treasury - chapter 2

financial market

• where buyers and sellers engage in the trade of assets.

• Well-functioning financial markets are fundamental to long-term economic growth and financial stability.

• They provide a platform to raise and allocate capital efficiently, manage risks, determine asset prices and inform investor decisions.

• Well-regulated financial markets foster investor confidence through transparency, fairness, and clearly defined rules of engagement. 

financial market

• a place where firms and individuals enter into contracts to sell or buy a specific product, such as a stock, bond, or futures contract.

• Buyers seek to buy at the lowest available price and sellers seek to sell at the highest available price.

• All employ professionals are regulated.

• provide a platform to raise and allocate capital efficiently, manage risks, determine asset prices and inform investor decisions.

bank or credit unions

for loans or savings accounts

securities markets

such as the New York Stock Exchange or American Stock Exchange, for businesses to acquire investment capital, mutual funds, or bonds.

over the counter market

another securities market, where a computer network of dealers buy and sell shares.

capital markets

• consist of money markets, bond markets, mortgage markets, stock markets, spot or cash markets, derivatives markets, foreign exchange markets, and interbank markets.

• instruments include Treasury notes, Treasury bonds, municipal bonds, and corporate bonds.

spot or cash markets

commodities or securities purchased are paid for and received at the point of sale.

derivatives markets

contracts called derivatives are traded, deriving their value from an underlying assets.

foreign exchange markets

where currencies are traded, making it the largest financial market globally, with trillions of dollars exchanged daily.

interbank markets

a global network used by financial institutions to trade currencies and other currency derivatives directly between themselves.

money market

an integral part of the financial market in which financial instruments with high liquidity and short maturities are traded.

major participants in the money market

• governments

• commercial banks

• corporations

• government-sponsored enterprises

• money-market

• mutual funds

• brokers

• dealers

• federal reserve

treasury bills

a debt instrument issued by the Bank on behalf of the Government to raise funds in order to finance budget deficits.

commercial paper

an unsecured, short-term debt instrument issued by corporations

banker’s acceptance

known as bills of exchange

certificated of deposits

a type of savings account that pays a fixed interest rate on your deposit for an agreed-upon period.

repurchase agreements

a contract to sell securities, usually government bonds, and repurchase them back shortly after at a slightly higher price.

treasury notes

a marketable U.S. government debt security with a fixed interest rate and a maturity between two and 10 years.

treasury bonds

long-term, fixed-interest debt securities issued by the U.S. government with maturities of 20 or 30 years.

municipal bonds

debt instruments that local, county, and state governments issue to secure financing for civic improvements.

corporate bonds

debt securities issued by corporations to fund business activities. And consist of zero coupon bonds, floating rate bonds, and convertible bonds.

bond market

also known as the debit, credit, or fixed income securities market.

corporate bonds

consists of zero coupon bonds, floating rate bonds, and convertible bonds.

bond ratings

assigned by credit rating agencies such as S&P and Moody’s. The major debt issued in the international market includes euro notes, Eurobonds, euro medium-term notes, global and foreign bonds.

bonds

can be transferred from one owner to another

bond portfolio investment strategies

can be classified into passive, active, matched funding, contingent, and structured strategies.

passive

buying and holding bond for a fixed period. A steady income, and simple to understand and maintain

active

buying low and selling high, does not aim to eliminate risk and focuses on the total returns.

matched funding

aims to generate cash flows from bonds to meet specific, predetermined financial obligations.

contigent

fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point.

structured

investing in structured notes, which are hybrid securities combining a debt obligation with an embedded derivative component.

mortgages

are securities or loans used to finance real estate purchases for homes or land.

mortgage market

where mortgage loan are traded

mortgage-backed securities

are created through the process of securitization and CMOs

securities market

consists of primary and secondary markets. The primary market handles new issues, whereas the secondary market handles trading of existing issues.

actions of investors

The actions of individual, institutional, and mutual-fund investors all affect the prices of stocks, bonds, and futures. For example, if a large number of people want to buy a certain stock, its price will go up, just as if many people were bidding on an item at an auction.

business condition

Both the condition of an individual business and the strength of its larger industry affects the price of its stock. Profits earned, volume of sales, and even the time of year will all affect how much an investor will pay for a stock.

