Primary markets facilitate the iuance of new securities.
Secondary markets facilitate the trading of existing securities.
Stock Stocks (also referred to as equity securities) are certificates representing partial ownership in the corporations that iued them.Money marketThose financial markets that facilitate the flow of short-term funds (with maturities of le than one year) are known as money markets.
Derivative securities are financial contracts whose values are derived from the values of underlying aets
Commercial paper is a short-term debt instrument iued only by well-known creditworthy firms and is typically unsecured.
Repurchase agreements refers that one party sells securities to another with an agreement to repurchase the securities at a specified date and price.
A banker’s acceptances indicates that a bank accepts responsibility for a future payment.They are commonly used for international trade transactions.
Stripped Treasury Bonds The cash flows of bonds are commonly transformed(转化) by securities firms so that one security represents the principal payment only while a second security represents the interest payments: a principal-only (PO) security and an interest-only (IO) security
An initial public offeringis a first-time of shares by a specific firm to the public
A secondary stock offeringis a new stock offering by a specific firm whose stock is already publicly traded.
A put option grants the owner the right to sell a specified financial instrument for a specified price within a specified period of time.American optionThe option which can be exercised on or before the maturity date is called American option
Exercise price or strike price: is the price at which financial instrument can be bought or sold in the future.
A bond index futures contract allows for the buying and selling of a bond index for a specified price at a specifies date.
The Loanable Funds theory, commonly used to explain interest rate movements, suggests that the market interest rate is determined by the factors that control the supply of and demand for loanable funds.
Dynamic open market operation The buying and selling of government securities (through the Trading Desk) is referred to as open market operations.Dynamic operations are implemented to increase or decrease the level of funds.
Eurocommercial Paper A short-term, unsecured loan iued by a corporation in a currency other than the one in which the corporation operates
initial marginUnder exchange requirements, a customers must establish a margin deposit with the broker before a transaction can be execute.
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn.
Answer the questions
1、What are the ways by which the money flows from individual surplus units to deficit units?
financial markets facilitate the flow of funds from surplus units to deficit units.Those financial markets that facilitate the flow of short-term funds (with maturities of le than one year) are known as money markets.
Those that facilitate the flow of long-term funds are known as capital markets.Debtbondstockfundderitives
2、How does the level of tax, do you think, affect the demand of household for loanable funds? (please explain by pictures)
if tax rates on household income are expected to significantly decrease in the future, households might believe that they can more easily afford future loan repayment and thus be willing to borrow more funds.For any interest rate, the quantity of loanable funds demanded by households would be greater as a result of tax law adjustment.This represents an outward shift in the demand schedule.
tax rates on household income (income tax decreases → the line of household demand moves right)
3、What is the relationship between the government demand for loanable funds and interest rate? (explain by pictures)
Whenever a government’s planed expenditures cannot be completely covered by its incoming revenues from taxes and other sources, it demands loanable funds.The way to obtain fund: Municipal (state and local) governments iue municipal bonds to obtain funds, while the federal government and its agencies iue Treasury securities and federal agency securities
Interest-inelastic (insensitive to interest rates): federal government
expenditure and tax policies are generally thought to be independent of
interest rate.Thus the federal government demand for funds is said to be
Interest-inelastic, or insensitive to interest rates.In contrast, municipal
governments sometimes postpone proposed expenditures if the cost of
financing is too high, implying that their demand for loanable funds is
somewhat sensitive to interest rates.
• Like the household and busine demand, the government demand for
loanable funds can shift in response to various events.
Deficit increases → move right
Exhibit 2.3 impact of increased government budget deficit on the government demand for loanable funds
The federal government demand-for-loanable-funds schedule is Dg1, if new bills are paed that cause a net increase in the deficit of USD20 billion, the federal government demand for loanable funds will increaseby that amount.The new demand schedule is Dg2.
4、What are the economic factors that affect interest rates?
1) Impact ofEconomic Growth on Interest Rates
2) Impact of Inflation on Interest Rates
3) Impact of the Money Supply on Interest Rates
4) Impact of the Budget Deficit on Interest Rates
5) Impact of foreign Flows of Funds on Interest Rates
6) Summary of Forces that Affect Interest Rates
5、Explain “crowding-out effect” please.
The deficit might not necearily place upward preure on interest rates.
Given a certain amount of loanable funds supplied to the market( through saving), exceive government demand for these funds tends to “crowd out” the private demand (by consumer and corporation) for funds.The federal government may be willing to pay whatever is neceary to borrow these funds, but the private sector may not.This impact is known as the crowding-out effect.
6、What are the monetary policy tools?
Open market operations
Adjustments in the discount rate
Adjustments in the reserve requirement ratio
7、What are the ways by which the money flows from individual surplus units to deficit units?
