Summary: Practice Of Financial Markets
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Read the summary and the most important questions on Practice of Financial Markets
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Bond Market
This is a preview. There are 14 more flashcards available for chapter 26/11/2020
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Primary issuers of securities on Capital Market
- Federal and local governments: debt issuers
- Corporations: equity and debt issuers
- Federal and local governments: debt issuers
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Treasury bill, note and bond
Type Maturity
Treasury bill < 1 year
Treasury note 1 - 10 years
Treasury bond 10 years- No default risk -> Treasury prints money to payoff debt
- Low interest rates
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Treasury Inflation-Protected Securities (TIPS)
Principal amount tied to current rate of inflation to protect purchasing power -
Separate Trading of Registered Interest and Principal Securities (Treasure STRIPS)
Coupon and principal payments are stripped from aT-Bond and sold as individualzero-coupon bonds- Coupon bond stripped in coupon part and principal part -> prices should be equal (otherwise arbitrage)
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Purpose financial guarantees
Timely payment of interest and principal, backed by insurance companies- Issuers lower risk of debt -> lower interest rate, but fee
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Credit Default Swap (CDS)
Buying insurance on your neighbor's house -> ethical problems- Creditors might be better of with default than non-default
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Current yield of a bond
i = C / P -
Duration of a bond
- Maturity up -> duration up
- Interest rate up -> duration down
- Coupon rate up -> duration down
- Duration is additive: is weighted average of durations of individual securities, with weights equaling proportion of portfolio invested in each security
- Maturity up -> duration up
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What drives bond prices?
- Market conditions
- Ratings
- Age of bond
- Market conditions
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Stock Market
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Electronic Communication Networks (ECN)
Allow traders and brokers to trade without need of middleman
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