strengthen

c. weaken; strengthen

The unit of Japanese currency is know as: a. yuan b. won c. yen d. Chinese dollar

c. yen

Which of the following instruments are traded in a capital market? a. negotiable banks CDs b. US Treasury bills c. corporate bonds d. repurchase agreements

c.corporate bonds

Corporate stocks

claims ownership of a corporation by sharing in the net profit net loss, assets -common v. preferred stock

Bank loans

commercial loans, consumer loans, real estate loans ect. that are made by banks for a maturity greater than 1 yr

Eurocurrencies

currencies that are held in financial institutions OUTSIDE the home country as a SHORT-TERM deposit -eurodollar, euro yen ex: US citizen makes (US)$1000 deposit in a London bank for 3 months>>>> 3 month Eurodollar, the London bank must pay the depositor back in US $

The market where stocks are issued for the first time is known as either ______ or ______ for stocks. a. primary market secondary market b. exchange; OTC market c. IPO market; secondary market d. IPO market; primary market

d. IPO market; primary market

Which of the following are depository institutions? a. commercial banks b. credit unions c savings and loan associations d. all of the above e. none of the above

d. all of the above

An investment Intermediary that lends funds to consumers is: a. investment bank b. finance fund c. consumer company d. finance company

d. finance company

An important financial institution that assists in the initial sale of securities in the primary market is the: a. brokerage house b. stock exchange c. commercial bank d. investment bank

d. investment bank.

Borrower are also known as_______ a. bond buyers b. bond sellers c. bond issuers d. only b and c e. none of the above

d. only b and c

A break down of financial markets can result in a. financial stability b. rapid economic growth c. stable prices d. political instability

d. political instability

The main difference between an exchange and an OTC market is: a. the OTC market is often publicly organized by interest parties where as the exchange is often private b. the exchange is less important than the OTC market c. the exchange is more important than the OTC market d. the OTC market is often privately organized by interested parties where as the exchange is often public

d. the OTC market is often privately organized by interest parties where as the exchange is often public.

If the foreign exchange rate moves from 1 euro per US dollar to 2 euro per us dollar, it means that the euro became______ and the US dollar became ______ a. stronger; stable b. weaker: stable c. stronger; weaker d. weaker; stronger

d. weaker; stronger

Certificates of Deposits (CDs)

debt instrument issued by depository institution (banks) for maturity less than or equal to 1 year, some are greater than 1 yr.

US Treasury Notes (T-notes)

debt instrument issued by the US Treasury for a maturity greater than 1 yr but less than 10 yrs.

US Treasury bond (T-bonds)

debt instrument issued by the US govt. for a maturity greater than 10yrs

US Treasury Bill (T-Bills)

debt instruments issued by US Treasury for maturity less than or equal to 1 year

Corporate bonds

debt instruments issued by commercial corporations for a maturity GREATER than 1 year.

Municipal Bonds

debt instruments issued by state and local govt. for a maturity great than 1 yr. -exempt from paying federal income tax

preferred stock

does not give an owner a voting right but pays a fixed, and most often higher, dividend rate, than common stock holder

Non-bank financial institutions are also known as: a. nonbank banks b. shadow banks c. commercial banks d. all of the above e. either a or b

e. either a or b

Short -term US dollar time deposits are held outside of the US are: a. Euro b. banker's acceptance c. US dollar certificate of deposit d. commercial paper e. eurodollar

e. eurodollar

Bond buyers are also known as______ a. demanders of loanable fnds b. suppliers of loanable fund c. investors d. only a and c e. only b and c

e. only b and c

common stock

gives an owner a voting right and a dividend payment if any

Ginnie Mae (GNMA)

govt. owned and operated home mortgage co. for govt. employees such as military families.

Borrowers

must give receipt, (BOND) to the lender, this action is describe as supplying a bond. -At the same time he must receive money from the lender, this action is described as demanding money, -a borrower is viewed as both a bond supplier and fund demander at the same time names: =dissavers =spenders =fund deficit unit =demander of loanable funds =buyers of loanable funds =money buyers =debt issuers =bond issuers =bond sellers.

Lenders

must hand over(supply) money to the borrower and at the same time receive a receipt, (BOND) IOU from the borrower. - a fund supplier and bond demander and the same time names: =savers =INVESTORS =depositors =fund surplus unit =suppliers of loanable funds (money) =sellers of loanable funds =money sellers =debt buyers =bond buyers =bond demanders

Contractual saving Institution

receive payments (take deposits) fro customers on specified contract terms. ex: 1) Insurance Co. 2) Penchant funds

Exchange Market

regulated by the govt.

Eurodollars

short term US dollar time deposits that held outside of the US. thus the eurodollar rate is the deposit rate foreign banks pay the US dollar depositors

Repurchase agreements (Repos)

short-term financing arrangements where debt instruments are sold one day and usually repurchased the next day (used by investment banks or FEDS.)

Federal Fund

short-term funds that one member bank of the feds is lending to another bank of the fed usually over night. -fed fund rate: the rate the fed establishes and regulates as a major monetary policy tool.

Investment Intermediaries

specialize in making loans to customer or making investments on behalf of customers ex: 1) Financial Companies = loan companies 2) money market mutual funds= funds that invest in money market instruments 3) Mutual funds: stocks and bonds= funds mutually owned by investors and dedicated to invest in stocks or bonds.

What determines the SPOT FX rates?

supply and demand forces determine the spot rates DEMAND - so when US Consumers increase demand for foreign products -the US Imports INCREASE which means that the US $ must be supplied to buy these foreign products, -which weakens the value of the $ relative to the FX.

Purchasing Power Parity (expected inflation)

use expected inflation rates for a LONG TERM infrequent analysis because the inflation data is available only on a monthly basis -the country that has a HIGHER rate of expected inflation will have a WEAKER currency in the future. (LOOK AT EXAMPLE )

Interest Rate Parity

uses interest rates for a SHORT-TERM frequent analysis -the country that has a HIGHER interest rate will have a WEAKER currency in the future. ex: -US: $1>>>>>> 20% interest rate>>>$1.20 (1 yr later) -UK: 1 pound>>>> 10% int. rate>>>>1.10 pound -FX rate $1/pound >>>>>>>>>> $1.20/1.10 pound =$1.09/ pound since the rate of $1.09 is greater than the current SPOT rate of $1/pound, we can expect the 1-yr FORWARD rate of $1 to be WEAKER against the UK pound

Govt. Securities (Treasury Securities)

when US govt. issue debt instruments -t-notes, t-bonds