Section 2.

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Currency Market Instruments. Treasury BillsCertificates of DepositCommercial PaperBankers\' AcceptancesEurodollarsRepos and ReversesBroker\'s CallsFederal FundsLIBOR (London Interbank Offer Rate). 2-2. Treasury Bills. Treasury billsIssued byDenominationMaturityLiquidityDefault riskInterest typeTaxation.
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Part 2 Asset Classes and Financial Instruments

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Money Market Instruments TB (Discount, impose), CD ($100k, $250k, assess), CP Bankers\' Acceptances (int\'l balance and business) Eurodollars-Dollar named (time) stores held outside the U.S.; higher premium Federal Funds - Key loan cost for the economy ; Repos and Reverses LIBOR (London Interbank Offer Rate) Call Money Rate ( purchase stock on edge get cash from their; the advance might be \'brought in\' 2-2

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Commercial Paper Commercial Paper Issued by Maturity Denomination Liquidity Default hazard Interest sort Taxation Large reliable organizations and budgetary establishments Maximum 270 days, as a rule 1 to 2 months Minimum $100,000 3 months or less are fluid if attractive Unsecured, Rated, Mostly top notch Discount Interest wage is completely assessable New Innovation: Asset sponsored business paper is upheld by an advance or security. In summer 2007 resource supported CP advertise caved in when subprime guarantee values fell. 2-3

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MMMF and the Credit Crisis of 2008 Between 2005 and 2008 currency showcase common assets (MMMFs) developed by 88%. Why? MMMFs had their own particular emergency in 2008 when Lehman Brothers petitioned for insolvency on September 15. A few assets had put vigorously in Lehman\'s business paper. On Sept. 16, Reserve Primary store "broke the buck." What does this mean? A keep running on currency advertise reserves resulted. The U.S. Treasury incidentally offered to safeguard all cash assets to stop the run - (up to $3.4 trillion in these assets.) 2-4

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Money Market Instrument Yields on currency showcase instruments are not generally specifically similar Factors affecting "cited" yields Par esteem versus venture esteem 360 versus 365 days expected in a year (366 jump year) Simple versus Progressive accrual 2-5

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Bank Discount Rate (T-Bill cites) - $10,000 $9,875 360 x r = 5% BD 90 $ 10,000 $10,000 = Par Example 90-day T-charge, P = $9,875 2-6

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Bond Equivalent Yield 10,000 - 9,875 365 x r = BEY 9,875 90 r BD =5% Example Using Sample T-Bill r BEY = .0127 x 4.0556 = .0513 = 5.13% 2-7

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Effective Annual Yield 9875 (1+ ) 365/90 r = EAY 9875 10000 - r BD =5% r BEY =5.13% r EAY =5.23% Example Using Sample T-Bill r EAY = 5.23% 2-8

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Money Market Instruments Treasury bills Certificates of store Commercial Paper Bankers Acceptances Eurodollars Federal Funds Repurchase Agreements (RPs) and Reverse RPs Discount BEY* Discount BEY* Discount 2-9

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Capital Market - Fixed Income Instruments Government Issues US Treasury Bonds and Notes Bonds versus Notes Denomination Interest sort Risk? ____________________ Taxation? Variety: Treasury Inflation Protected Securities (TIPS) Tips have vital balanced for increments in the Consumer Price Index Marked with a trailing "i" in the quote sheet (See Figure 2.4) 2-10

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Capital Market - Fixed Income Instruments Government Issues Agency Issues (Fed Gov) Most are home loan related Issuers: FNMA, FHLMC, GNMA, Federal Home Loan Banks Risk of these securities? Inferred backing by the administration In September 2008, Federal government assumed control FNMA and FHLMC. 2-11

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Capital Market - Fixed Income Instruments Government Issues Municipal Bonds Issuer? Contrast from Treasuries and Agencies? Chance? G.O. versus Revenue Industrial improvement Taxation? r = loan fee 2-12

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Capital Market - Fixed Income Instruments Private Issues Corporate Bonds Investment review versus theoretical review 2-13

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Capital Market - Fixed Income Instruments Mortgage-Backed Securities Pass-through A security upheld by a pool of home loans. The pool supporter \'goes through\' month to month contract installments made by property holders and spreads installments from any mortgage holders that default. Insurance: Traditionally all home loans were adjusting contracts yet since 2006, Alt-An and subprime home loans were incorporated into pools 2-14

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Capital Market - Equity Common stock (ADRs) Preferred stock Fixed profits: restricted additions, non-voting Priority over basic Tax treatment Preferred & basic profits are not impose deductible to the issuing firm Corporate expense prohibition on 70% profits earned 2-15

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Capital Market - Equity Capital Gains and Dividend Yields You purchase a share of stock for $50, hold it for one year, gather a $1.00 profit and offer the stock for $54. What were your profit yield, capital pick up yield and aggregate return? (Disregard charges) Dividend yield: = Dividend/P purchase $1.00/$50 = 2% Capital pick up yield: = (P offer – P purchase )/P purchase ($54 - $50)/$50 = 8% Total return : = Dividend yield + Capital pick up yield 2% + 8% = 10% 2-16

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How are stocks weighted? Cost weighted (DJIA), 1 share every stock and contribute money and stock profits proportionately. Showcase esteem weighted (S&P500, NASDAQ), $ put resources into every stock are corresponding to market esteem Equally weighted (Value Line Index), same measure of $ in every stock 2.4 Stock and Bond Indexes 2-17

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Examples of Indexes - Domestic Dow Jones Industrial Average (30 Stocks) Standard & Poor\'s 500 Composite NASDAQ Composite (> 3000 firms) NYSE Composite Wilshire 5000 (> 6000 stocks) 2-18

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2.5 Derivative Markets Listed Call/Put (purchase/offer) Option: Holder the privilege to purchase/offer 100 shares of the fundamental stock at a foreordained cost at the very latest some predetermined termination date. Fates 2-19

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Derivatives Securities Options Basic Positions Call (Buy/Sell?) Put (Buy/Sell?) Terms Exercise Price Expiration Date Futures Basic Positions Long (Buy/Sell?) Short (Buy/Sell?) Terms Delivery Date Deliverable thing 2-20

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Selected Problems 1. Locate the after expense rate of come back to an organization that purchases favored stock at $40, holds it one year and offers it at $40 in the wake of gathering a $4 profit. The association\'s assessment rate is 30%. (Pretax rate or return = ____________ ) The aggregate before-duty salary is $4. After the 70% rejection, assessable wage is: 0.30  $4 = $1.20 assessable salary Therefore Taxes owed are Tax rate  assessable wage Taxes = 0.30  $1.20 = $0.36 After-duty pay = $4 – $0.36 = $3.64 After-expense rate of return = $3.64/$40 = 9.10% $4/$40 = 10% 2-21

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3. An financial specialist has a 30% assessment rate and corporate securities are paying 9%. What must munis pay to offer a proportional after expense yield? 2-22

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6. What would you hope to happen to the spread between yields on business paper and T-bills if the economy were to enter a lofty subsidence? The spread will augment. Weakening of the economy expands credit chance, that is, the probability of default. Financial specialists will request a more prominent premium on obligation securities subject to default hazard. 2-23

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