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154 Cards in this Set

  • Front
  • Back
Characteristics of Money Market Funds: _____ denominations, _____ default risk, _____ maturities
large, low, short
* large denomination - in units of $1M to $10M
* low default risk - cash lent in money markets must be available for a quick return to the lender, money market securities can generally be issued only by high-quality borrowers with little risk of default
* short maturities - an original maturity of 1 year or less
Some money market instruments are bought & sold on a discount basis. What are they?
T-bills, commercial paper, banker's acceptance
With discount yields, you use a _____-day year and calculate yield from _____ value.
360, face
the product of the periodic rate and the number of periods in a year
bond equivalent yield
What is this equation for:
[(Pf-Po)/Pf] (360/h)
idy = discount yield
What is this equation for:
[(Pf-Po)/Po] (365/h)
ibey = bond equivalent yield
Before you calculate effective annual return, you need to convert _____ to _____ first.
discount yield, bond equivalent yield
What is this equation for:
[1+i/(365/h)]^(365/h) - 1
h = number of days to maturity
i = ibey (bond equivalent yield)
Effective annual return
Single-payment security holder receives a terminal payment consisting of _____ plus the _____ of the security.
interest, face value
Money market securities (ex: jumbo cds & fed funds) pay interest only once during their lives, at maturity. This is a _____.
single-payment yield
To compare single payment yields with other securities that pay interest based on a 365 day year (instead of 360), the nominal interest rate must be converted to a _____.
bond equivalent yield
short-term obligations of U.S. government
treasury bills
What are the maturities for T-bills?
13 weeks or 26 weeks
What denominations are T-bills issued in? (primary)
They are issued in denominations of multiples of $1,000. The minimum allowable denomination for a T-bill bid is $1,000.
A typical purchase in the newly issued T-bill market (primary) is a round lot of _____.
$5 million
The U.S. Treasury has a formal process by which it sells new issues of Treasury bills through its regular T-bill _____ Every week (usually on Thurs), the amount of new 13-week and 26-week T-bills the Treasury will offer for sale is announced. Bids may be submitted by government securities dealers, financial and nonfinancial corporations, and individuals and must be received by the Federal Reserve Bank by the deadline of 1 p.m on the Monday following the announcement.
The _____ market for T-bills is the largest of any U.S. money market security.
Secondary market T-bill transactions occur between _____ dealers & are conducted over the Federal Reserve's wire transfer service.
primary government securities dealers
Secondary T-bill market - At the heart of this market are those securities dealers designated as primary government securities dealers by the Federal Reserve Bank of New York (consisting of _____ financial institutions) who purchase the majority of the T-bills sold competitively at auction and who create an active secondary market. In addition, there are many (approximately 500) smaller dealers who directly trade in the secondary market. Primary dealers make a market for T-bills, by buying and selling securities for their own account and by trading for their customers, including depository institutions, insurance companies, pension funds, and so on.
Secondary T-bill markets is an _____ market (markets that do not operate in a specific fixed location - rather; transactions occur via telephones, wire transfers, and computer trading.
over-the-counter (OTC)
An individual wanting to purchase $50,000 of T-bills in the secondary market must contact his or her bank or broker. A bank or broker that is not a primary government securities dealer or a secondary market dealer must contact (via phone, fax, or wire) one of these dealers (ex: J.P. Morgan Chase) to complete the transaction.
_____ is used for transactions in secondary markets between primary government securities dealer.
Fedwire, the federal reserve's wire transfer service
The normal settlement period for Treasury securities in the secondary market is the business day _____ the transaction day - "next-day" settlement.
T-bill yields are quoted as _____ yield.
the price dealers are willing to pay T-bill holders to purchased their T-bills for them
the discount yield based on the current purchase price that is available to investors (potential T-bill buyers)
asked, calculated from the settlement date, two days after the quote date
percentage difference in the ask and bid yields
Short term funds transferred between FIs, usually for a period of one day
federal funds
Fed funds are short-term, _____ loans.
The overnight (or one day) interest rate for borrowing fed funds is the _____ rate.
federal funds
The federal funds rate is normally [[higher/lower]] than T-bill rate.
In the equation for federal funds rate:
iff = [(Pf-Po)/Po] (360/h)
where iff is a _____