8、How does the Fed use the monetary policy tools to adjust the money supply?（答案待定）
1.Open Market Operations
The buying and selling of government securities (through the Trading Desk) is referred to as open market operations.
When the Fed iues securities, the commercial banks purchase those that
are most attractive.The total funds decrease and the money supply falls.
When the Fed purchase securities, the total funds increase, which represents
a loosening of money supply growth.
Adjusting the Discount Rate
The interest rate that an eligible(有资格的) depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.To increase the money supply, the Fed can authorized a reduction in the
discount rate; to decrease the money supply, the Fed can increase the
discount rate.
3.Adjusting the Reserve Requirement Ratio
Reserve Requirement Ratio is the proportion of their deposit accounts that must be held as reserves.
The lower the reserve requirement ratio, the greater the lending capacity of depository institutions, so a largermoney supply.
When the fed manipulates the money supply to influence economic variables, it must decide what form of money to manipulate.The optimal form of money should
(1)be controllable by the fed and (2)have a predictable(可预测的) impact on economic variables when adjusted by the fed.The most narrow form of money, known as M1, includes currency held by the public and checking deposits(such as demand deposits, NOW accounts, and automatic transfer balances) at depository institutions.
9、What are the differences between the general obligation bonds and revenue bonds both of which belong to municipal bonds?
Like the federal government, stateand local government frenquently spend more than the revenues they receive.To finance the difference, they iue municipal
bonds, most of which can be claified as either General obligation bonds or revenue bonds.payments on General obligation bonds are supported by the municipal
government’s ability to tax, whereas payments on revenue bonds must be generated by revenues of the project( tollway, toll bridge, state college dormitory, etc) for which the bonds were iued.
Material: municipal bond
10、What are the characteristics of corporate bonds?
The bond indenture, trustee
Corporate bonds can be described according to a variety of characteristics.The bond indenture(契约) is a legal document specifying the rights and obligations of both the iuing firm and the bondholders.It is very comprehensive( normally several hundred pages) and is designed to addre all matters related to the bond iue ( collateral, payment dates, default provision, call provisions, etc)
Sinking-Fund Provision(偿债基金准备)
Bond indentures frequently include a sinking-fund provision, or a reqirement that the firm retire a certain amount of bond iue each year.This provision is considered to be an advantage to the remaining bondholders because it reduces the payments neceary at maturity.
Protective Covenants(保护条款)
Bond indentures normally place restrictions on the iuing firm that are designed to protest the bondholders from being exposed to increasing risk during the investment period.Those so called Protective Covenants frequently limit the amount of dividends and corporate officers’ salaries the firm can pay and also restrict the amount of additional debt the firm can iue.Other financial policies may be restricted as well.
10、What are the main differences between common stock and preferred stock?
The ownership of common stock entitles shareholders to a number of rights not
available to other individuals.Normally, only the owner of common stock are permitted to vote on certain key matters concerning the firm,such as the
election of the board of directors, authorization to iue new shares of common stock, approval of amendments to the corporate charter, and adoption of bylaws(附例).
Usually not allow for significant voting rights,
The preferred stockholders have the priority to earn dividends compared with common stockholders .
But a firm is not legally required to pay preferred stock dividends.
11、What are the similarities and differences between forward contract and future contract?
Futures and forward contracts are similar in the following ways:
Both are derivative securities for future delivery.The parties agree today on
price and quantity for settlement in the future.
Both are used to hedge currency risk, interest rate risk or commodity price
risk.
They differ in these ways:
Forward contracts are private, customized定制 contracts between a bank
and its clients depending on the client’s needs (OTC).There is no secondary market for forward contracts since they are private contractual agreements. Forward contracts are settled at expiration.Futures contracts are continually
settled (mark to market)
12、What are the risks of trading futures contracts?
Market risk
Basis risk
Liquidity risk
Credit risk
Prepayment risk
Operational risk
13、What are the determinants of call option premiums?
Market price of the underlying instrument
Influence of the market price: the higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the call option premium, other things being equal.
Volatility of the underlying instrument
Influence of the stock’s volatility: the greater the volatility of the underlying stock, the higher the call option premium, other things being equal.
Time to maturity of the call option
Influence of the call option’s time to maturity: the longer the call option’s time to maturity, the higher the call option premium, other things being equal
14、What are the reasons that the Eurodollar market is attractive for both depositors and borrowers?
the spread between the rate banks pay and the rate they charge is relatively small
Only governments and large corporations participate in this market—lower
risk
Investors in the market avoid some costs (no deposit insurance, lower taxes,
no government-mandated credit allocations)
Eurodollar CDs are not subject to reserve requirements
Le regulations and restrictions
