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