You can then convert the rates to an ibey, then EAR.
ispy -> single payment yield
A repurchase agreement is essentially a collaterized _____ loan.
fed funds
an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date in the future
repurchase agreement (repo)
an agreement involving the purchase (buying) of securities by one party from another with the promise to sell them back at a given date in the future
reverse repurchase agreement (reverse repo)
Because treasury securities back most repurchase agreements, they are low credit risk investments and have _____ interest rates than uncollaterized fed funds.
What is this an equation for:
iRA = [(Pf-Po)/Po] (360/h)

Pf includes _____ (repurchase price of the securities = selling price plus interest paid on the repo)
where: iRA is an _____
yield on a repurchase agreement

ispy (single-payment yield), interest
The largest (in terms of dollar value outstanding) of the money market instruments
commercial paper
Commercial paper denominations?
$1 million
Maturities of commercial papers:
Maximum of 270 days, generally range from 1-270, the most common are between 20-45 days
The 270 day maximum maturity for commercial paper is a SEC rule that says that securities with a maturity of more than 270 days must go through the time-consuming and costly _____ process to become a public debt offering (ex: corporate bond).
Icp (yield on commercial paper) os a _____.
idy (discount yield)
bank-issued time deposit that specifies an interest rate and maturity date and is negotiable in the secondary market
negotiable certificate of deposit (CD)
A negotiable CD is a _____ instrument, meaning that whoever holds the CD when it matures receives the principal and interest.
Negotiable CDs have denominations that range from _____ to _____. The most common denomination is _____.
$10 mil
$1 mil
Negotiable Cd maturities rance from _____ to _____, with most having a maturity of _____ to _____ months.
two weeks, one year
one, four
The secondary market for negotiable CDs is not very _____.
an unsecured short-term promissory note issued by a corporation to raise short-term cash, often to finance working capital requirements
commercial paper
a time draft payable to a seller of goods, with payment guaranteed by a bank
banker's acceptance
Banker's acceptance are commonly used for _____ trade transactions.
Because banker's acceptances are payable to the bearer at maturity, they can and are traded in _____ markets.
The risk of default on banker's acceptances is very _____, therefore, interest rates on banker's acceptances are _____.
low, low
Banker's acceptances are sold on a _____ basis.
Money Market Participants
1. U.S. _____
2. Federal _____
3. _____ Banks
4. _____ Market _____ Funds
5. _____ & _____
6. _____
7. Other _____ Institutions
8. _____
1. Treasury
2. Reserve
3. Commercial
4. Money, Mutual
5. Brokers, Dealers
6. Corporations
7. Financial
8. Individuals
There are _____ primary government security dealers. There are also money and security brokers, as well as other brokers and dealers.
Some examples of other financial institutions that participate in money markets are property-_____ & _____ insurance companies, and non-_____ finance companies.
casualty, life, bank
dollar-denominted deposits held offshore in U.S. bank branches overseas and in other (foreign) banks
eurodollar deposits
The market in which eurodollar deposits trade is the _____ market.
Large banks in London have organized an interbank Eurodollar market used by banks around the world as a source of _____ funding; rate paid on these funds is known as the _____ (LIBOR).
overnight, London Interbank Offered Rate
The fed funds rate is generally [LOWER/HIGHER] than the LIBOR (London Interbank Offered Rate).
Eurodollar certificates of deposit -
Most have a maturity of _____ to _____. They are not subject to _____ requirements.
one week, six months,
The rate on Eurocommercial Paper is generally about _____-_____% above the LIBOR.
1/2 - 1%
Treasury Notes and Bonds have a minimum denomination of _____.
A treasury bond's coupon payment is exempt from _____ and _____ taxes.
state, local
The most recent auctioned issue of a given maturity is referred to as the _____ issue or the _____ issue.
on-the-run, current
Securities that are replaced by the on-the-run issue are called _____ issue.
Issues that have been replaced by several on-the-run issues are said to be _____ issues.
well off-the-run issues
Dealers of treasury notes and bonds profit from the _____.
Once issue, T-notes and T-bonds trade in very active _____ markets, OTC market
The U.S. Treasury sells T-notes and T-bonds through competitive and noncompetitive Treasury _____.
a Treasury security in which periodic coupon interest payments can be separated from each other and from the final principal payment.
With stripped treasury bonds, one security represents the _____ payment only, a second security represents the _____ payments.
principal, interest
STRIPS were originally created by securities firms in the early _____.
In 1985, the Treasury created the _____ (Separate Trading of Registered Interest and Principal Securities) program.
Strips are not issued by the U.S. _____, but are created and sold by various _____ institutions.
Treasury, financial
STRIPS [ARE/ARE NOT] backed by the U.S. government.
STRIPS trade in an active _____ market.
With Inflation-Indexed Treasury Bonds, the principal value will increase by the amount of the U.S. _____ rate. They also have a _____ coupon rate.
inflation, lower
Government National Mortgage Association (Ginnie Mae) uses proceeds to purchase _____ that are insured by the Federal Housing Administration (FHA) and by the Veteran's Administration (VA); bonds are backed by the mortgages that are purchased with the proceeds and by the federal government. This is a type of federal agency bond.
A type of federal agency bond-
Federal Home Loan Mortgage Association (Freddie Mac) uses proceeds to purchase _____ mortgages; bonds are not backed by the federal _____, but have a very low degree of _____ risk.
conventional, government, credit
A type of federal agency bond -
Federal National Mortgage Association (Fannie Mae) is a federally chartered corporation owned by individual _____; uses the proceeds to purchase _____ mortgages; bonds are not backed by the federal government, but have a very low degree of _____ risk.
investors, residential, government, credit
Municipal Bonds are issued by _____ and _____ governments.
state, local
A municipal bond's interest payments are exempt from _____ income taxes and most _____ and _____ income taxes.
federal, state, local
The minimum denomination for municipal bonds is typically _____.
Municipal Bonds sell in a secondary market less active than the one for _____ bonds.
2 types of municipal bonds:
1. _______ bonds - backed by the full faith and credit of the issuer
2. _______ bonds - sold to finance a specific revenue-generating project and are backed by cash flows from that project.
general obligation, revenue
a type of revenue bond issued by municipalities on behalf of a corporation to help build the economic economic base of the municipality; the municipality gives its approval for the sale of the bonds but assumes no legal liability for repayment.
industrial development bonds (IDBs)
For corporate bonds, the minimum denomination is ______.
Corp. Bonds
______ - legal contract that specifies the rights and obligations of the bond issuer and the bond holders.
Corp Bonds -
______ bond - coupons are attached to the bond and the holder (bearer) at the time of the coupon payment gets the relevant coupon paid on presentation to the issuer

