ASSIGNMENT3g [Name of the Student][Name of t.docx

ASSIGNMENT 3
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[Name of the Student]
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Running Head: ASSIGNMENT1
General Essay Questions (5pts each)
1. What are TIPs? How do these securities provide a hedge
against inflation? Discuss the spread between traditionally-
structured Treasury notes and TIPs. What factors influence this
spread relationship?
TIPs are the Treasury Inflation Protected securities. These are
the bonds issued by the government that offer return after the
inflation which is also known as a real return. they are different
from the nominal or traditional bonds in which the returns are
specifically before inflation. This is the way for the investors
for offsetting the risk that comes with the inflation. These TIPs
offer the hedge against inflation by providing a return which is
calculated after taking out the risk of inflation. This is the best
way for investors to offset the risk that comes due to the
inflation in society. With the strengthening of the economy,
inflation can increase, and the return is not expected to increase
in the high rate of inflation, so for affording protection against
inflation in the economy, TIPs are used in the form of fixed
income investment for the destruction of inflation. TIPs are

backed by the government and they offer high attractiveness for
the investors because the level of risk in these securities is less.
TIP spread is when the yield of TIPS and other US Treasury
securities is compared having the same date for the maturity.
The difference that exists between both of them is used as
payment adjustment for the inflation. The traditionally
structured treasury notes do not consider inflation at the start
and the yield is used for compensating the investors for the
expected future rate of inflation. This spread between both
securities is the indication for the market about inflation. The
most important factor in influencing the spread relation is
inflation because this spread is basically dependent on the
inflation rate change. The spread is basically the projection for
the inflation and it cannot be predicted how it will change in the
future. Comprehensively, the TIP spread is considered to be a
reliable measure for predicting the appropriate level of
inflation.
2. Fully describe the fixed-income instruments of the money and
capital markets. Make sure you cover all the money and bond
markets we discussed. Do not just list the instruments.
Among financial markets, there are two most commonly used
concepts, one is a capital market and the other one is the money
market. The money market is used by the corporate entities and
government for lending and borrowing money for a short term.
In contrast, capital market contains long term assets with having
the maturity of more than a year. In the capital market, the
bonds and stock options are available. The securities in the
capital market which offer a fixed rate of return are called as
fixed - rate capital securities and a combination of features for
the common and preferred stocks are offered to them. there is a
fixed yield in these securities. Preferred stock is the best option
here in which the dividend payment is fixed and must be given
to the people.
The most commonly used fixed income security is a bond in the
capital market. This is a form of borrowing in which the

continuous return is given every year by the investors. These
bonds can be further divided into corporate bonds or
government bonds. Corporate bonds are offered by companies
having a strong financial position while the governments offer
municipal bonds. The government also offer treasury bonds
which are offered for the funding of its debt. Some other types
of fixed income securities include the certificate of deposit,
treasury notes, T – bills, and preferred stocks. The T – bills and
T – notes are same as the T – bonds offered by the US
government. However, these bills and notes are short - term and
issues on a discounted value. Certificates of deposit are issued
by the bank in the return of money saved in banks for a
predetermined time period and the banks pay the interest
amount for the account holders. There is the lower rate on these
securities as compared to the bonds but in comparison to the
traditional saving accounts, they offer more rates. Preferred
stocks are another type of fixed income securities in which
fixed dividend is offered to the investors based on the
percentage share or a dollar amount. Interest rate and the
inflation rate in the state are the determinants of the price of
preferred stocks. The yield on these shares is high as compared
to other bonds because the life time is longer.
3. Fully discuss the concept of risk in the bond market. Describe
the different types of risk and how these risks can cause
realized return to being different from expected return.
Bonds are used as a great source for the generation of income
and it is commonly considered to be a safe investment. When
this is compared with the stocks, it is safe, but investors need to
consider some of the risks that are associated with the bond
market as well. The biggest risk for the bond market is a change
in interest rate. There is an inverse relationship between bond
prices and interest rate. This mostly happens because when the
decline in interest rates occur, an investor tries to lock their
investment in the high rates. This result in scooping up of the
bonds which offer high return rate as compared to the market
rate of interest. The increase in the demand resulting in the

increase in prices of bonds as well.
Another risk is called as reinvestment risk in which the
proceeds are reinvested on a lower rate as compared to the
previous earning. The fall in interest rates is a common way of
presenting the risk. This callability feature helps the issuer in
redeeming the bond prior to their maturity date. Another risk is
called as the inflation risk in which the when the rate of
inflation is increased in the economy in comparison to the
income investment, the purchasing power of the investors start
to decrease and result in giving a negative rate of return.
Default risk is another type of bond risk which can occur when
dealing with them. when any person purchases a bond, this
means that the company has to repay the amount of bond on
maturity. However, it is not guaranteed that all the corporate
bonds will offer full credit and faith at the end of the period. It
is important to consider the possibility of default while making
the investment decision. The credit rating of the company is
another important risk which must be considered while
investing in the bonds. When the rating companies downgrade
the bonds of a specific company, this result in reducing the
prices of bonds. The last risk that bonds have to face is known
as liquidity risk. This risk involves the idea that the investor
might not be able to sell his bond in the market which is a threat
to the liquidity. All these risks play an important role in
bringing a difference in the realized and expected returns of the
bonds. When the risks increase, this result in decreasing the
value of bonds and investors get less return in comparison to the
one expected by them.
4. What is securitization? Discuss the benefits of securitization
from the issuer and investor perspective. What is a CMO? How
does it differ from a pass-through security? How did the
development of the CMO structure expand the appeal of
mortgage securities? What is negative convexity as it relates to
mortgage securities?
Securitization is the method in which the group of assets or

