Fin 410: Chapter 9

Another name for BEY

"asked yield" and APR

M

# of periods in a year

US Treasury Bill

A short-term US government instrument issued by the US Treasury

Fisher Hypothesis

Asserts that general level of nominal interest rates follows the general level of inflation (on average, interest rates are higher than inflation)

Market Segmentation Theory

Debt Markets are segmented by maturity, so interest rates for various maturities are determined separately in each segment

Federal funds rate

Interest rate that banks charge each other for overnight loans of $1 million or more

London Interbank Offered Rate

Interest rate that international banks charge one another for overnight Eurodollars

Discount Rate

Interest rate that the fed offered to commercial banks for overnight reserve loans

Modern Term Structure Theory

Long-term bond prices are much more sensitive to interest rate changes than short-term bonds (interest rate risk)

Maturity Preference Theory

Long-term interest rates contain a maturity premium necessary to induce lenders into making longer term loans

Treasury Yield Curve

Represents the interest rates for default-free lending across the maturity spectrum, BASED ON COUPONS

Commercial Paper

Short-term unsecured debt issued by the largest corporations

Prime Rate

The basic interest rate on a short term loan that the largest commercial banks charge to their most creditworthy corporate customers

Expectations Theory

The term structure of interest rates reflects financial market beliefs about future interest rates

Eurodollars

US dollar denominated deposits in banks outside the US

Money Market

When issued _____ securities have a maturity of less than one year.

Fixed Income

When issued ______ securities have a maturity of greater than one year.

Banker's Acceptance

a postdated check on which a bank has guaranteed payment, commonly used to finance international trade transactions

Pure Discount Security

an interest bearing asset, which makes a single payment of face value at maturity

STRIPS

pure discount instruments created by "striping" the coupons and principal payments of US Treasury notes and bonds into separate parts Separate Trading of Registered Interest and Principal Securities

Call Money Rate

the interest rate brokerage firms pay for call money loans from banks, this rate is used as a basis for customer rates on margin loans

Term Structure of Interest Rates

the relationship between time to maturity and the interest rates for default free, also called "zero-coupon yield curve" NOT BASED ON COUPONS

Repurchase Agreement (or Repo)

the sale of securities together with an agreement the seller to buy back the securities at a later date