Investment 2 投资学

Treasury bills Certificates of deposit Commercial paper Bankers’ acceptances Eurodollars Repos and reverses Broker’s calls Federal funds LIBOR (London InterBank Offer Rate)
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Asset allocation Security selection --- introduce you to the important features of broad classes of securities Financial markets --- segmented into money markets and capital markets
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Federal Funds: ---Each member bank in the Fed system is required to maintain a minimum balance in a reserve account with a Fed reserve bank. ---Funds in the bank’s reserve account are called “ federal fund”. ---Some banks have more funds than required; Some banks have a shortage of fed funds. ---Banks with excess funds lend to those with a shortage ---Very short-term loans between banks with federal funds rate.
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--- Mortgage loans are bought by agencies and bundled into a large pool that could be traded like a security. --- Cash flows: homeowner (principle and interest payment) originator(banks) agency (such as, Freddie Mac or Fannie Mae) investor (mutual fund, hedge fund, pension fund, et.) --- conforming mortgages, the loans must satisfy certain underwriting guidelines (standards for the creditworthiness of the borrower) --- subprime mortgages, riskier loans made to financially weaker borrowers --- Fannie and Freddie were allowed and even encouraged to buy subprime mortgage loans. ---Sep,2008: Fannie and Freddie got taken over by the federal government.
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◦ Municipal Bonds: issued by state and local governments in U.S. ---interest income is exempt from federal income taxation ---interest income is exempt from state income taxation in the issuing state ◦ Corporate Bonds: issued by private firms. ---Semiannual coupon( annual payments in some countries) ---Subject to larger default risk than government securities high yield ---options in corporate bonds: Callable, Convertible ◦ Federal Agency Debt: Debt of mortgage-related agencies such as Fannie Mae and Freddie Mac.


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Money Market (short-term, low-risk debt )

Debt Market Equity Market Derivative Market
Capital Market (long-term and riskier securities) Bond Market
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Capital market:
◦ International Bonds: firms borrow abroad and investors buy bonds from foreign issues. For example, ---Eurobonds, a bond dominated in a currency other than that of the country in which it is issued. A dollar-dominated bond sold in London would be called “Eurodollar bond” ---Samurai bonds, yen-dominated bond sold in Japan by non-Japanese issuers ---Yankee bonds, dollar-dominated bond sold in the united states by non-U.S. issuer ---Dim Sun bonds, Chinese yuan-dominated bond issued in Hong Kong. Fund their operations in China and to reduce their foreign exchange risks.
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Money market:
◦ Repos and Reverses: Short-term loan backed by government securities. --- Repos:::Repurchase agreements --- The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price; It is like a 1-day loan from the investor. --- Reverse repos :::The dealer buys the government securities from an investor and agree to sell them back at a specified higher price on a future date.
Derivative Market
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Debt Market
Treasury
--money market instruments --capital market instruments
debt
Non-Treasury
--money market instruments --capital market instruments

Capital market:
http://treasurydirect.gov
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Money market:
◦ Commercial Paper = short-term unsecured debt issued by large corporations (maturities up to 270 days; longer maturities require registration with SEC) ◦ Certificates of deposit = (or fixed deposit, term deposit), time deposits with a bank ◦ Eurodollars = dollar-denominated time deposits in banks outside the U.S. (foreign banks or foreign branches of American banks) ◦ LIBOR = (London InterBank Offered Rate), the rate at which large banks in London are willing to lend money among themselves. ◦ Bankers’ Acceptances = An order to a bank by a bank’s customer to pay a sum of money on a future date, typically within 6 months.
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Mortgage-backed securities or mortgage pass-through
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How to choose?
Equity Market
Treasury notes and bonds Treasury Inflation Protected Securities (TIPS) Federal agency debt International bonds Municipal bonds Corporate bonds Mortgages and mortgage-backed securities Common stocks Preferred stocks Depository Receipts Options Futures
debt
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Money market:
◦ Treasury Bills: <= 1 year; zero coupon ---Short-term government securities with maturities ranging from 4 weeks to 52 weeks. (4, 13, 26, 52 weeks) ---Bills are sold at a discount from their face value. ◦ Treasury Notes: 1-10 years; semiannual coupon ◦ Treasury Bonds: 10-30 years; semiannual coupon ◦ Treasury Inflation Protected Security (TIPS): 5, 10, 30 years; semiannual coupon ◦ hedge inflation risk ◦ ---par value increases with inflation, which is measured by Consumer Price Index ◦ ---While the interest rate remains fixed, the coupon payment varies with inflation