四川大学经济学院金融市场学复习重点

Ppt1
The properties of financial assets:
1.Moneyness
2.Divisibility and denomination
3.Reversibility
4.Cash flow
5.Term to maturity
6.Convertibility
7.Currency
8.Liquidity
9.Return predictability
plexity11.Tax status
1.Moneyness:
money is the financial assets which are used as a medium of exchange or in settlement of transactions
Money:currency+all forms of deposits that permit check writing
Near money(other assets):can be transformed into money at little cost,delay,or risk:time deposits,treasury bill
2.Divisibility and Denomination
Divisibility is the minimum size in which a financial assets can be liquidated and exchanged for money.Denomination is the dollar value of the amount that each unit of asset will pay maturity.
3.Reversibility is the cost of investing in a financial asset and then getting out of it and back into cash again.Consequently,reversibility is also referred to as turnaround cost or round-trip cost.
4.Cash flow is the cash distributions that the financial asset will pay its owners;this includes dividends on shares and coupon payments and bonds or noncash payments.
5.Term to maturity is the length of the period until the date at which the instrument is scheduled to make its final payments,or the owner is entitled to demand liquidation
6.Convertibility the asserts are convertible into other assets.
7.Currency many financial assets are denominated in one currency
8.Liquidity is how much sellers stand to lose if they wish to sell immediately.It depands on financial asset,quantity,thickness
9.Return predictability is a basic property of financial assets,in that it is a major determinant of their value.
plexity some financial assets are combination of simpler assets
11.Tax ernmental regulations for taxing the income frome the ownership or sale of financial assets vary widely
Principles of pricing of financial assets
RR:the real rate of interest
IP:inflation premium
DP:default risk premium
MP:maturity premium
LP:liquidity premium
EP:exchange-rate risk premium
Tax status(favorable tax treatment):After-tax yield=pretax yield×(1-Marginal tax rate)
Basis point:1basis point=0.0001,0.01%,
Price volatility
The longer the maturity,the more sensitive(change in the discount rate)
The smaller the coupon rate,the more sensitive
The smaller the initial yield,the more sensitive
Duration :the approximate percentage change in price for a 100basis point change in interest rates around the prevailing yield
∆y=change in yield (in decimal)
P 0=initial price of the asset
P -=asset’s price if the yield is decreased by ∆y
P +=asset’s price if the yield is increased by ∆y
Bond with the longer maturity will have greater duration
Bond with the lower coupon rate will have greater duration.
Bond with lower initial yield will have greater duration
An estimate of the percentage change in the price of a financial asset is:Duration x (Dy)x 100Ppt2
The Theory of Interest Rates
1.Fisher’s Classical Approach
2.Loanable Funds Theory
3.The Liquidity Preference Theory Fisher’s Classical Approach
Decisions on Saving :1.Marginal rate of time preference 2.Income 3.Reward for saving (interest rate)
Decisions on Borrowing:1.Gain from investment 2.Marginal productivity of capital 3.Rate of interest
Conclusion:long-run level of interest rate and the amount of investment depend on
1.Technological development
2.Propensity to save
Fisher’s law:inflation &interest rates )1)(1()1(p r i ++=+or i=r+p
The Loanable Funds Theory
Level of interest rate is determined by 1.Total demand :Household,firms,government
2.Total supply:Household,firms,government
The Liquidity Preference Theory
Assumption:wealth in two forms:1.Money2.Bonds
B s+M s=B d+M d/B s-B d=M d-M s
Shifts in the rate of interest：Demand(level of income,level of prices)
Supply(actions of central bank)
Liquidity Effect：If increasing,causes the interest rate to fall
Income Effect：If increasing,causes the interest rate to rise
Price Expectations Effect：If increasing,causes the interest rate to rise
Features of a Bond：1.Term to maturity2.Principal value/par value/maturity value3.Coupon rate Yield to maturity：Trial-and error process试错法
1.If the market price=par value Yield to maturity=coupon rate
2.If the market price>par value Yield to maturity<coupon rate
3.If the market price<par value Yield to maturity>coupon rate
