1 / 30

Markets and Instruments Chapter 2

Markets and Instruments Chapter 2. Finance 650 Spring 1999. Lecture notes prepared by: Dr. Susan D. Jordan. The Money Market. Treasury Bills auction or primary market secondary market Treasury Auction Process competitive versus noncompetitive. Auction results.

garry
Download Presentation

Markets and Instruments Chapter 2

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Markets and InstrumentsChapter 2 Finance 650 Spring 1999 Lecture notes prepared by: Dr. Susan D. Jordan Chapter 2 (BKM)

  2. The Money Market • Treasury Bills • auction or primary market • secondary market • Treasury Auction Process • competitive versus noncompetitive Chapter 2 (BKM)

  3. Auction results Results in WSJ and http://www.publicdebt.treas.gov/of/ofbills.htm Chapter 2 (BKM)

  4. TBill Formulas • P = Face [ 1 - rBD * (n/360)] • rBD = (F-P)/F * 360/n (bank discount yield) • rBEY = (F-P)/P * 365/n = (365* rBD)/(360 - t* rBD ) • rBEY = bond (coupon) equivalent yield or APR • effective annual yield = [1 + (F-P)/P ] 365/n - 1 • = (F/P) 365/n - 1 Chapter 2 (BKM)

  5. Secondary market transactions • From WSJ on Tuesday, August 25, 1998 • Dealer’s selling price (your purchase price) • Dealer’s purchase price (your selling price) Chapter 2 (BKM)

  6. Money market instruments • Commercial Paper • Eurodollar • Certificate of Deposit • Domestic • Eurodollar • Yankee • Bear Market CD • Bull Market CD Chapter 2 (BKM)

  7. Money market instruments (cont.) • Banker's Acceptance • Repurchase Agreement Repo RP • Federal Funds • Broker's call • LIBOR rate -- London Interbank Offered Rate Reverse Repo Chapter 2 (BKM)

  8. The Fixed-Income Capital Market • Includes Treasury notes and bonds, corporate bonds, municipal bonds, mortgage securities, and federal agency securities. • Overview of Bond Features • indenture • term to maturity • principal value • coupon rate Chapter 2 (BKM)

  9. Bond features (cont.) • sinking fund • debenture • mortgage or secured bond • income bond • Embedded Options • convertible bond • callable bond • put bond • exchangeable bond Chapter 2 (BKM)

  10. Treasury Notes and Bonds • Notes: original maturity of 2 to 10 years • Bonds: original maturity > than 10 years • Denominations of $1,000 or more • Both make semiannual coupon payments • Some T-Bonds may be called (last 5 years). • T-bonds issued since Feb. 1985 not callable. • Inflation-indexed Treasury securities Chapter 2 (BKM)

  11. Treasury quotesFrom WSJ Wednesday, August 28, 1997 • If date is followed by p or n it is a note • Numbers to the right of the colon = 1/32 of a point • If you purchase, you pay • If you sell $1000 face, you receive • Coupon rate of 7 = 7% of par ($70/year or $35 semi) 103.5625% of par $1035.00 Chapter 2 (BKM)

  12. Treasury quotesFrom WSJ Wednesday, August 28, 1997 • Yld = semiannual yield * 2 = Simple Interest = APR (Annual Percentage Rate ) = bond equivalent yield • Other Treasury bonds • Flower bond • Callable bonds (Maturity YR is a range) • yield on callables • discount bond = yield to maturity • premium bond = yield to first call Chapter 2 (BKM)

  13. Municipal Bonds • general obligation bond • revenue bond • industrial development bond or private purpose bond • tax anticipation bond • Equivalent taxable yield • r(1-t) vs. rm or r vs. rm/(1-t) Taxable bond yield = 7.20 and tax-exempt yield = 5.31 7.20*(1-.20)= 5.76 7.20*(1-.30)= 5.04 Chapter 2 (BKM)

  14. Corporate bonds • issued by private firms to borrow money from the public • Corp Bond Quotes from WSJ on Wed, Sept. 3, 1997 Current yield = 67.50/1006.25 Chapter 2 (BKM)

  15. Equities • Common stock • Residual claim and limited liability • Two Basic Rights • Preemptive right • Right to control • Proxy • Preferred stock • fixed dividends • priority over common • tax treatment Chapter 2 (BKM)

  16. Stock market quotes • Dividends: annual disbursements based on last quarterly declaration • Yield: div/close • PE: close/(last four EPS) So what was EPS for last four quarters? 27 = 38.3125/E or $1.42 Chapter 2 (BKM)

  17. Derivative Assets or Contingent Claims • Option Contract • purchaser of an option contract has the right to buy or sell the underlying at a stated price (the strike or exercise price) on or before a specified date (expiration). • Put: right to sell • Call: right to buy • Option Premium • Writer/Seller Naked versus covered Chapter 2 (BKM)

  18. Option contract quotes Chapter 2 (BKM)

  19. Derivative Assets or Contingent Claims • Futures Contract • calls for delivery of an asset (or its cash value) on a specified date for an agreed upon price to be paid at the maturity date. • Long: commitment to purchase the underlying • Short: commitment to deliver the underlying • cash settlement for index options • How is a long futures contract different from long call? Chapter 2 (BKM)

  20. Futures quotes Chapter 2 (BKM)

  21. Stock Market Indicators • Provide an overall indication of aggregate market movements • Uses: • track average returns • base of derivatives • measure systematic risk • compare performance of managers Chapter 2 (BKM)

  22. Stock Market Indicators • Sample • Computation • Average • Arithmetic • Geometric • Indexes • Value-weighted or capitalization-weighted • Equal-weighted Chapter 2 (BKM)

  23. Dow Jones Average & Indices • 30-Stock Industrial Average (DJIA or DOW) • 20-Stock Transportation Average • 15-Stock Utilities Average • 65-Stock Composite Average • The Dow Jones Equity Index Chapter 2 (BKM)

  24. DJIA • Price-weighted • Large, well-known cos (Blue chips) • 1884 with 11 stocks • 1928 => 30 stocks • Divisor is not equal to # companies • Divisor adjusted: • Companies added/deleted • Stock splits or stock dividends > 10% Chapter 2 (BKM)

  25. Consider a 2-stock sample • Price-weighted average • Equal-weighted index • Value-weighted index Chapter 2 (BKM)

  26. DOW or price-weighted average • Day 0 = ($110+$30)/2 = 70 • Day 1 = ($154+$33)/2 = 93.5 • Change in DOW = 93.5/70 - 1 = 33.57% • Value-weighted Index (base = 100) • Day 0 = (MV1 + MV2)/Base * 100 =100 • Day 1 = (1540+33000)/31100 *100 =111.06 • Change in Value = 111.06/100 -1 = 11.06% • Equal-weighted Index • Change of (40% + 10%)/2 = 25% Chapter 2 (BKM)

  27. Consider 3 stocks Chapter 2 (BKM)

  28. Examples of domestic indices • Dow Jones Industrial Average • Standard & Poor’s 500 Composite • Nasdaq Composite • NYSE Composite • Wilshire 5000 • Value Line Composite Chapter 2 (BKM)

  29. Examples of international indices • Nikkei 225 & Nikkei 300 • FTSE (Financial Times of London) • Dax • Region and Country Indexes • EAFE • Far East • United Kingdom Chapter 2 (BKM)

  30. Example of bond indices • Lehman Brothers • Merrill Lynch • Salomon Brothers • Specialized Indexes • Merrill Lynch Mortgage Chapter 2 (BKM)

More Related