Investment Midterm - Extra terms

• The possibility that a bond issuer will default, by failing to repay
• principal and interest in a timely manner. Bonds issued by the federal
• government, for the most part, are immune from default (if the
• government needs money it can just print more). Bonds issued by
• corporations are more likely to be defaulted on, since companies often
• go bankrupt. Municipalities occasionally default as well, although it is
• much less common. also called default risk or credit risk.

Risk associated with the unique circumstances of a particular company, as they might affect the price of that company's securities

the present value of a firm's expected future net cash flows discounted by the required rate of return

stock price minus exercise price, or the profit that could attained by immediate exercise of an in-the-money option

short-term, highly liquid government securities issued at a discount from the face value and returning the face amount at maturity

a bank time deposit

short-term unsecured debt issued by large corporations

• dollar-donominated deposits at foreign banks or foreign branches of americn banks
• tie to 3 month LIBOR (next)

• London Inter Bank Offer Rate
• rate that most creditworhy banks charge one another for large loans of Eurodollars in the London market

• funds in a bank's reserve account
• bank to bank lending within US (rate of interest FF)

• repurchase agreement market (temporarily/short-term capitalize of bonds) - bond returned once money returned
• short-term, often over-night, sales of government securities with an agreement to repurchase the securities at a slightly higher price. A reverse repo is a purchase with an agreement to resell at a specific price on a future date

Agency debt is a security, usually a bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the government, but not guaranteed by the government since the agencies are private entities. Such agencies have been set up in order to allow certain groups of people to access low cost financing e.g. students and home buyers. Some prominent issuers of agency securities are Student Loan Marketing Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Agency securities are usually exempt from state and local taxes, but not federal tax. Agency debt is also called an agency security.

long-term debt issued by private corporation typically paying semiannual coupons and returning the face value of the bond at maturity

tax-exempt bonds issued by state and local governments, generally to finance capital improvement projects. general obligation bonds are backed by the general taxing power of the issuer. revenue bonds are backed by the proceeds from the projcet or agency they are issued to finance.

owndership claim in a pool of mortgages or an obligation that is secured by such a pool. also called pass-through, because payments are passed along from the mortgage orininator ot the purchaser fo the mortgage-backed security

offshoots of mutual funds that allow investors to trade portfolios of securities just as they do shares of stock

a firm pooling and managing funds of investors

a primitive security is an instrument such as a stock or bond for which payments depend only on the financial status of its issuer

a derivative security is created from the set of primitive securities to yield returns that depend on factors beyond the characteristics of the issuer and that may be related to prices of other assets

forcasting the realized compound yield over various holding periods or investment horizons

the bond's annual coupon payment divided by its price. different from yield to maturity

a graph of yield to maturity as a function of time to maturity

zero-coupon bonds created by selling each coupon or principal payment from a whole treasury bond as a separate cash flow

if investment bankers ever noticed a bond selling for less than the amount at which the sum of its parts could be sold, they would buy the bond, strip it into stand-alone zero-coupon securities, sell off the stripped cash flows, and profit by the price difference

if the bond were selling for more than the sum of the values of its individual cash flows, they would buy the individual zero-coupon securities in the strips market, reconstitute (reassemble) the cash flows into a coupon bond, adn sell the whole bond for more than the cost of the pieces

• the mispricing among two or more securities to clear a riskless economic profit
• any violation of the Law of One Price, that identical cash flow bundles must sell for identical prices, gives rise to arbitrage opportunities

the sale of shares not owned by the investor but borrowed through a broker and later repurchased to replace the loan. profit is earned if the initial sale is at a higher price than the repurchase price

• theory that forwrd interest rates are unbiased estimates of expected future interest rates
• forward rate equals the market consensus expectation of the future short interest rate
• liquidity premiums are zero
• relate yields on long-term bonds to expectations of future interest rates
• use the forward rates derived from teh yield curve to infer market expectations of future short rates

common term for the market consensus value of the required rate of return k

recently issued bond, selling at or near par value

relationship between yield to maturity and time ot maturity for newly issued bonds selling at par

refer to U.S. government bonds of a given maturity that are not the most recently issued. While they are not as recent as on-the-run treasuries, off-the-run treasuries can be used to construct a yield curve if there is a problem or distortion with the yield curve as represented by on-the-run treasuries

the transition point between recession and recovery

If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher

• premium that market is willing to pay for every dollar of the company's growth
• market expectation of growth

graph representing a set of portfolios that maximize expected return at each level of portfolio risk