Class Notes (837,355)
Canada (510,241)
Commerce (1,910)
Lecture 2

COMMERCE 3FB3 Lecture 2: chapter 2

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Jonathan Dushoff

Chapter 2: Financial Markets and Instruments Major Classes of Financial Assets or Securities • Debt o Money market instruments o Bonds • Common stock • Preferred stock • Derivative securities o Options o Futures Markets & Instruments • Money Market o Short-term debt securities ▪ Treasury bills, etc. • Capital Market o Bonds (government and corporate) o Equities (common and preferred) o Derivatives (options, futures, swaps) The Money Market • Money Market o A subsector of the fixed-income market o Consists of very-short-term debt securities o Trade in large denominations • Instruments o Treasury Bills ▪ The most marketable of all Canadian money market instruments ▪ The government raises money by selling bills to the public ▪ Investors buy the bills at a discount from the stated maturity value ▪ The holder receives a payment equal to the face value at maturity o Certificate of Deposit (CD) ▪ A time deposit with a chartered bank ▪ The bank pays interest and principal only at the end of the fixed term ▪ Guaranteed Investment Certificate (GIC): a time deposit for smaller amounts ▪ Bearer Deposit Notes (BDNs): marketable CDs o Commercial Paper ▪ Issued by large, well-known companies ▪ Short-term unsecured debt notes ▪ Backed by a bank line of credit ▪ Rollover at maturity: issue new paper to obtain the funds necessary to retire the old paper o Bankers’ Acceptances o Eurodollars o Repos and Reverses ▪ Repurchase agreements (RPs) • The dealer sells government securities to an institutional investor on an overnight basis Buy back those securities the next day at a slightly higher price • ▪ Reverse repo • Tquestionso buy government securities from an investor and sell them back at a higher price on a future date Yields on Money Market Securities Calculating Money Market Yields Bond equivalent yield (BEY) • o Simple interest annualized rate • Effective annual yield o Compound interest annualized rate • Bank discount yield o As BEY but using 360 days and par value o The quoted yield for US T-bills EXAMPLE Consider a $1,000 par value T-bill sold at $990 with a maturity of a maturity of a half-year, or 182 days • Bond equivalent yield – annualized discount / purchase price r = [(1000 – P)/P] x 365 / n (e.g. $10 x (365/182) / $990 = 2.026%) • Effective annual yield – term yield compounded to annual rate r = [1 + (1000 – P)/P]T – 1 = (1000/P)T – 1 (e.g. [1 + ($10
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