______ bond - the bond's holder's (or owner's) identification information is kept in an electronic record by the issuer and the coupon payments are mailed or wire-transferred to the bank account of the registered owner.
bearer, registered

Because of the lack of security with bearer bonds, they have largely been replaced by registered bonds in the U.S.
Corp Bonds -
______ Bonds - the entire issue matures on a single date (most corp. bonds)

______ bonds - the issue contains many maturity dates, with a portion of the issue being paid off on each date
term, serial
Secured bonds - ______ bonds - bonds issued to finance specific projects, which are pledged as collateral for the bond issue.
Bonds backed solely by the creditworthiness of the issuing firm, unsecured by specific assets or collateral, are called ______. ______ debentures are also unsecured, and they are junior in their rights to mortgage bonds and regular debentures (riskiest).
debenture, subordinated debenture
a requirement that the issuer retire a certain amount of the bond issue each year.
sinking fund provision
Protective covenants are protecting ______.
A provision on a bond issue that allows the issuer to force the bond holder to sell the bond back to the issuer at a price above the par value (or at the call price).
call provision
______ bonds are bonds that can be exchanged for issuer's common stock, yield lower than non______ bond.
convertible (x2)
Bond rated as speculative or less than investment grade by bond-rating agencies. These bonds are ______ risk, ______ yield. Some are issued as this type of bond, some were downgraded because of poor performance.
Junk bond, high, high.
Treasury securities - bonds are quoted as a % of ______ value, but the numbers after the period are not in hundred, but ______.
face value, 32nds

