RSM332H1 Lecture 1: Class 1
Document Summary
Upward potential and downside risk: money market instruments (cash instruments) Term deposits, issued by commercial banks; insured by federal deposit insurance corporation (fdic) Issued by corporate, credit cards for companies; cps have credit risk. Credit risk -> need higher returns for risk. Ycp = y t-bill + risk premium -> rp is relatively small (does not move with interest rate) When risk is high, premium is high, central banks will cut interest rates, rp mostly moves in opposite direction of interest rates: fixed-income instruments. Interest income is exempt from tax at the federal level. Investors accept a lower yield relative to taxable bonds. Similar to treasury bonds but have default risk. Transfers risks to the right people; those who want to take the risk. Securitization, which transforms illiquid loans into marketable, liquid securities. Short-term deposits and gives out long-term loans. Aaa municipals are tax-exempt -> therefore willing to accept lower yield. Credit spreads = default premium = yrisky ysafe.
