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Ch. 8: Fixed-Income Markets

Ch. 8: Fixed-Income Markets. Money Markets: T-bills Agency Securities (p. 223) Negotiable CDs Commercial Paper Bankers Acceptances {letter of credit} Repurchase Agreements Federal Funds Eurodollars. Pricing Money Market Instruments. Bank Discount Rate: d = (FV – Price)/FV * 360/n

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Ch. 8: Fixed-Income Markets

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  1. Ch. 8: Fixed-Income Markets Money Markets: • T-bills • Agency Securities (p. 223) • Negotiable CDs • Commercial Paper • Bankers Acceptances {letter of credit} • Repurchase Agreements • Federal Funds • Eurodollars

  2. Pricing Money Market Instruments • Bank Discount Rate: d = (FV – Price)/FV * 360/n • Bond Equivalent Rate k = (FV – Price)/Price * 365/n • Effective Annual Yield y = [1 + k/(365/n)](365/n) - 1

  3. Examples SupposePrice = $984 & n = 90 d = (FV – Price)/FV * 360/n = 6.4% k = (FV – Price)/Price * 365/n = 6.6% y = [1 + k/(365/n)](365/n) – 1 = 6.8% Pricing with Bank Discount Yield: Price = FV – (FV * d * n/360) = 1000 – 1000*.064*90/360 = $984

  4. Capital Market Instruments • Treasury & Agency Bonds • Corporate Bonds • Callable, call premium, yield to call • Sinking fund • Indenture contract – special requirements • Mortgage vs. debenture bonds

  5. Municipal Bonds (state and local gov’t) • Exempt from federal tax • aty = bty (1 – t) • Securitized Credit Instruments • Mortgages • Car loans

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