...opportunity to buy and sell various forms of short-term securities which are highly liquid and are relatively low-risk debt instruments. The maturities of money market instruments range from one day to one year and are often less than 90 days. It comprises of the call and notice money market, repo market and the market for debt instruments. There is no physical "money market." Instead it is an informal network of banks and traders linked by telephones, fax machines, and computers. Banks financial institutions, companies and government are the key participants in the money market. The size of the transactions in the money market typically is large ($100,000 or more). At the center of this web is the central bank whose policies have an important bearing on the interest rates in the money markets. The money market provides an equilibrium mechanism for levelling out the demand and supply of short term funds and serves as a focal point for the intervention by the central bank (RBI in India) for influencing the liquidity and interest rates in the financial systems.The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis. In essence the market acts as a repository for short-term funds. Large corporations generally handle their own short-term financial transactions; they participate in the market...
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...nominal bonds in investment portfolios, and in the design and execution of fiscal and monetary policy, financial economists and macroeconomists need to understand the determinants of nominal bond risks. This is particularly challenging because the risk characteristics of nominal bonds are not stable over time. In this paper the authors ask how monetary policy has contributed to these changes in bond risks. They propose a model that integrates the building blocks of a New Keynesian model into an asset pricing framework in which risk and consequently risk premia can vary in response to macroeconomic conditions. The model is calibrated to US data between 1960 and 2011, a period in which macroeconomic conditions, monetary policy, and bond risks have experienced significant changes. Findings show that two elements of monetary policy have been especially important drivers of bond risks during the last half century. First, a strong reaction of monetary policy to inflation shocks increases both the beta of nominal bonds and the volatility of nominal bond returns. Positive inflation shocks depress bond prices, while the increase in the Fed funds rate depresses output and stock prices. Second, an accommodating monetary policy that smooths nominal interest rates over time implies that positive shocks to long-term target inflation cause real interest rates to fall, driving up output and equity prices, and nominal long-term interest rates to increase, decreasing bond prices. The paper shows...
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...Homework Assignment – Week 2 Chapter 3 1. Write down the formula that is used to calculate the yield to maturity on a 20-year 10% coupon bond with $1,000 face value that sells for $2,000. Assume yearly coupons. $2000 $100/(1 i) $100/(1 i)2 $100/(1 i)20 $1000/(1 i)20 2. If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk? You would rather be holding long-term bonds because their price would increase more than the price of the short-term bonds, giving them a higher return. 3. A financial advisor has just given you the following advice: “Long-term bonds are a great investment because their interest rate is over 20%.” Is the financial advisor necessarily correct? No. If interest rates rise sharply in the future, long-term bonds may suffer such a sharp fall in price that their return might be quite low, possibly even negative. 4. If mortgage rates rise from 5% to 10%, but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses? People are more likely to buy houses because the real interest rate when purchasing a house has fallen from 3 percent (5 percent –2 percent) to 1 percent (10 percent 9 percent). The real cost of financing the house is thus lower, even though mortgage rates have risen. (If the tax deductibility of interest payments is allowed for, then...
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...to firms or governments who need funds. Financial institutions serve as intermediaries by channeling the savings of individuals to firms that need funds. * Investors commonly finance the investments made by firms by purchasing debt securities or equity securities issued by those firms. In this assignment, functioning of Financial Markets would be explained with details of Capital and Money Markets’ Instruments.. Financial Markets; Types and Functions A financial market is a place for buying and selling of financial securities such as stocks and bonds. The financial markets can be divided into different subtypes; * Capital Markets * Stock Markets, that deal in issuance and subsequent trading of shares or common stock. * Bond Markets, that deal in issuance and subsequent trading of bonds. * Commodity Markets, that facilitate the trading of commodities. * Money Markets, that provide short term debt financing and investment. * Derivatives Markets, that provide instruments for the management of financial risk. * Futures Markets, that provide standardized forward contracts for trading products at some future date. * Insurance Markets, that facilitate the redistribution of various risks. * Foreign Exchange Markets, that facilitate the trading of foreign exchange. The capital and money markets are also classified into primary markets and secondary markets. * Primary market deals with the issuance of new...
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...1. Introduction Debt market may be short-term, intermediate and long-term. Short-term and intermediate-term financing sources include trade credit, bank loan, finance company loan, commercial paper; inventory financing includes the issuance of mortgages and bonds (Shim J.K; 1989:138). The importance of the debt market in an emerging economy cannot be overemphasized. In the presence of uncertainty and prudential norms, banks often decline to lend for long term projects, and borrowing from overseas markets may be constrained by country risk perceptions and restrictions on capital mobility. In such cases, the market for debt securities may emerge as the mainstay of the credit and capital markets. (Sumon Kumar Bhaumik&SuchismitaBose, 2001) Bond market link having long-term financing needs with investors willing to place funds in long-term interest bearing securities (UN, TW; 2001). When a corporation (or government) wishes toborrow money from the public on a long term basis, itusually does so by issuing or selling debt securities. Theyare generally called bonds (Ross, 1998).A corporate bond is security representing a long-term promise to pay a certain sum of money at certain time over the course of the loan with fixed rate of interest payable to holder of the bond. And the debenture is the bond backed or secured only by the general credit of corporation. (Hampton, 1998) 2. Empirical Studies Though the debt market, debenture and bonds provide the loan capital to company and...
