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33 Cards in this Set
- Front
- Back
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term-to-maturity
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the length of time until the final payment of a debt security
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term structure of interest rates
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the relationship between yield and term to maturity on securities that differ only in length of time to maturity.
-graphically approximated by the yield curve. |
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yield curve
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a smooth line, which shows the relationship between maturity and a security's yield at a point in time.
-ascending (normal) -flat -descending (inverted) |
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forward rate
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the interest rate that is expected to exist in the future
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spot rate
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an observed interest rate at which current transactions take place
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implied forward rate
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- it is the rate necessary to make funds invested at the short rate and reinvested at the implied forward rate generate a return equal to that which could be obtained by buying longer term security.
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default
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the failure on the part of the borrower to meet any condition of the bond contract
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default risk (credit risk)
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the possiblity that the borrower will not pay back all or part of the interest or principal as promised.
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default risk premium
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the amount of additional compensation investors must receive for purchasing securities that are not free of default risk.
_the rate on US treasury securities chi used as the default-free rate. |
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bond ratings
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the credit ratings of bonds, ranked in order of the perceived probability of their default and published as letter grades with the highest-grade bonds being those with the lowest default risk.
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investment-grade bonds
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the bonds rated in the top four major rating categories (Baa or BBB and better)
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speculative-grade (junk) bonds
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the bonds rated below Baa (or BBB)by bond rating agencies.
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municipal securities
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securities issued by state and local governments that sell for lower market yields than comparable securities issued by the US Treasury and private corporations.
-exempt from federal taxes |
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marketability
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the costs and rapidity with which investors can resell a security
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call option (call provision)
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permits the issuer to call (refund) the obligation before maturity.
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put option
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permits the investor to terminate the contract at a designated price before maturity
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conversion option
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permits the investor to convert a security contract into another security (stock)
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call price
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the specified price the issuer can call a bond at.
-usually set at the bond's par value or slightly above (1 interest payment) |
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call interest premium
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the difference in interest rates between callable and noncallable contracts.
-will be priced to yield a higher return than a noncallable bond |
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put interest discount
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the difference in interest rates between putable and nonputable contracts.
- yield will be lower than a nonputable bond |
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conversion yield discount
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-the difference between the yields on convertibles compared to nonconvertibles
-lower yield on convertible bonds because they have an opportunity for increase rates of return though conversion |
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money market
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-short maturity
-standardized securities (one security is a close substitute for another) -good marketability -liquid -low default risk |
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treasury bill
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-sold on discount
-maturities up to 1 yr -usually $10,000 denominations -3 month T-bill has lowest interest rate off MM securities |
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types of federal agencies
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-farm credit agencies(loans to farmers)
-housing credit agencies (loans for mortgage market) - federal financing bank (purchases securities of agencies and issues its own obligations) |
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nonguaranteed agency debt
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securities issued by federal agencies that are not guaranteed by the federal government against default
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federal funds
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immediately available funds that can be lent on an overnight basis to financial institutions.
- most liquid of all financial assets -short term mm instrument |
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immediately available funds
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1) deposit liabilities of Federal reserve banks
2) liabilities of commercial banks that may be transferred or withdrawn during a business day |
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repurchase agreement (repo)
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consists of the sale of a short-term security with the condition that, after a period of time, the original seller will buy it back at a predetermined price.
-bank financing |
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reverse repurchase agreement
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-bank investment
-security purchased under agreement to resell at a given price int he future |
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commercial paper
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-short term (typically 6mo or less)
-unsecured -large denominations (100,000 ^) -sold at discount from par -very liquid -credit ratings are important -quality guaranteed |
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banker's acceptance
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a draft drawn on a bank by a corporation to pay for merchandise. the draft promises payment of a certain sum of money to its holder at a future date.
-mostly relate to international trade. |
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letter of credit
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issued by an importer's bank that obligates the bank to pay the exporter a specified amount of money once certain conditions are fulfilled.
-part of banker's acceptance process. |
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federal agency
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an independent federal department established by congress and owned or underwritten by the US govt.
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