The Risk Premium the financial assets is trading at a spread(in basis points),the spread is the risk premium between two bonds,it is determined by: 1.type of issuer 2.Perceived creditworthiness of issuer3.Term to maturity4.Inclusion of options5.Taxability of interest 6.Expected liquidity of an issue7.Swap rate yield curve
PPT3
The Yield Curve:Relationship between yield and maturity for bonds of the same credit quality
but different maturities
Spot Rate :rate on zero-coupon bond,Any financial asset can be viewed as a package of zero-coupon instruments ,Yield curve based on theoretical spot rates
Theoretical value of a bond is equal to the present value of its periodic cash flows discounted at the corresponding theoretical spot rate for each
period
Forward Rates :market’s consensus prediction of future interest rates ，indicate how an investor’s expectations must differ from the market consensus in order to make the correct decision
Subscripts m t f When in the future the rate begins,m The length of time for the rate,t For example 12
1f means the six-month (one period)forward rate beginning six years (12periods)from now 六年后的半年利率1
)1()1(/1-⎦⎤⎢⎣⎡++=++t m m t m t m m t z z f The relationship between a t-period spot rate,the current six-month spot rate,and the implied six-month forward rates is:
1
)]1)...(1)(1)(1)(1[(/113211-+++++=-t t t f f f f z z Ppt4
Two categories :discount(pay only a face value at maturity)and coupon securities(pay interest every six months,plus principal at maturity)
The securities with maturities of one year or less as discount securities are treasury bills.The securities with maturities between 2and 10years are treasury notes.
The securities with maturities greater than 10years are treasury bonds.
Tips :Treasury Inflation Protection Securities
The Primary Market
Auction Cycles:
Discount:3-month and 6-month bills:weekly auctions
1-year bill:monthly auction
Coupon:two-and five year notes:monthly auctions
10-year note and 30-year bond:quarterly auctions
Determination of the Results of an Auction
1.Deduct total noncompetitive tenders and nonpublic purchases (e.g Federal Reserve)
2.Remainder for competitive tenders:
Arrange the bids from the lowest-yield to the highest-yield bid
Stop yield:The highest yield accepted
3.Bidders
Bidders lower than stop yield:awarded their total tender
Bidders at stop yield:awarded a percentage of their total tender
Bidders higher than stop yield:missed /shut out
4.Announcement:1.Stop yield 2.Associated price 3.Proportion of securities awarded to those investors who bid exactly the stop yield 4.The quantity of noncompetitive tenders
5.The median yield bid
6.The bid-to-cover ratio =total competitive +noncompetitive bids by public/total awarded to the public
The yield for winner bidders
Discriminating price treasury auction:
Different successful bidders paid different prices (their bid prices).
Noncompetitive bidders are paid average price of competitive bids
Prior to 1998
Single price treasury auction
All successful bidders (both competitive and noncompetitive)are awarded securities at the same yield(stop yield )It’s also called Dutch auction
Since 1998
Primary Dealers :the firm which is dealt with the federal dealers in implementing its open market operations.
Reporting dealer:the firm which will be put on the federal reserve’s regular reporting list The firm which want to be the primary dealer should apply the positions and trading volume The Secondary Market
Treasury bills :
Quoted on a bank discount basis
t F D Y 360⨯=Y=annualized yield on a bank discount yield
D=dollar discount
F=face value
t=number of days remaining to maturity
Price=F-D=F-Y ×F ×t/360
True Rate of Return
360
365Y ⨯-⨯=D F F Y d T Treasury notes and bonds:Quoted on a price basis
Repurchase Agreement Market
Repo:an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date in the future.
Dollar interest =repurchase price –sale price
Repo rate h
P P P 360rate repo 00f ⨯-=P f :Repurchase price
P 0:Selling price
h:Number of days until the repo matures
Term ：1.Overnight repo 2.Term repo （more than one day ）
Stripped Treasury Securities
STRIPS:（Separate Trading of Registered Interest and Principal of Securities ）
a Treasury security in which periodic coupon interest payments are separated from each other and from the final principal payment.