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...tenPOTENTIAL ISLAMIC CERTIFICATES FOR RESOURCE MOBILIZATION MOHAMED EL-HENNAWI* 1. INTRODUCTION The development of financial instruments has become an essential ingredient for the economic development of Islamic countries, most of which are underdeveloped. The absence of these instruments, together with the problem of limited resources and skills which are necessary to cope with the growing investment needs, tends to hinder the development process of these countries. Islamic countries need to stimulate higher domestic savings rates and to efficiently channel the savings into productive investments, as a precondition for accelerating economic growth. This calls for the development of relatively advanced financial markets with all the relevant components, such as new financial institutions, securities markets, etc. Islamic banks, national and international, have recently come into existence to play an important intermediary role in pooling savings, especially from small investors, and channelling them into productive investments. This role has been constrained, to a great extent, by the absence of capital markets and financial instruments based on shari'ah. Islamic banks, therefore, have embarked on a serious effort to develop their own instruments for mobilizing the funds of the Islamic Ummah and using them to foster economic and social development of the ummah. To be more specific, some of these banks suffer from excess liquidity, for which no suitable placements...
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...The short-term debts and securities sold on the money markets— which are known as money market instruments—have maturities ranging from one day to one year and are extremely liquid. Treasury bills, federal agency notes, certificates of deposit (CDs), euro dollar deposits, commercial paper, bankers' acceptances, and repurchase agreements are examples of instruments. The suppliers of funds for money market instruments are institutions and individuals with a preference for the highest liquidity and the lowest risk. Treasury Bills Treasury bills (T-bills) are short-term notes issued by the U.S. government. They come in three different lengths to maturity: 90, 180, and 360 days. The two shorter types are auctioned on a weekly basis, while the annual types are auctioned monthly. T-bills can be purchased directly through the auctions or indirectly through the secondary market. Purchasers of T-bills at auction can enter a competitive bid (although this method entails a risk that the bills may not be made available at the bid price) or a noncompetitive bid. T-bills for noncompetitive bids are supplied at the average price of all successful competitive bids. Certificates of Deposit A certificate of deposit is a document evidencing a time deposit placed with a depository institution. The following information appears on the certificate: • the amount of the deposit, • the date on which it matures, • the interest rate and • the method under which the interest is calculated. Large...
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...Threat of fiscal dominance? A BIS/OECD workshop on policy interactions between fiscal policy, monetary policy and government debt management after the financial crisis Basel, 2 December 2011 Monetary and Economic Department May 2012 Papers in this volume were prepared for the joint BIS and OECD workshop on “Policy interaction: fiscal policy, monetary policy and government debt management”, held in Basel on 2 December 2011. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or the central banks represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 92-9131-135-9 (print) ISSN 1682 7651 (online) ISBN 92-9197-135-9 (online) Preface The massive expansion of central bank balance sheets to contain the worst financial crisis in living memory raises questions about the theory and practice of monetary policy. The persistence in many advanced countries of large fiscal deficits and the prospect of high public debt/GDP ratios for many years is likely, at some point, to create policy dilemmas not only for central banks but also for public debt managers. Some countries have already had to cope with higher...
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...blur the separation of their policies from fiscal policy. The mandates of debt management offices have usually had a microeconomic focus (viz, minimising longer-term borrowing costs, while limiting refunding risks). Such mandates have usually avoided any explicit macroeconomic policy dimension but some major policy overlaps are latent. What is needed is a policy framework for all official actions that affect the maturity structure of government debt in the hands of the public. This requires more analysis of the macroeconomics of government debt management. A full debate about the allocation of functional responsibilities would have to take account not only of the economics, but also of political and institutional constraints. There are operational advantages in having in place appropriate governance arrangements that serve to forestall short-sighted policies and hold specific institutions accountable for their mandates. Keywords: Monetary policy, central banks, policy design and consistency, policy coordination, debt management, sovereign debt JEL classification: E52, E58, E61, H63 1 An earlier version of this paper was presented at the ECB’s Public Finance Workshop on “Challenges for Sovereign Debt Management in the EU”, held on 7 October 2011 in Frankfurt, Germany. This was also published in the OECD’s Working Papers on Sovereign Borrowing Public Debt Management. Emails: Hans.Blommestein@oecd.org and...