illiquid assets are taken, and then financial engineering is used
for transforming it into the form of security. These illiquid
assets are then packed, purchased and then securitized for
selling them to the investors. The best example used for
defining securitization include mortgage - backed securities.
The benefit investors get out of the securitization to include the
advantage of getting the proportionate amount which is treated
as the return on investment. This proportionate amount is
because of the securitization on the back of security and reduces
the risk of default. On part of the issuer, the mortgage pool is
divided into different parts which are helpful in spreading and
diversifying the risk.
CMOs are the collateralized mortgage obligations which are the
securities formed from the pool of mortgages. The formation of
CMOS is similar to the creation of pass – through securities.
CMOS is developed for providing investors with a large range
of cash flow certainties and time frames as compared to the pass
– through securities. The difference in both these securities is
that in CMOS, the structuring is done and there are different
securities which are created by the help of pools of securities.
The cash flows of interest and principal are redirected in this
process. The portions of cash flows are segregated from the
CMOS so that the interest payments and principal can be
segregated based on the distribution schedule of the creation of
CMO.
When the yield curve of the bonds is concave, negative
convexity exists. This is basically the rate of change in the
duration and it is measured by using the second derivative for
the bond price in comparison of its yield. When this thing is
seen in terms of mortgage securities, they are convex in shape
which results in lower yield and negative convexity.
5. What types of securities does the Treasury issue? Fully
explain the Treasury auction system process. Discuss the
Treasury’s decision to move to a single-price system. How does
the auction system differ from a traditional underwriting?
The treasury securities issued by the government include

treasury bonds, treasury bills, treasury inflation protected
securities and treasury notes. There are the marketable
securities issued on the part of government and state is
responsible for fulfilling all the obligations behind these
securities. There are some other non – marketable treasury
securities which include the State and Local Government Series
and the government account series which are issues to the
government managed saving bonds and trust funds.
In the treasury auction process system, there are various steps
involved. The first step is the announcement of the issuance of
securities to the general public. Once the announcement is
made, it is done for attracting the dealers, financial institutions
and brokers. There are various details included in the issuance
of auctions. Further, there is bidding in which the dealers and
other persons interested in the purchase of securities offer their
bid to make a purchase. There are two types of budding options,
one is called competitive while the other is noncompetitive. The
auctions are available for the public and then the bidding is
made by them. after the bids are made, the Treasury securities
are issued to the person having the highest bid. The account of
the bidder is charged for the amount he has offered for the
securities. There is a standard interest rate applied on these
treasury options and there are few cases in which accrued
interest is also paid by the purchaser of the securities.
Treasury bills come under the single – payment securities and
this means that they are sold on a discount and have to pay
some specific face amount when the maturity arrives. The
treasury conducts are done in the format of the single price.
This is done so that the non-competitive bid can be subtracted
from the offered quantity of the securities.
The auction system is different from the underwriting system
used traditionally. In the auctions, there is a minimum price set
by the company which is also called as the floor price and all
the interested parties made auctions in the ascending order. In
comparison, the underwriting system was operated by the agents
of the company who are known as underwriters. They are

helpful for the company in the selling of shares while the
issuance of new shares. These parties take their commission for
selling the shares to the market parties. So, there is no
commission or third party involved in the issuance of shares
using auctions while the contrary happens when this thing is
done by the underwriters.
6. Fully explain the two perspectives of return in the money and
capital markets. Fully describe the models of return in the bond
and equity markets.
In the two types of markets, there are capital and money market
involved. The buyers and investors have their reasons for
selecting the securities from each market. In the capital market,
there are high - risk investments while the money market assets
are safer. The returns from the money market are low but they
are at a steady pace. In comparison, the returns in the capital
market are higher. The magnitude from the returns of the capital
market have a direct correlation with the risk level but this is
not always true. The markets are considered efficient in the long
run and inefficient in the shorter term. These are the issues
which are tried to recover by the investors in the capital market.
So, overall, the returns offered by the capital markets are high,
but the money market offers less level of return. the money
market is considered to be safe but there are sometimes negative
returns of this market as well because of some adverse factors.
These are the unusual conditions and it is important to consider
it before putting the money in the capital or money market.
The returns of equity and bonds are divided into the cash
distribution and capital gains. There are periodic interest
payments in the bond returns however the equity returns consist
of the capital gains mainly which are obtained on the sale. The
portfolio consists of both the bonds and equity, so the overall
return is a combination of both these securities. When the
comparison of both these securities is done in the longer run,
this means that the equities will perform better in comparison of
the bonds. The bonds are commonly determined by the interest
rate they offer, and it is always fixed depending on the market