The cash flow is from:ci:from coupon;bp:principal from a Treasury bond;np:principal from a Treasury note
Federal Agency Securities
Government owned corporation:Securities backed by full faith and credit of ernment For example：Tennessee Valley Authority
Government sponsored entity(GSE)：Privately owned,publicly chartered entities;Not backed by full faith and credit of ernment
For example:
Publicly owned shareholder corporation 1.Fannie Mae2.Freddie Mac3.Federal Agricultural Mortgage Corporation
Funding entity of federally chartered bank lending system1.Federal Home Loan Banks2.Federal Farm Credit Banks
Euro government bond market:40%of outstanding government bonds
Three largest markets:Germany,Italy and France
Municipal Securities Markets
Issued by state and local governments,usually tax exempt
Purposes of municipal securities
Short-term:in anticipation of the recipt of funds from taxes or proceeds from the sale of a bond issue.
Long-term:the principle means for financing both1.Long-term capital projects such as the construction of schools bridges roads and airports;and2.Long-term budget deflects that arise from current operation
Types of municipal securities:
1.tax-backed debt:General obligation bonds
backed by the full faith and credit of the issuer/taxation power/small portion
2.revenue bonds:to finance specific revenue-generating project
backed by cash flows from that project/feasibility study/riskier than GOB
Yields on Municipal Bonds
Yield ratio=yields on municipal security/yields on comparable treasury security
PPT5
Equity Security Characteristics
Two forms of equity security:
mon stock
1.Returns from common stock
2.Residual Claim–lowest priority
3.Limited Liability
4.Voting
Rights
Taxation on dividends:
1.Ordinary income:Regular marginal tax rate
2.Qualified dividends:1.5%if the individual’s regular income tax rate<25%
2.15%if the individual’s regular income tax rate>25%
Capital gain:
Short term:Ordinary income
Long term: 1.5%if the individual’s regular income tax rate<25%
2.15%if the individual’s regular income tax rate>25%
Voting Rights
Straight voting:The vote occurs one director at a time
The number of votes for each director is the number of shares outstanding.
Cumulative voting:
All directors up for election are voted on at the same time
1.Number of votes assigned to each stockholders=number of shares×number of directors to be elected
2.A shareholder may assign all of his or her votes to a single candidate for the board or may spread them over more than one candidate
3.The candidates with the highest number of total votes are elected to the board
2.Preferred Stock
Characteristics of both a bond and a common stock:senior to common stock but junior to bonds Participating or not
Nonparticipating preferred stock:dividend is fixed
Participating preferred stock:actual dividends may be greater than promised
Cumulative or not
Cumulative preferred stock:any missed dividend payments go into arrears and must be made up before any common stock dividends are paid
Noncumulative preferred stock:missed dividends do not go into arrears and are never paid Trading Mechanics:
Market order:Order to be executed at the best price available in the market
Limit order:Conditional order
Buy limit:designated price or lower
Sell limit:designated price or higher
Stop order:Conditional order
Buy stop order:designated price or higher
Sell stop order:designated price or lower
Short selling:Sale of a security not owned by the investor
1.borrow security
2.Sell
3.If the market price changes lower,then buy the same amount to return the lender
4.obtain the captain gain
Margin transaction:buy the security by borrowing the money
1.buying on margin:a transanction in which an investor borrows to buy shares using the shares themselves as collateral
Pricing efficiency of the stock market
Forms of efficiency
Weak form:price reflects past price and trading history
Semistrong form:price fully reflects all public information
Strong form:price reflects all information
Implications for investing in common market
Active strategies
Passive strategies
Secondary markets
Stock Exchanges
New York Stock Exchange(NYSE)
American Stock Exchange(AMEX)
4%of NYSE in terms of daily share volume
5%of NYSE in terms of daily dollar volume
National Association of Securities Dealers Automated Quotation(NASDAQ)
Stock Market Indexes
DJIA:Dow Jones Industrial Average
NYSE Composite Index
Standard&Poor’s500Index
NASDAQ Composite Index
PPT6
Credit Risks:
Default Risk:Risk that issuer will default on its obligation to the lender
Credit Spread Risk:1.Spread widened2.Downgrade Risk
Commercial Paper:short-term unsecured promissory note issued in the open market which is alternative to short term bank loans
Issuers:well-known,credit-worthy firms
Investors:Institutional investors:1.Money market mutual funds:1/32.other investors:pension funds,commercial bank trust departments and so on:2/3
Maturities:1–270days or30–50days
Use:1.Bridge financing2.Rolling over short-term paper(Backed by bank credit lines
)
Limited secondary market activity:the holders often hold it until thematurity
eligible paper:the issue must carry one of the two highest ratings from the least two of the credit rating companies.