Ex: 100.29 = 100 29/32% of face value
Bond Market Indexes are managed by major ______ banks. There are many bond market indices & you can always find the appropriate index to compare a bond's performance with.
Bond Market Participants - suppliers & demanders of long-term funds

major issuers - ______, ______, and ______ governments

major purchasers - ______, ______, government units, and ______ investors
federal, state, local
households, businesses, foreign
______ don't have to be sold in Europe (name is misleading). They are issued and sold outside the country of the currency in which they are denominated. They are traded in OTC markets, mainly in London and Luxembourg.
Ex: dollar denominated bond issued in Japan, yen denominated bond issued in U.S.
Foreign bonds are issued by firms and governments outside of the issuer's ______ country and are usually denominated in the currency of the country in which they are ______.

Ex: Japanese company issues $1 denominated bonds in the U.S.
home, issued
Sovereign bonds are ______-issued debt. They have historically been issued in ______ currencies, in either U.S. dollars or euros.
government, foreign
______ Bonds are bonds issued by less-developed countries, backed by U.S. ______-coupon bonds. The principal of the bonds is guaranteed, but coupon payments typically are not.
Brady, zero
The ______ rate is the rate for immediate delivery at the current exchange rate.
The rate at which a currency can be exchanged in the future is known as the ______ exchange rate.
The cross-exchange rates can be figured by comparing ______ exchange rates.
3 types of exchange rate systems
1. ______ floating system - no government imposed boundaries (allows market to determine exchange rate)
2. ______ float - a system with no boundaries in which exchange rates are market determined but are still subject to government intervention (allows currency to float freely, but government can step in sometimes)
3. ______ exchange rate system - pegged to another currency or a unit of account and maintained within specific boundaries (lose flexibility in monetary policy)
freely, dirty, pegged
The value of the foreign currency may change relative to the ______ dollar.
Use forward transaction to avoid loss (______ with forwards).
On-balance-sheet hedging - Match ______ (use same units) & ______ (lend money in same proportion).
assets, liabilities
Off-Balance-Sheet hedging - use ______ to offset risk (hedging with forwards). You enter into an agreement today, but trade will occur in the future.
Largest ______ banks are major players in foreign exchange trading and dealing.
To reduce its foreign exchange net exposure to zero and this avoid FX risk, FIs must match foreign currency assets to liabilities in a given currency, and match buys and sells in its trading book in that foreign currency.
Foreign currency exchange rates between two countries adjust to reflect changes in each country's price levels (or inflation rates and implicitly interest rates) as consumers and importers switch their demands for goods from relatively high-inflation (interest)-rate countries to low inflation (interest)-rate countries.
Purchasing Power Parity (PPP)
The forward exchange rate is determined by the spot exchange rate and the interest rate differential between the two countries.
Interest Rate Parity
With interest rate parity, the return on U.S. investment = hedged return on ______ investment
Balance of payment accounts:
- summarize transactions between citizens of one country with other countries
- use ______-entry accounting methods such that debit entries must be matched with offsetting credit entries - the balance of payments must always balance -> sum of current account and capital account must always be zero.
______ accounts summarize foreign trade in goods and services, net investment income, and gifts, grants, or aid given to other countries.
______ accounts measure investment capital flows into and out of a country.
Valuation of Mortgages - The market price (Pm) of mortgages should equal the ______ of their future CFs.
present value
Federally insured mortgages
- guarantor can be either the FHA or the VA
- borrowers must meet various requirements specified by those government agencies to qualify for FHA and VA mortgage loans from a FI
-maximum mortgage amount is limited by ______
mortgages held by financial institutions that are not federally insured (but generally they are required to be privately insured if the borrower's down payment is less than 20% of the property's value.
conventional mortgages
a mortgage that locks in the borrower's interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change
fixed-rate mortgage
a mortgage in which the interest rate is tied to some market interest rate, thus, the required monthly payments can change over the life of the mortgage
adjustable-rate mortgage
Mortgage maturities are typically ______ years, recently ______ years.
30, 15
Mortgage that requires a fixed monthly interest payment for a three-to five-year period. Full payment of the mortgage principal (the balloon payment) is then required at the end of the period
balloon-payment mortgages
FI will place a ______ against a property that remains in place until the loan is fully paid off.
Down Payment - Borrowers who put up less than ______% are required to purchase private mortgage insurance (PMI).
Discount Points (or just points)-
fees or payments made when a mortgage loan is ______ (at closing)