conditions. The equity investment always results in periodic
dividends as well as the capital gain that is obtained when the
sale of these securities takes place. So, the equity investment is
known for the capital return.
II. Presentation Questions (5pts each)
1. What are the major types of derivatives? Define futures,
forwards, and options. What benefits do derivatives provide to
the money and capital markets?
The derivatives are commonly characterized in four major
categories. These categories include futures, forwards, options
and swaps. The first type is forward contracts which is the
simplest among all and the oldest form of derivatives. This is
the arrangement in which the agreement is made for selling the
securities on a future date. The price for selling the security in
the future is decided at the present time. The second type of
contract is a futures contract which is somewhat similar to the
forward contracts. The price of selling a commodity is decided
in advance but the difference lies in the fact that the future
contracts are listed in stock exchange. This makes the exchange
as an intermediary. This means that the future contracts are of
standard nature and there can no modification take place in the
agreement.
The third type of derivatives is options which are different from
the other two types. Options are asymmetric in nature and
bounds one party whereas the other party has to decide on
another date which is the expiry date of the contract. The
obligation is on a single party, but the option of choice is given
to another party. the fourth type is swaps which are the most
complicated type of derivatives. This enables the participants
for exchanging the stream of cash flows. The uncertain cash
flow can be switched by a party with a certain cash flow. The
best example for swap can be the switching of fixed interest rate
for the floating interest rate. This is used by the companies for
reducing the foreign exchange risk.
In the capital and money markets, the derivatives can be used
for changing the interest rates in the markets. This is helpful in

the shifts of currency exchange rates. The prices change in the
markets is based on the flow of information that occurs in the
markets on a unique degree. The money market and capital
market instruments can be dispersed on the basis of the
derivative market securities. The changes occurring in both
markets are managed by the investors using the speculation and
other information on the market for getting maximum returns
from their decisions made.
2. What are emerging markets; converging markets and frontier
markets? What characterizes the emerging markets of Brazil and
Eastern Europe?
The emerging markets are the ones in which the development is
taking place and they are on the way of success. These are the
markets which have started using their resources efficiently but
have not reached the full potential. Most of the markets in this
world are emerging because they have a high potential for
success. In the converging markets, the convergence happens
when the different price is not allowed for any single
commodity. In short, there is no perfect competition in the
market which means that the demand and supply are not
determined by the market forces. The third type is the frontier
market which is a new generation market. This is the forward
type of emerging market in which the capital market and
economies are developed in a more established manner.
The economic market of Brazil has increased the sustainability
level in the previous few years. This market is considered to be
among 10 of the largest economies of the world. The capital, as
well as financial market of Brazil, still has a great potential for
growth. The integration of Brazil in the financial market on the
global market is ensured with the help of introducing a new
product. There are many new securities and methods introduced
in the market for improving the growth level of this market.
This involves introducing products with the collaboration of
UK.
The emerging market of eastern Europe has a huge amount of
part in the real sector which includes the global integration and

considerable trade on the period of post – transition. The
financial sector of this market shows that the ownership of
foreign banks is associated with the increased efficiency of the
banks. The ownership of domestic banks along with the high
amount of returns has transmitted this into the European
financial market. There are significant effects of wealth from
the communication of central banks on the financial markets
and this has also reduced the uncertainty in the financial
markets.
3. What countries make up the Eurozone? What are the benefits
of the use of a single currency in the Eurozone? How has the
evolution of the Eurozone impacted the money and capital
markets?
There are all the European countries that come in the eurozone,
some of them include Austria, Cyprus, Netherland, Belgium,
Malta, Estonia, France, Italy, Finland, Greece, Germany, and
Ireland etc. The effect of using the same currency in all these
countries has multiple positive impacts on the success of this
region. The most prominent benefit of using this same currency
in this market is that the risk is shared among all these
countries. There are many welfare effects that can be obtained
by the monetary union. Other benefits involve mechanical
benefits in which the most important one is the cost saving on
transactional cost which occurs on the conversion of currency.
The loss in the foreign exchange trade is also another effect
which occurs because of using the common currency. The
liquidity in the region increases which is helpful in reducing the
cost of transactions in the selling and buying of financial assets.
This has a huge impact on the money and capital market as well.
The risk is shared in the securities on the international level
because of using the same currency. The stabilization of the
federal budget increase because of the risk sharing among the
capital market securities. The financial markets in the European
regions are more integrated in this way and the financial
reforms are performed on a national level. High level of priority
is given to the economic reforms taking place on the overall EU

level. Using Euro as a mutual currency for all the markets of
members is without any doubt the best strategy for reducing the
risk and improving the efficiency level of the market while
saving cost in multiple methods.
4. Define all the governmental agencies involved in the
securities regulation process. Discuss the major aspects of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010, including the Volcker Rule.
The department of commerce is the most prominent
governmental body which focuses on the regulation of
securities. This is also known as the Bureau of Industry and
Securities. The main focus of this department is dealing with
local companies and then regulating the procedure of exports in
the country. The department which is solely associated with the
dealing of securities is known as Securities and Exchange
Commission. This department is present in all the economies
and every company operating in the country should be listed in
this institute. This institute is responsible for retaining the
business activities in the country and can extend the companies
who operate publicly in the region. Another department is the
state department which is the Directorate of Defense Trade
Controls. This ensures the commercial level operations of
companies working in the economy of any particular company.
Dodd-Frank Wall Street Reform and Consumer Protection Act is
a large reform which was implemented in the form of legislation
and passed by Obama in the year 2010. This was done as a
response to the financial crisis occurring in 2008. This took
multiple years to implement as there were 2,300 pages of this
legislation. There were multiple new agencies of government
which were given the responsibility of multiple different tasks
and they looked on various aspects of the banking system. The
most important aspects of this act are that it has helped in
improving the stability of the financial system in the country.
There are various elements in this act which help with the
consumer protection. There are many economic aspects of this
law as well. This includes the consolidation of multiple