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...and CMBS markets are no exception. The credit meltdown has led to a curious pricing disparity in the commercial MBS market: Triple-A paper with a 5-year term is suddenly trading at spreads way above similarly rated 10-year bonds, due primarily to rising concerns about "extension risk." Last Friday, 10-year super-senior CMBS was trading at 1,050 bp over swaps, while the spread on 5-year notes swelled to 1,300 bp. Over the summer, before the credit markets went into a deep tailspin, the difference between the 5- and 10-year spreads generally was only a few basis points. The pricing difference throws bond-market convention on its head. All things being equal, long-term paper normally commands higher spreads to reflect the greater risk associated with holding investments longer. That started to change in the summer of 2007, when the credit crunch caused bond trading to slow. The benchmark classes of 10-year bonds started trading at slightly tighter spreads than 5-year paper because their larger supply offered more liquidity. But more recently, the gap has ballooned, widening to as much as 400 bp. "The trend has really become noticeable over the past month," one investor said. The new concern about 5-year CMBS is that the timely payoff of bonds depends on the payment streams of commercial mortgages scheduled to mature in the relatively short term, when credit conditions could make it difficult, if not impossible, for borrowers to cover balloon principal payments by refinancing....
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...1. What is the Fisher hypothesis? Is it Valid? Explain The Fisher hypothesis (sometimes called the Fisher effect) is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, specifically the nominal interest rate and the expected inflation rate. The term "nominal interest rate" refers to the actual interest rate giving the amount by which a number of shillings owed by a borrower to a lender grows over time; the term "real interest rate" refers to the amount by which the purchasing power of those shillings grows over time—that is, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the loan proceeds. The relation between the nominal and real rates is given by the Fisher equation, which is This states that the real interest rate () equals the nominal interest rate () minus the expected inflation rate (). Here all the rates are continuously compounded. For rates based on simple interest, the Fisher equation takes the form where is the simple nominal interest rate and is the simple real interest rate; this equation is well approximated by using the simple rates in the previous equation provided all three percentage rates are relatively small. If the real rate is assumed, as per the Fisher hypothesis, to be constant, the nominal rate must change point-for-point when rises or falls. Thus, the Fisher effect states that there will be a one-for-one adjustment of the nominal...
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............8 Relation between Debt and Equity Market................................................................................10 Empirical Relation.................................................................................................................12 Limitations of Study................................................................................................................15 Conclusion.............................................................................................................................16 Reference and Bibliography...................................................................................................17 Abstract The purpose of this paper is to empirically analyse the dynamic relationship between stock market and bond market post liberalization. - The research work deals...
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...Running Head: Bond Valuation: Liquidity Risk in the Pricing of Corporate Bonds Term Paper: Bond Valuation: Liquidity Risk in the Pricing of Corporate Bonds Group #5: Christina Adams Dorcas Adewunmi Nakia Hillsman Princess Mitchell Marquita Wilson Presented to: Dr. Felix Ayadi ABSTRACT Liquidity risk in the pricing of corporate bonds and the importance of investors knowing liquidity risk in the pricing of corporate bonds and how it affects returns on investments is an important factor in the performance of financial institutions. This paper summarizes the research of several different researchers and their take on the importance and significance of liquidity risks. Furthermore, it addresses the assumptions, a review of different studies as well as a contrast of different methodologies on how liquidity of risk in the pricing of bonds has an affect on investments. PURPOSE OF THE STUDY The purpose of this study is to demonstrate how to conduct an analysis and predict future situations of the liquidity risk in the pricing of corporate bonds. We will also study different companies and previous studies to see how they handled liquidated risk. Corporate bonds are good for businesses with a high credit value. It is easy for them to be able to issue higher bond amounts with a low interest rate. Many people believe that corporate bonds put you at a higher risk because of its taxable terms, ability to collect...
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...Corporate Bond What Does Corporate Bond Mean? A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies. Investopedia explains Corporate Bond Corporate bonds are issued in blocks of $1,000 in par value, and almost all have a standard coupon payment structure. Corporate bonds may also have call provisions to allow for early prepayment if prevailing rates change. Corporate bonds, i.e. debt financing, are a major source of capital for many businesses along with equity and bank loans/lines of credit. Generally speaking, a company needs to have some consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate. The higher a company's perceived credit quality, the easier it becomes to issue debt at low rates and issue higher amounts of debt. Most corporate bonds are taxable with terms of more than one year. Corporate debt that matures in less than one year is typically called "commercial paper". Capital Markets What Does Capital Markets Mean? A market in which individuals and institutions trade financial securities. Organizations/institutions...
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...The International Bond Market Impact of Unconventional Monetary Policy Yu Zhang 130023326 University of Dundee College of Arts and Social Sciences School of Business April 2014 Content Abstract ................................................................................................................................................... 2 Chapter 1 Introduction .......................................................................................................................... 3 Chapter 2 Literature review.................................................................................................................. 6 Chapter 3 Data and Methodology....................................................................................................... 10 3.1 Data.............................................................................................................................................. 10 3.2 Methodology ............................................................................................................................... 10 Chapter 4 Four Central Banks’ Unconventional Monetary Policy Announcements Details ........ 13 4.1 Important Announcements........................................................................................................ 13 Table 1 Important announcements by the Federal Reserve ............................................................ 13 4.2 Quick Summary: .....................................................
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