Cheat Sheet

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Treasury bills: short-term obligations issued by the U.S. government Federal Funds: short term fund transferred b/n financial institutions usually for no more than 1 day Repurchase Agreements: agreement involving the sale of securities by 1 party to another with a promise by the seller to repurchase the same securities from the buy at a specified date and price Commercial Paper: short-term unsecured promissory notes issued by a company to raise short-term cash Negotiable Certificates of Deposit: bank-issued time deposit that specifies an interest rate and maturity date and is negotiable, i.e., can be sold by the holder to another party Banker Acceptances: time draft payable to a seller of goods, with payment guaranteed by a bank. Corporate Stocks: the fundamental ownership claim in public corporation. Mortgages: loans to individuals or businesses to purchase a home, land or other real property. Corporate Bonds: long-term bonds issued by corporations Treasury Bonds: long-term bonds issued by the U.S. treasury States and Local Government Bonds: long term bonds issued by state and local governments US Government Agencies: long term bonds collateralized by a pool of assets and issued by agencies of the U.S. government Bank and Consumer Loans: loans to commercial banks and individuals

Coupon Rate: interest rate on a bond instrument used to calculate the annual cash flows the bond issuer promised to pay the bond holder. Required Rate of Return: interest rate an investor should receive on a security given its risk. Required rate of return is used to calculate the fair present value on a security. Expected Rate of Return: interest rate an investor would receive on a security if he or she buys the security at its current market price, receives all expected payments, and sells the security at the end of his or her investment horizon. Realized Rate of Return: actual interest rate earned on an investment in a financial security. Realized rate of return is a historical (ex post) measure of the interest rate. Duration: 1.average life of bond 2. Time it takes to recoup investment 3. Sensitivity or elasticity to IR change 3 things impact duration: 1. Coupon of interest (/\ coupon, \/ duration) 2. YTM [ir] (/\ IR,\/PV,\/DUR) 3. Maturity (longer mat , longer duration) Annual : ∆P/P= -D[ ∆R/ 1+R] Semi Annual = -D[∆R/1+(R/2)] /\ IR \/P (neg answer) \/IR /\ P pos answer

Quantity of loanable funds supplied increases as interest rates rise
Unbiased expectation theory: at a given point in time the yield curve reflects the markets current expectations of future short term rates ; intuition behind theory is that if investors have a 4 yr investment horizon they could either buy a current 4 yr bond and earn the current or spot yield on a 4 yr bond (iR 4, if held to maturity) each year of could invest in 4 successive one year bonds of which the only know the current one year spot rate buy form expectation of the unknown future one-yr rates[E(2r1), E(3r1), and E(4r1)] |note: ex 1R4 :1 indicated the period bought in , 4 indicates the purchase of a security with a 4 year life E(3r1): expected return on a security with a one-year life purchased in period 3|| In equilibrium, the return to hold a 4 yr bond to maturity should equal the expected return to investing in 4 successive 1 yr bonds. If this equality does not hold a arbitrage opportunity exists. || if future one year rates are expected to rise each successive year into the future then the yield curve will slope upwards || if future 1 yr rates are expected to remain constant each successive year into the future then the 4 yr bond rate will be equal to the 3 yr bond rate -- that is the term structure of interest rates will remain constants over the relevant time period. Specifically, the unbiased expectation theory posits that current long-term interest rates (1RN) are geometric averages of current (1R1) and expected future E(Nr1) short term interest rates: (1+1RN)N=(1+1R1)(1+E(2r1))…(1+E(Nr1)) Therefore: 1/N 1RN=[(1+1R1)(1+E(Nr1))…(1+E(2r1)) -1 1RN = actual N-period rate today N + term to maturity 1R1= actual current 1 year rate today R(ir1) = expected one yr rates for years i=1,2,3,4… Upper case = actual interest rate ;lower = estimates

Liquidity premium theory: investors will hold long term maturities only if they are offered at a premium to compensate for future uncertainty in a securities value, which increases with an assets maturity

Dick Fuld: Lehman CEO Bear Sterns failed in March Morgan Stanley bailed out $200 Paulson: US Treasury Sec; CEO Goldman Sachs b4 Ben Bernanke chairman of Fed Reserve Greenspan (running removed much regulation): April 24 2004 Chris Cox (SEC) {all banks regulate themselves, banks can leverage any they want, decrease interest rates 13 x’s in years (cheap credit)} all big inv banks there Paulson took over in ’08 {facilitates process without no loans etc.} Fannie and Freddie Buy loans make bundle, didn’t sell off loans, expected bailout Merrill Lynch bought by BOA 2 inv banks left { Goldman Sachs, Morgan > Chase} AIG G.S  Mortgage backed sec (bonds) Insure with AIG against housing market go down Rating Agencies : AIG has AAA rating {AAA,A,BB} : tranching AA 580 \/ is “diversifiable” Bernie Frank+Chris Dodd : Frank Dodd Act’10 (Ratings Regulation) GE Calls Paulson: GE pas employees with commercial paper: personal loan backed by nothing (approx. 17 days) issue new debt Sheila Blair(FDIC) (/\ 250,000$ /account) set capital requirements Wells Fargo didn’t need money

Markets: 1. Primary v. Secondary Raise capital selling to each other Ivest bank (ipo, Seo) NYSE (actual market) Dutch Auction NASDAQ (OTC) 2.Brokers v. Dealers buyers + sellers put 2gther has inventory charge commission don’t have to look no inventory NYSE has dealers 3. Money v. Capital Bills short term bonds 1year < Money market 1yr> 1.Tbills (discount) (new-old)/old 2.federal funds 3.purchase agreements REPO 4.commercial paper 5.negotiable CD’s 6.bankers acceptance Capital Markets >1yr 1.sotcks 2.bonds 3. Mortgages (bond = MBS) 4. T bonds/ state/ municipal bonds 5.bank + consumer loans 4.derivative markets 1.options 2.futures/forward 5.forex

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