regulatory agencies and among the reforms of consumer
protection, there are new agencies formed for the protection of
consumers. There are many new measures introduced as well for
improving the international standards as well as the cooperation
so that the improvement in the accounting and regulation can be
tightened for the credit rating agencies. Later on, the Volcker
rule was also added in this which prohibits the depository banks
from doing the proprietary trading. The banks were restricted
because of this rule for doing some specific speculative
investments.
5. What are hedge funds and private equity funds? What
strategies do these entities employ? How are these types of
firms regulated today? Explain the structure of a private equity
firm.
Private equity funds require direct investment in the public or
private companies which are further de – listed from the public
exchange. These are the acquisitions and investments which are
illiquid and have long - term nature. The capital is increased in
them by the help of private partnerships which are known to be
private equity funds. In contrast, the Hedge funds are about
making an investment in the assets which offer high returns in a
short time period. So, the managers of these funds prefer the
liquid assets so that the shift can be made between various
investments.
The strategy used by the private equity funds include the short -
term return companies which can offer a high level of return in
the longer run. The basically have requirement of the
controlling equity type of interests for the companies in which
the investment is made by them. this can be obtained using a
leveraged buyout. The money is invested in this type of
investment when it is called out and the investor only commits
for the capital initially. However, the strategy of hedge funds
require the investors to invest the money in one go. There is no
restriction of the hedge funds and they can be liquidated at any
time.
The regulation of hedge funds is done in an open - minded

fashion where there are no restrictions imposed on the
transferability of the funds. In comparison, the private equity
funds are regulated in the form of close ended investment in
which the restrictions are imposed on the transferability for a
specific time period. The way in which compensation of these
funds occurs is also different.
The structure of the private equity firm is made by the general
as well as limited partners. The capital is provided, and the
institutional investors are included in it in the form of
endowment funds, banks, foundations, insurance companies and
other individuals having a high net worth. Such individuals are
called limited partners because their liability is extended only
to the amount of capital they invest in the venture. There is a
minimum level of commitment set for this which is commonly 1
million dollars.
III. Market Monitoring Questions
1. You are a reporter for a major financial newspaper. You are
asked to write a concise, well-organized article on the major
movements in the money and capital markets over the
September-November 2018 period, highlighting not only market
movements but also the major themes that affected the
marketplace during this period. Limit your response to 500
words. (10pts)
In the global markets, the long - term growth prospects are
being hindered because of the structural barriers and high level
of commodity dependence in 2018. The trade tension among the
economies has been intensified which is a risk on the global
level and an important threat to the growth outlook. The
turbulence in the financial market happening recently has
exposed the economies to various vulnerabilities in the
developing world. Before October, it was advised in the global
market to the investors for taking a defensive approach. They
were advised to beware of the momentum, growth style factors
and high Beta value in the market.
There were multiple data points which were highlighted in
September expecting to be rising in the coming times. The most

important thing included in them is the optimism for small
businesses which is high for all times and the indices of
manufacturing which was hitting high values. The confidence of
the consumer is also hitting the top level. It is important for
considering the implications of this correction in the market
because there are many new things to come until next May
2019. In the fourth quarter of 2019, the growth level is slower
as compared to the other quarters.
The positive indicators show that the market of US is not going
to be in recession in the near future. The growth expectations
for GDP are missed as the shift in economic reality is slowing
down and the margin is continuously changing in the analysis.
After analyzing the macro environment, there is another
important factor which is called the trajectory of the corporate
earnings. The corporate earnings are tough while entering in
2019. The most significant reason for this fact is the corporate
taxes which were implemented in 2018. The tax cut is
implemented in this time period is the main reason behind the
change in these factors.
Based on the evaluation models, this slowing growth in the
earning can lead to the decrease in the valuation of the equities.
The impact of these slowing economies is considered on the top
flow and line but this also has an impact on the stock market. In
the market returns, the highlighted term at this time is volatility
which is rising in all classes of assets but not in the equity
market. Another important aspect going on is known as the tech
volatility which is going on in high potential. The implications
that result in this volatility can be measured by the help of
potential move in the prices.
2. Clearly, economic indicators are an important fundamental
factor that influences rates and relationships in the money and
capital markets. What do you believe are the four key economic
indicators (make sure you cite specific indicators)? Why? What
do these indicators tell us about the market? What happened to
each of these indicators this semester? (10pts)
The most important economic indicator used in the money, as

well as capital markets for determining the growth rate of the
economy, is GDP or gross domestic product. This is the market
value of all the goods as well as services being produced in the
country in a set time period and this is helpful in measuring the
wealth in the society. this also indicates how far the profits will
grow. This is important because it is used by the federal
reserves to adjust the policy of the country accordingly. This is
based on the estimates at first and the final numbers are given
in the market. The reason for the increase or decrease in its
value is always given in the quarterly reports of economies. In
recent times, GDP has shown positive growth in the economies.
The next indicator is called money supply which is important
because it is used by the federal reserve especially for the
making of monetary policy and bringing change in the interest
rate and changing the money supply in the market. In the recent
time period, this is used by the economists for getting
information about recession, recoveries, and all the other
changes that occur in the stock prices. With the increase in
internationalization, the money supply has fallen out of
synchronization along with all the other economic indicators.
The third indicator is the CPI or consumer price index. This is a
complex indicator which is important for the economy because
it helps in estimating inflation. This change occurring in
inflation can also have major implications on the overall
economic policy and monetary policy as well. In this semester
time period, the change in CPI has been positive and this has
shown some particular details about specific products.
Another indicator is producer price index also termed as PPI.
This is used for tracking the prices in all the sectors of goods
production. It is important as it is the first term coming every
month as a measure of inflation. This shows the production
trends which are increasing in the recent few months. This has a
significant impact on the changing of the price levels for the
products as well as services.
3. Discuss the “flight to quality” phenomenon. What is it? Cite
examples of the effect of “flight to quality” from market