government actions

The government makes decisions that affect both how much an individual stock may be worth, such as by issuing new regulations on a business, and what sort of instruments people want to be investing in. The government's interest rates, tax rates, trade policy, and budget deficits all have an impact on prices.

economic indicators

Investors closely watch general trends that signal changes in the economy to predict what is going to happen next. Indicators include the gross national product, or how much the country is producing; the inflation rate, or how quickly prices are rising; the budget deficit, or how much the government is spending; and the unemployment rate. These indicators point to changes in the way ordinary people spend their money and how the economy is likely to perform.

international events

Events around the world, such as changes in currency values, trade barriers, wars, natural disasters, and changes in governments, all change how people think about the value of different investments and how they should invest in the future.

stock markets

• aka Equity Securities

• buyers go through brokers and dealers.

• grew out of small meetings of people who wanted to buy and sell their stocks. These investors realized it was much easier to make trades if they were all in the same place at the same time.

• Any new issues of stock must be registered with the country’s Securities and Exchange Commission (SEC),

• Prospectus: issued by the issuer, is a document that gives details about a company's operation and the stock to be issued. The issuer distributes this prospectus to interested parties. Investment bankers buy large quantities of the stock from the company and then resell the stock on an exchange.

potential buyer

A _______ places an order with a broker for the stock they wish to purchase. The broker puts in the order to buy on the appropriate exchange. The transaction takes place when someone wants to sell and someone wants to purchase the stock at the same price.

purchaser

A _______, receives a stock certificate. The certificate can be transferred from one owner to another or held by the broker on the investor's behalf.

futures markets

• can help businesses to manage price risks.

• carry substantial risk and are complicated by complex kinds of trading options. To realize a profit, it is necessary to be right about both the direction and the timing of a price change.

• An exchange where agreements to buy or sell a particular commodity or security at a predetermined price at a specified time in the future are traded.

futures contracts

can help protect buyers against rising prices and sellers against declining prices through futures contracts.

bull market

a period during which stock prices are generally rising.

bear market

a period when stock prices are generally falling.

dealers

act as market makers by quoting prices at which they will sell (ask or offer) or buy (bid) to other dealers and to their clients or customers. That does not mean they quote the same prices to other dealers as they post to customers, and they do not necessarily quote the same prices to all customers.

OTC dealers

convey their bid and ask quotes and negotiate execution prices by telephone, mass e-mail messages, and, increasingly, text messaging. The process is often enhanced through electronic bulletin boards where dealers post their quotes.

customer market

• bilateral trading occurs between dealers and their customers, such as individuals or hedge funds.

• Dealers often initiate contact with their customers through high-volume electronic messages called “dealer-runs” that list securities and derivatives and the prices at which they are willing to buy or sell them.

Interdealer market

dealers quote prices to each other and can quickly lay off to other dealers some of the risk they incur in trading with customers, such as acquiring a bigger position than they want.

FMA

covers areas like the pricing of fixed-income securities and equity; the term structure of interest rates; portfolio allocation and diversification; and an introduction to risk management.

portfolio theory

In both portfolio theory and real options theory, risk is characterized as a variance in returns from a particular asset.

real options theory

CAPM

is a general equilibrium model, which provides an overarching theory of the pricing of risk in a perfect marker under equilibrium. It is a widely used tool in finance that connects the concepts of risk and return.

ex-ante

“before the event”, is the prediction of a particular event in the future, such as the potential returns of a company. Predictions are often inaccurate since it is impossible to account for variables, which are affected by market forces of supply and demand.

ex-post

“after the event”, is backward-looking, and it looks at results after they have already occurred. For investment companies, analysts can use historical returns to forecast the probability of making a profit or loss on an investment.

mean variance analysis

a technique that investors use to make decisions about financial instruments to invest in, based on the amount of risk that they are willing to accept (risk tolerance).

variance

measures how distant or spread the numbers in a data set are from the mean, or average.

expected return

the estimated return that a security is expected to produce. Since it is based on historical data, the expected rate of return is not 100% guaranteed.

covariance

used in portfolio theory to determine what assets to include in the portfolio.

correlation

modern portfolio theorist recommends that an investor measure the correlation coefficients between the returns of various assets in order to strategically select those that are less likely to lose value at the same time. That means determining to what extent the prices of the assets tend to move in the same direction in response to macroeconomic trends.

risk

defined in terms of standard deviations, a measure of the volatility or variability of an investment’s returns.