Medium Term Notes(MTN):a corporate debt instrument,with the unique characteristic that notes are offered continuously to investors by an agent of the issuer
Characteristics:1.on a continuous basis2.rated by rating agencies3.maturities range from9 months to30years4.flexibility5.Selling by dealers
Typically issued by non-financial corporations
The primary market of MTNs
1.sold in small amounts
2.Continuous basis
The yield spread
Bank Loans:a corporation can raise funds by borrowing from a bank
Secondary market for bank loans
1.Trade
2.Securitized
Syndicated bank loans
1.A group of banks provides funds to the borrower
2.Collateralized
3.Senior bank loans:have a priority position over subordinated lender
4.Float rate,based on LIBOR(the london interbank offered rate)
Corporate Bonds
Issuers:1.Utilities2.Transportations3.Industrial4.Banks and finance companies
Investors
Institutional investors:life insurance companies,pension funds(50%),households,foreign investors,depository institutions,non-life insurance companies,mutual funds,securities brokers and dealers
bond indenture:a legal contract specifies the rights and obligations of the issuer and the bondholder which contains a number of covenants which describes rules and restrictions placed on the bond issuer and bond holder(Restrictions to limit the ability of issuer to increase dividends or limit corporate officers’salaries the firm can pay)
Maturity of Bonds
Term Bonds:entire issue matures on a single date(bullet-maturity,bullet bonds)
Serial Bonds:the issue contains many maturity dates
Security for Bonds
Pledged 1.Mortgage bond:grants the bondholders a lien against the pledged assets
2.Collateral trust bonds:securied by the financial instruments they own
3.Equipment trust certificates:securied by the equipment
Not pledged1.Debentures:not secured by a specific pledge of property,but have a claim of general creditors on all assets and earnings not pledged specifically to secure other debt
2.Subordinated debentures:Junior to secured debt,debentures,and other general creditors;Junk bonds
3.Guaranteed bond:an obligation guaranteed by another entity
Provisions for Paying Off Bonds
Call provision:allowing the issuer an option to buy back all or part of the issue prior to maturity i ncb=i cb-op cb op cb:Value of the issuer’s option to call the debt early
Call protection/refunding protection:denies the issuer the right to redeem bonds during the first five to10years following the date of issue of lower-cost debt obligates that have an equal or superior rank to the debt to be redeemed.
Sinking fund provision:require that the issuer retire a certain amount of the bond issue early over a number of years,especially as the bond approaches maturity.
For example Bond with maturity of20years,retire5%each year beginning in the fifth year; reduce credit risk
Convertible Bonds and Exchangeable Bonds
Conversion provision:grants the bondholder the right to convert the bond to a predetermined number of shares of common stock of the issuer,so Investors are willing to accept a lower rate of interest on convertible bonds
exchangeable bond grants the bondholder the right to exchange the bonds for the common stock of a firm other than the issuer of the bond.
Conversion value=Current market price of common stock received on conversion×Conversion rate
Issues of debt with warrants
Attached with bonds
Call option:1.Purchase common stock of issuer2.Purchase common stock of a firm other than the issuer3.Purchase a debt obligation of issuer
Can be detached and sold separately
Putable Bonds
A putable bond grants the bondholder the right to sell the issue back to the issuer at par value on designated dates.
High-yield Bonds
The bonds are issues with a credit rating below triple B
Original-issue:have been rated investment grade at the time of issuance and then have been downgraded
1.because the issuer increased their debt as a result of a leveraged buyout or a recapitalization
2.because of other reasons(fallen angel)
The role of high-yield bonds in corporate finance
1.Shift from commercial banks to the investor groups willing to accept
2.LBOs
3.Recapitalizations
High-yield bonds structures
1.Conventional(a fixed coupon rate and were term bonds)
2.Deferred coupon structures:1.Deferred-interest bonds(sell at a deep discount and do not pay interest for an initial period)2.Step-up bonds(pay low interest for initial period)
3.Payment-in-kind bonds(give the holders the option to pay cash or pay a similar bond)
Ppt7
Negotiable Certificates of Deposits(NCDs)
NCD:bank-issued time deposit that specifies an interest rate and maturity date and is negotiable (i.e.,salable)in the secondary market.