movements this semester. (5pts)
The flight to quality is the concept in which the financial
market investors sell their securities which are perceived to be
having a high level of risk and then make a purchase of safe
investments. This is a sign of fear in the market and the
investors always want less risk while exchanging lower level of
profit. This commonly occurs with the increase in the demand
for the assets who have securitization of private agents. This is
a sudden shift that takes place in the investment behaviors of
the investors in the period when financial turmoil is in the
market. The feature of flight to quality is the insufficient taking
of risk by the investors.
When the risk - taking becomes excessive, this can become the
reason of financial turmoil and many other disturbances in the
market in the following period. This type of shift in the
portfolio can have multiple negative effects on the financial
market. With the increase in negative credit spread and
leverage, there can be most liquid assets that are safer and
reduce the risk in the asset market. These indicators can have a
real effect on the overall economy.
The investors in this semester have been getting the taste of this
fine thing and this is the indication that it can lead to future
problems. The shares of the companies are considering to be of
low quality in the past few years and they are the ones which
have outperformed the expectations of the investors. In the
dynamic shifts happening in recent years, the conditions have
also been adverse than these conditions. In the previous two
years, the low - quality stocks have outperformed but the recent
period has shown a completely negative impact (Gandel, 2018).
This shows that quality is considered as the most important
aspect for the investors in the current time period.
https://www.washingtonpost.com/business/flight-to-
qualitycould-signal-trouble-for-stocks/2018/10/09/255f100c-
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0e01efba3cc1_story.html?noredirect=on&utm_term=.6a01d5c7e
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4. We began the semester with a discussion of the key themes
currently influencing the money and capital markets. What are
these themes? Which of these themes are still driving rates and
relationships today? (10pts)
There are few themes in the capital as well as money market
which are commonly influencing the overall global market. The
most prominent of them is the recent fall in oil prices, the
survival of the European Union and the worrisome feelings
about the slow growth of the Chinese market. Oil is considered
an important factor in the global economy. With the increase in
its prices, everything goes down and vice versa. This complete
year was in a form result of incorrect expectations from every
side. So, according to the stats, there is no a difference in the
indicators in the time period of start and end of this semester.
The economies are going at the same pace but figures are
becoming clearer now because it has not almost year end and
there is multiple analysis coming on the top of the economic
outlooks.
There are various elements in the fixed income securities as
well which play their role in bringing change in the overall
market. The rate of inflation is much more stable now. So, yes,
the rates as well as the relationships which were identified at
the start of this semester still stand. With the new
administration of Trump, the spending of government has
increased while the taxes are reduced. The relations with China
are also changing which is a big change on a global level. This
change in relations can result in having various other impacts
on the overall world trade.
5. The Federal Reserve is clearly a dominant influence on the
money and capital markets. Discuss how the markets monitor
the Fed and what this information has revealed this semester.
What has the market focus been regarding the Fed this
semester? (10pts)
The federal reserve is analyzed by the markets and there are
many important insights that help in changing the future. The

most important conclusion drawn from this time period is that
the Fed is looking for increasing the inflation in this time. It is
believed by the economists that the high rate of inflation would
not hurt the economy. It will be helpful for the central banks for
supporting their growth rate and combat the problems that can
occur in the upcoming downturn of the economic world. The fed
is pushing the economy for driving more inflation and the
warning has been issued against deflation for multiple years.
The economic downturn which is upcoming can only be
encountered using a high rate of return on the economic
securities.
For getting the higher rates of interest, it is important to raise
inflation in the economy. It is not made clear that which level of
inflation or interest rate would be more appropriate. There are
many factors such as the aging population, less level of
economic growth, and an increase in the saving rates is pushing
towards the interest rates which would make the economy grow
at a sustainable rate. There are higher targets set by the
economists which give fed more room by increasing interest
rate by the help of central bank forces. In recent months, the
investment community was also obsessed with the interest rates.
The rate that prevails among the banks is also changing with the
ripple effect in all the economies. There is a huge response of
economy on the change of these aspects. So, these indicators
show that the interest rate will increase in both the money and
capital markets.
JULIO : Hey Guys, SO the questions highlighted in yellow are
the ones that I found answers to. The ones highlighted in red are
the ones that I have NO clue about LOL hope this and whatever
you share helps
*****Page 33 has the questions and what we believe are correct

answers to the midterm that is posted below
Finance 141: The Money and Capital Markets
Midterm Review
The following topics will be covered on this examination:
1. Definitions of all rates/markets we are following in the
market monitoring project.
Short term rates
Prime: rate that commercial banks charge their most
creditworthy customers (admin rate)
Discount rate: The discount rate is the interest rate charged to
commercial banks and other depository institutions for loans
received from the Federal Reserve's
Federal Funds: the rate at which banks borrow from other banks
on an overnight basis.
`Why is the fed funds rate closely monitor?
Describe the federal funds futures contract: agreement btw two
entities to borrow or lend in the fed funds market at a certain
point in the future.
What about non-banks?
Question 4: How do institutions utilize federal funds contracts?
to hedge against short term interest rate markets
Federal Funds Target discount window. (admin rate)
: (admin rate)à rate target by the FED
3 month-U. S Treasury Bill (risk free rate): (market rate) short-
term debt obligation backed by the Treasury (less than 1 year)
3-month Libor à rate that banks borrow and lend US dollar
deposits off shore (benchmark for interest swap rates) (market
rate) is a benchmark rate that some of the world’s leading banks
charge each other for short-term loans.
3-Month Prime (A1/P1) Commercial Paperà short term debt
instrument of a corporation (market rate) (unsecured debt) As a
result, only firms with high-quality debt ratings will easily find
buyers without having to offer a substantial discount (higher
cost) for the debt issue

