Finance 305 pt 2

Money Market Instruments (5)

1. Treasury Bills

2. Federal Funds

3. Repurchase Agreements

4. Commercial Paper

5. Commercial CDs

Capital Market Instruments (6)

1. Corporate Stock

2. Corporate Bonds

3. Treasury notes/bonds

4. Municipal bonds

5. mortgages

6. bank and consumer loans

Common Stock

• Right to vote

• dividends

• right to vote

(99% of equity)

Preferred Stock

• usually no vote

• fixed dividend

• higher priority than common stock

IPO

first public sale of shares

• take 8-12 weeks

• priced up until day of sale

Firm commitment

The underwriter buys the shares and bears the risk of any unsold shares

Gross spend

compensation to investment bankers

IPO underpricing

first day return to IPO subscribers

Indices

track a portfolio’s return

Value-weighted (indices)

weights proportional to market capitalization, larger companies have a greater weight.

ETFs

Like mutual funds but listed and traded like stocks.

Stock Return equation

dividend yield + capital gains yield

Mortgage interest rate is quoted as a _____ ____

Monthly APR

when does treasury announce how many bills of each maturity it will sell

once a week.

Since 1998 the Treasury has used what auction style?

Single-price (uniform-price) auction: every successful bidder pays the same price.

Noncompetitive bids

specify only an amount and are always filled first.

Competitive bids

specify an amount and a discount yield.

Repo Definition

sell securities now, agree to repurchase at a higher price later

• a collateralized loan

Reverse repo

buy now, sell back later

• the lending side

Negotiable CDs

Bank time deposits (100,000-10mil) that can be resold

Commercial paper

unsecured corporate debt

• 1-270 days

• poor secondary market

ABCP

• backed by asset pools

• was securitized mortgages before 2008

• helped break the buck in 2008

Money markets flourished due to

Regulation Q capping bank deposit rates

FRNs meaning

Floating rate notes

Originate to distribute

lenders sell mortgages within months but keep servicing for a fee.

MBS

hundreds of mortgages pooled in an SPV; investors buy claims on the pool’s cash flows.

What does Ginnie Mae do? (MBS)

guarantees MBS on federally insured loans

• does not issue

What do Frannie Mae and Freddie Mac do (MBS)

Buy conforming mortgages and issue MBS

Private label (MBS)

• non conforming loans

• credit risk matters

• market died after 2008

Pass-through (MBS)

Pro-rata share of the pool, everyone bears prepayment risk.

ABS (MBS)

same idea of pass-through but applied to auto-student and credit caed loans