Bearer instrument:whoever holds it when it matures receives the principal and interest rate Denominations:$100,000-$10million,$1million is the most common denomination
corporations because too large for individuals, sometimes purchased by money market funds(indirectly by individuals)
Maturities:2weeks–one year,most of1–4months
Federal Funds
Borrowing and lending of excess reserve balances among depository institutions Characteristics:
1.one-day maturity:overnight money
2.Unsecured
Fed fund rate:Tool of monetary policy
effective fed funds rate:Weighted average
Sample:two transactions on Sep1.$50million at3.375%,$150million at3.625%
weighted average:3.5625%
Market for Federal Funds
Trading:Directly take place between any pair of commercial banks over the telephone Arranged through fed funds brokers,who charge a small fee for bringing the two parties together ($0.50for$1m.transaction)
Federal Funds versus Repo
Common use as a source of overnight funding
Repo:collateralized fed funds
Fed funds:uncollateralized
Interest rate:spread as25basis points
Banker’s Acceptances
1.Order to pay a specified amount on a specified date in the future
2.Facilitates commercial trade transactions;
3.Sold on a discounted basis prior to maturity
Interest rates:
Compared with T-bills:more1.Risk premium2.Liquidity premium
Compared with NCDs:1.Backed by commercial bank guarantees
2.Further backed by importer
Sequence of Steps in the Creation of A Banker’s Acceptance
Ppt8
Mortgage Markets
Mortgages are loans to individuals or businesses to purchase real property(home,land,other real estate.The debt is secured by the property)
Mortgage Types(by types of property)
1.Residential mortgages
mercial mortgages
3.Farm mortgages
Mortgage Originator:Commercial banks,thrifts,mortgage bankers
Income from mortgage origination
1.Origination fee(+application fees,processing fees)Points,1point=1%
2.Secondary market profit
3.Servicing fee
Mortgage Origination Process
1.borrowers complete application forms
2.the mortgage originator evaluate of the application
The underwriting standards are1.Payment-To-Income Ratio(PTI)(the ratio of the monthly payments to monthly income,which measures the ability of the applicant to make monthly payments)lower the ratio,the greaterthe likelihood2.Loan-To-Value Ratio(LTV)(the ratio of the amount of the loan to the market value of the property)lower the ratio,the greaterthe likelihood
mitment Letter form Lender
4.borrowers decide thechoice of Type of Mortgage
1.Fixed-rate mortgage
2.Adjustable-rate mortgage
3.Hybrid
Mortgage Maturities:30-year,20-year,15-year,10-year,5-year
Types of Residential Mortgage Loans
there are different types of residential mortgage loans.They can be classified according to the following attributes
Lien status:1.First lien 2.Second lien/junior lien
Credit classification:1.Prime loan:high credit quality2.Alternative-A loan/alt-A loan3.Subprime
loan:lower credit quality
Prime loan:FICO scores ≧660;front ratio ≦28%,back ratio ≦36%;LTVs ≦95%
1.Credit score:FICO scores:350-850,the higher ,the better.
2.LTV
3.PTI Front ratio:monthly payments/pretax monthly income (monthly payments:interest +principal +property taxes +homeowner insurance)
Back ratio:total monthly payments/pretax monthly income (total monthly payments:monthly payments +other debt payments)
Interest Rate Type:1.FRM:fixed-rate mortgage 2.ARM:adjustable-rate mortgage
Amortization Type:
Amortization:the amount of the monthly loan payment that represents the repayment of the principal borrowed
Fully amortization:1.Fully amortizing FRM 2.Fully amortizing ARM
Fully amortizing FRM
⎥⎦⎤⎢⎣⎡-++=1)1()1(MP 0n n i i i MB ()()⎥⎥⎦⎤⎢⎢⎣⎡-++-+=1)1(11MB 0n t n t i i i MB ⎥⎦
⎤⎢⎣⎡-++=-1)1()1(SP 10n t t i i i MB MP=monthly mortgage payment MB0=original mortgage balance i=note rate divided by 12n=number of months of the mortgage loan MBt=mortgage balance after t months SPt=scheduled principle repayment for month t
adjustable-rate mortgage:1.