*money you have to pay up front to buy down your mortgage - 1 pt. = 1%
An amortization schedule shows how the fixed monthly payments are split between ______ and ______.
principal, interest
______ mortgages exceed mortgage conforming limits (>$417,000).
Mortgages to borrowers who do not qualify for prime mortgages are known as ______ mortgages (mortgages to borrowers who have weakened credit histories).
Mortgages that are considered more risky than a prime mortgage and less risky than a subprime mortgage.
Alt-A Mortgages (Alternative A-paper)
Adjustable rate mortgages that offer the borrower several monthly payment options
option ARMs
Option ARM
______ Payment Option - payment changes annually, with a payment cap

- initial interest rate period usually holds only for the first 1 to 3 months; after that, negative amortization - amount owed increases and the borrower is charged additional interest at the rate on the loan times the new, larger principal balance
Option ARM
- ______-Only Payment - pay only the interest on the loan during the initial period of the loan; after that the mortgage must amortize so that the mortgage will be paid off by the end of its original term
- after 10 ears from the start of the loan, the interest-only option typically goes away
Option ARM
- 30 yr fully amortizing payment - pays both ______ & ______ on the loan
- payment is calculated each month based on the prior month's fully indexed rate, loan balance, and remaining loan term
principal, interest
Option ARM
- 15 year fully amortizing payment - puts the mortgage on an ______ amortization schedule
Second mortgages - interest rate ______ than first mortgage
loans that let customers borrow on a line of credit secured with a second mortgage on their homes
home equity loan
Reverse-Annuity Mortgages (RAM)
- borrower receives regular monthly payments from a ______ rather than making them
- when RAM matures (or the borrower dies), the borrower (or the borrower's estate) sells the property to retire the debt
financial institution
______ Sales occurs when a FI originates a mortgage and sells it with or without recourse to an outside buyer. (Remove them from balance sheet, could give a chance for better asset diversification)
Creating mortgage-backed securities is known as ______.
Mortgage ______ securities:
- FIs pool the mortgages and other assets they originate and offer investors an interest in the pool
- Interest and principal payments on the mortgages are sent to the FI, which then transfers (passes through) the payments to the owners of the MBSs after deducting fees or service and for guaranteeing payments to the owners.
Ginnie Mae Mortgage-Backed Securities:
-FIs issue securities that are backed by FHA and VA mortgages
- Ginnie Mae guarantees ______ payment of principal and interest to investors who purchase these securities - timing insurance
- minimum denominations of ______
timely, $25,000
Fannie Mae Mortgage-Backed Securites:
- Fannie Mae issues mortgage-backed securities and uses the funds to purchase mortgages.
-FNMA holds mortgages on its ______.
- receives a fee for guaranteeing timely payment of principal and interest to the holders of the MBSs
-mortgages may be collaterized by ______ or ______ insured mortgages.
balance sheet, conventional, federally
Freddie Mac Participation Certificates (PCs) - performs a similar function to that of FNMA, except that its major securitization role has historically involved ______.
Government agencies in the business of guaranteeing timely principal & interest payments include:
Ginnie Mae
Fannie Mae
Freddie Mac
Who are each of the following owned by:
Ginnie Mae (GNMA)
Fannie Mae (FNMA)
Freddie Mac (FMAC) or (FHLMC)
______ allows firms that plan to offer multiple issues of stocker over a 2 year period to submit 1 registration statement
(adv: save costs, more flexibility when you sell shares)
shelf registration
tombstone ad - isn't really an ______
ADRs (American Depository Receipts) invest in foreign stocks ______.