Long Term rates
· 10 Year-U. S Treasury Note: treasury borrow for 10 years
debt obligation issued by the United States government with a
maturity of 10 years upon initial issuance.
· 10-Year Japanese Government
· 10-Year German Government
· 10-Year Spanish Government
· EMBI Global Index: The emerging markets bond index is a
benchmark index for measuring the total return performance of
international government bonds issued by emerging market
countries that are considered sovereign (issued in something
other than local currency) and that meet specific liquidity and
structural requirements.
· 30-Year U.S Treasury Bond (long bond) (60 coupon
payments)
· U.S Corporates Double-A-Rated: (high quality) corporate
bonds
· High Yield 100: Speculative bonds. a high paying bond
with a lower credit rating than investment-grade corporate
bonds, treasury bonds, and municipal bonds. Since there is a
higher risk of default, these bonds pay better. (IDK what else to
add - alec)
· Fixed-Rate Mortgage-Backed ???? - can be bought and
sold through a broker; rate that is issued by either a federal
gov’t agency company, government sponsored enterprise, or
private financial company. It is secured by a mortgage or
collection of mortgages. (feel free to correct add more or be
more specific)
· Muni Master : municipalities

Foreign Exchange Rates
· Y/US $
· US$/British Pound
· US $/ Euro
· Chinese Yuan/ US $
· Brazilian Real/ US $
Commodities
1.Gold (per oz.)
2.Oil (per barrel)
Equity Indexes
1.Dow Jones Industrial Average: The Dow Jones Industrial
Average (DJIA) is a price-weighted average of 30 significant
stocks traded on the New York Stock Exchange (NYSE) and the
Nasdaq.
2.S & P 500: The S&P 500 Index (formerly Standard & Poor's
500 Index) is a market-capitalization-weighted index of the 500
largest U.S. publicly traded companies by market value, The
index is widely regarded as the best single gauge of large-cap
U.S. equities
3.Russell 2000: The Russell 2000 index is an index measuring
the performance of approximately 2,000 small-cap companies in
the Russell 3000 Index, which is made up of 3,000 of the
biggest U.S. stocks. The Russell 2000 serves as a benchmark for
small-cap stocks in the United States.
4.NASDAQ Composite: The Nasdaq Composite Index is the
market capitalization-weighted index of over 3,300 common
equities listed on the Nasdaq stock exchange.
5. Nikkei- Japanese stock exchange / the leading and most-
respected index of Japanese stocks. It is a price-weighted index
composed of Japan's top 225 blue-chip companies traded on the
Tokyo Stock Exchange.=
6.Stoxx Euro 600 - has a fixed number of 600 components

representing large, mid, and small cap companies among 17
European countries.
7.San Paulo Bovespa
8.Shanghai Composite -made up of all A-shares and B-shares
that trade on the shanghai stock exchange.
Other Benchmarks
VIX Index (CBOE Volatility): Measure of market expectations
of future volatility AKA fear index
2. Why are the money and capital markets important?
**function of the money and capital markets is the efficient
transfer of money
Capital markets Importance: provide an opportunity for the
public community/ enables a nation to achieve economic
growth/ , only through capital markets long-term funds are
raised by the business community./ capital markets are more
frequently used for long-term assets, which are those with
maturities of greater than one year.
Money Markets: Money markets are used by government and
corporate entities as a means for borrowing and lending in the
short term, usually for assets being held for up to a year
These markets. allow funds to move from people who lack
productive investment opportunities to people who have such
opportunities.
These markets are critical for producing an efficient allocation
of capital (wealth, either financial or physical, that is employed
to produce more wealth), which contributes to higher production
and efficiency for the overall economy.
3) Factor that’s characterize the instruments are:
Negotiability: All of the instruments can be buy and sold
Liquidity: how quickly you can turn assets into cash without
losing value (time, value, and volume component)

Market-Determined Prices: forces of supply and demand
4. What are the two ways money can be exchanged in the
economy?
Money can be exchange indirectly or directly
Indirectly-Financial Intermediation: it involves a financial
intermediary that stands between the lender-savers and the
borrower-spenders and helps transfer funds fromone to the
other. Banks take in deposits from lenders and borrows these
deposits to borrowers
Directfinance: method of financing where borrowers borrow
funds directly from the financial market without using a third-
party service,
5. What is the composition of the global money and capital
markets? Be prepared to identify and define major market
segments (ie. fixed income; equity and derivatives). What are
the major differences between fixed income and equity?
Differences between Fixed Income and Equity à main difference
is they make profit for investors/ manner in which they traded/
level of risk
Fixed income - Equity
· Fixed income is a market segment that consists of money
markets and bonds. This area of investment is one of less risk.
So investors will see little return since they are in a low-risk
environment. Investors also buy and trade these bonds on the
market but they see little return to what was invested. Buying
T-Bills are generally regarded as taking on no risk since the
gov’t would have to default which is highly unlikely.
· The equity market consists of common stock. Common stock
is the purchasing of a share(s) of a publicly traded company to