()()⎥⎥⎦⎤⎢⎢⎣⎡-++-+=1)1(11MB 0n t n t i i i MB 2.26.15351)00708.01()00708.01(00708.033.156,1981)1()1(MP 3483480=⎥⎦
⎤⎢⎣⎡-++=⎥⎦
⎤⎢⎣⎡-++=n n i i i MB Interest-only product:1.Lockout period:only interest is paid 2.Following lockout period:recast Credit Guarantees
ernment loans:loans backed by agencies of the federal government
FHA:Federal Housing Administration ;VA:U.S.Department of Veterans Affairs
2.Conventional loans:loans have no explicit guaranty from the federal government
Prepayments and prepayment penalties
Prepayment:the amount of the payment made in excess of the monthly mortgage payment
Partial prepayment/curtailment :1.The loan is not recast2.Monthly mortgage payment is the same
3.More of the subsequent monthly mortgage payment is applied to the principal
4.The loan is paid off faster
Entire mortgage balance is paid off :Prepayment penalty:six months of interest
Creative Mortgages Product:
1.Graduated-Payment Mortgages (GPMs)
2.Growing-Equity Mortgages (GEMs)
3.Second Mortgages
4.Shared-Appreciation Mortgages (SAM)
5.Reverse-Annuity Mortgage(RAM)
Graduated-Payment Mortgages:Allow the borrower to initially make small payments;payments increase over the first5to10years;Finally payments level off at the end of the mortgage period; Is tailored for families who anticipate higher income
Growing-Equity Mortgages:Initially payments are the same as a conventional mortgage;payments are continually increasing over time(typically by about4%per year); Reduces the actual life of the mortgage(contrast to GPMs)
Second Mortgages:Loans secured by a piece of real estate already used to secure a first mortgage;If a default occurs,its claim against the property is behind that of the first mortgage;Interest rate is higher
Shared-Appreciation Mortgages:Allows a home purchaser to obtain a mortgage at a below-market interest rate;Allows the lender to share in the price appreciation of the home;The financial institution has bought an option
Reverse-Annuity Mortgage:A mortgage borrower receives regular monthly payments from a financial institution rather than making them.When the RAM matures(or the borrower dies),the borrower(or the borrower’s estate)sells the property to retire the debt.
Investment Risks:1.Credit Risk:FHA-and VA-insured mortgages<Privately insured mortgages
<Conventional mortgages
2.Liquidity Risk
3.Price Risk
4.Prepayments and Cash Flow Uncertainty
Securitization of Residential Mortgages
Mortgage-Backed Securities(MBS):the process of transforming individual loan contracts into marketable securities
Pass-through securities:
Financial institutions pool the mortgages,then sell shares or participation certificates in the pool Agencies in Pass-through securities:1.Ginnie Mae2.Fannie Mae3.Freddie Mac
Prepayment risks on pass-through securities:Pay off old,high-cost mortgages and refinance at lower rates.
Collateralized Mortgage Obligations(CMOs):Repackaging the cash flows from mortgage pass-through securities in a different fashion
Characteristics:1.Are segmented into tranches(up to17tranches)2.Have semiannual coupon (unlike pass-through)
Sequential-Pay CMO
CMOs-1
For Payment of periodic coupon interest:Disburse periodic coupon interest to each tranche on the basis of the amount of principal outstanding at the beginning of the period.
For disbursement of principal payments:Disburse principal payments to tranche A until it is completely paid off,disburse principal payments to tranche B until it is completely paid off.After tranche B is completely paid off,disburse principal payments to thanche C until it is completely paid off.After tranche C is completely paid off,disburse principal payments to tranche D until it is completely paid off.
Accrual Bonds/Z bond
Z does not receive current interest;the interest would accrual and be added to the principal balance;the interest that would have been paid to the accrual bond class is then used to speed up paying down the principal balance of earlier bond classes.shorter-term tranches and a longer-term tranche are created;accrual bond appeals to investors who are concerned with reinvestment risk.
Stripped Mortgage-Backed Securities
Only two classes of securities.
IO:interest-only:Receive only Interest on the outstanding principal。