take part ownership. The capital invested is more risky to the
investor since there is no guarantee of them making their money
back. Stocks are mostly long term investments since the price of
a stock fluctuates daily, but for the most part continuously
increases over time.
· Derivatives are a broad term for the 5 subcategories that make
it up. Forwards, futures, options, interest rate swaps, and credit
default swaps all make up the derivative market. Options are a
form of a derivative that use puts and calls to trade among the
market.
6. Describe the instruments of the money markets, including
treasury bills; commercial paper; federal funds; repurchase
agreements; certificates of deposit; Eurodollar.
US Treasury Bills: Most widely held and most liquid security/
Treasury bills are sold with 4-, 13-, 26-, and 52-week
maturities/ A Treasury Bill (T-Bill) is a short-term debt
obligation backed by the Treasury Department of the U.S.
government with a maturity of less than one year,
Commercial Paper: (unsecured/debt instrument) Commercial
paper securities are unsecured promissory notes, issued by
corporations, that mature in no more than 270 days. Because
these securities are unsecured, only the largest and most
creditworthy corporations issue commercial paper. The interest
rates the corporation is charged reflects the firm’s level of risk.
Bankers’ Acceptance: A banker’s acceptance is an order to pay
a specified amount of money to the bearer on a given date/
traded at a discount from face value on the secondary market,
which can be an advantage because the banker's acceptance does
not need to be held until it matures.
Federal funds: Federal funds are short-term funds transferred
(loaned or borrowed) between financial institutions, usually for
a period of one day/ excess reserves that commercial banks and

other financial institutions deposit at regional Federal Reserve
banks;
Repurchases agreements: A repurchase agreement (repo) is a
form of short-term borrowing for dealers in government
securities. The dealer sells the government securities to
investors, usually on an overnight basis, and buys them back the
following day. (collateralized)
Certificates of deposit: A certificate of deposit (CD) is a
savings certificate with a fixed maturity date, specified fixed
interest rate and can be issued in any denomination aside from
minimum investment requirements. A CD restricts access to the
funds until the maturity date of the investment/ Customers buy
CDs to earn interest while keeping their money safe.
Euro Dollar: The term eurodollar refers to U.S. dollar-
denominated deposits at foreign banks or at the overseas
branches of American banks. By being located outside the
United States, eurodollars escape regulation by the Federal
Reserve Board, including reserve requirements.
7. What is a bond? What are the important features of a
bond? Who are the major issuers of bonds?
Bonds are securities that represent a debt owed by the issuer to
the investor. Bonds obligate the issuer to pay a specified
amount at a given date, generally with periodic interest
payments. / A bond is a fixed income investment in which an
investor loans money to an entity (typically corporate or
governmental) which borrows the funds for a defined period of
time at a variable or fixed interest rate.
Important features of a bond:

Face/par value: Principal portion of the loan/ Amount you get
back from the issuer on the day bond matures
Maturity: The maturity is the date at which the bond’s principal
comes due and must be repaid to lenders in full. Maturities for
corporate bonds are typically in the range of one to five years,
with some bonds maturing in 10 or even 30 years
Coupon/Yield: is the rate of interest that the issuer must pay,
and this periodic interest payment is often called the coupon
payment. This rate is usually fixed for the duration of the bond
and does not fluctuate with market interest rates.
** Federal Government (treasury bonds), State governments
(munis), and companies are major issuers of bonds (corporate
bonds)
8. Why are credit ratings important to the money and capital
markets?
Investors use credit ratings (e.g., Aaa or Baa) that reflect the
probability of default to determine the creditworthiness of
particular debt securities. As a consequence, debt ratings play a
major role in the pricing of debt securities and in the regulatory
process
Rating agencies assess the credit risk of specific debt securities
and the borrowing entities. In the bond market, a rating agency
provides an independent evaluation of the creditworthiness of
debt securities issued by governments and corporations. Large
bond issuers receive ratings from one or two of the big three
rating agencies. In the United States, the agencies are held
responsible for losses resulting from inaccurate and false
ratings
9. Be prepared to discuss the following from the report, The
New Dynamics of Financial Market Globalization: What is
financial globalization? What trends are significant in financial
globalization in the 2001-2016 period?
Financial globalization is the consolidation or integration of
financial markets across the world. The main goal to financial

globalization is to connect different nations/institutions to
global capital markets promoting growth and stability in the
global economy.
Significant Trends
1. Significant trends observed from the years 2007-2016 are:
a decline of global cross-border capital flows including a
limitation of lending across nations; a decrease of foreign
claims by European banks; slight changes on the value of
foreign investment relative to the global GDP; and the
percentage of equities and bonds owned by foreign investors.
10. What are the functions of the Federal Reserve? How is the
Federal Reserve organized; how does it operate and especially
how do they control monetary policy? What is meant by the
“dual mandate?” and “QE”? How do we follow the Fed in the
money and capital markets?
Three traditional functions
1. Conducting Monetary Policy which is to control the supply
of money in the banking system to achieve the dual mandate .
3. Providing Payment services to financial institutions : The
FED holds cash reserves and processes check and electronic
payments for depository institutions.
Functions of the FED:
· Control monetary policy
· Coordination of Monetary Policy with Foreign Central
Banks
· Foreign exchange market intervention and coordination
with foreign central banks
· Bank regulation and supervision
· Lender of Last resort
· System for check clearance
**** Monetary policy is the fed’s behavior in pursuit of price
stability, moderate long interest rates, and maximum
employment.

The FOMC sets monetary policy by choosing an interest rate.
That cost is important since it is the cost- to a bank- of holding
reserves.
How is the Fed Organized?
Board of Governors: consist of 7 members, appointed by the
president and confirmed by the senate
Federal Open Market Committee (FOMC) à Fed’s monetary
policy making body /made up of the board of governors and the
presidents of the reserve banks.
FOMC sets monetary policy by establishing a target for the
federal funds rate
Quantitative Easing: Quantitative easing is an unconventional
monetary policy in which a central bank purchases government
securities or other securities from the market in order to lower
interest rates and increase the money supply
Dual Mandate– the balancing act where the fed tries to promote
full employment and economic prosperity while trying to keep
low inflation rates.
How do we follow the fed in the money and capital markets?
We follow the fed by following the federal funds rate target and
the actual rate
11. Why is the New York Federal Reserve considered the most
powerful of the district banks?
The New York Fed has its ear to the ground in the finance
capital of America. Its seats are the closest to Wall Street,
meaning the New York Fed is responsible for sniffing out
information that could move markets ahead of other banks./ he
New York Fed is the largest in terms of assets of the twelve
regional banks. Operating in the financial capital of the U.S.,

the New York Fed is responsible for conducting open market
operations, the buying and selling of outstanding U.S. Treasury
securities. / The Federal Reserve Bank of New York is
responsible for executing the central bank's monetary policy by
reviewing price inflation and economic growth, and by
regulating the banks within its territory.
12.The important role of banks as financial intermediaries.
What is financial intermediation? What are the benefits of this
process? What is spread banking? Why is spread banking
inherently risky for a depository institution? What are the two
main types of liabilities of a bank? Why are banks so heavily
regulated? (I emailed her about these two subquestions so i will
write them out when i hear back from
Gioia)UPDATED!!!!!!!!!!!!!!!!!!!!!!
It involves a financial intermediary that stands between the
lender-savers and the borrower-spenders and helps transfer
funds from one to the other. A financial intermediary does this
by borrowing funds from the lender-savers and then using these
funds to make loans to borrower-spenders. The process of
indirect finance whereby financial intermediaries link lender-
savers and borrower-spenders/ This process allows fund to be
transferred from those who have capital to those who lack
capital
Benefits: hedge risk-spread out decrease risk, reduces the costs
of lending and borrowing, greater liquidity, ease of borrowing
Spread Banking? In simple terms, the net interest spread is like
a profit margin. The greater the spread, the more profitable the
financial institution is likely to be; the lower the spread, the
less profitable the institution is likely to be.
Balance Sheet of a Bank: Asset = credit ex. Credit cards, line of
credit, etc.
Liabilities = Savings Accounts - dont know about the other
one

The two main types of liabilities for banks are deposits and
borrowed funds(When banks go to the money and capital
markets to borrow).
Banks are heavily regulated b/c the regulators want to make
sure that banks are healthy and can perform their very important
function of financial intermediation; facilitating the transfer of
money in the economy.
13. What is securitization? Why is securitization an important
theme in the money and capital markets?
is the process of bundling small and otherwise illiquid financial
assets (such as residential mortgages, auto loans, and credit card
receivables), which have typically been the bread and butter of
banking institutions, into marketable capital market securities.
Securitization is the fundamental building block of the shadow
banking system.
14. How does the Fed administer discount window borrowings?
How has this process changed? Why did the Fed make these
changes?
How Does the fed administer window borrowings?
How has this process changed?
The fed administers rates to depository institutions by setting
the discount rate above the federal funds rate
Old system Discount window: 3 conditions Have to be me
1. they would have to need money or else liquidity crisis
2. no traditional forms of financing is available to them
3. They can’t relend the funds
New system /Discount window
Discount rate was below the federal funds rate
NEW SYSTEM:
1. All banks have access to the discount window Primary credit-
-> healthy institutions
Secondary credit--> higher rate for unhealthy institutions

Discount rate is above the federal funds rate
Why did the fed make these changes?
The intention was to rely on an above the market discount rate
instead of 12 federal reserve banks to ration borrowing at the
discount window.
· Federal funds future contract is an interest rate futures
contract that is based on the average federal funds rate over a
particular calendar month.
· Think of a future contract as specifying that a certain good
or asset is to be delivered at some future date at a pre-set price
the futures price.
The fed funds future market is not very good at predicting, The
rate does not tell us where the market thinks rates will be in the
future. Fed fud future rates, on average, overpredict future fed
fund rates.
Market partcipants can utilize this market by directly hedging
against the fed funds rate to match the borrowing rate with the
fed funds futures contract - Mark Accardo
16.What are derivatives?Define the five different types of
derivatives. What is a credit default swap? What benefits do
derivatives, like the credit default swap, provide the market?
Derivatives are financial instruments that derive their value
from some underlined asset
Forwards: A forward contract is a customized contract between
two parties to buy or sell an asset at a specified price on a
future date. A forward contract can be used for hedging or
speculation, although its non-standardized nature makes it
particularly apt for hedging. (over the counter product)

Futures: A futures contract is a legal agreement to buy or sell a
particular commodity or asset at a predetermined price at a
specified time in the future. (standardized also trade in
exchange)
Reserve requirmenets
PCEI: P
Options: option to buy or sell an underlying asset at a set
price/time. It ahs two values (Intrinsic value and time value)
(market price vs strike price)
Call right to buy
Put right to sell at strike price
Interest Rate Swaps: Counterparties exchange interest rates / An
interest rate swap is an agreement between two parties to
exchange one stream of interest payments for another, over a set
period of time. Swaps are derivative contracts and trade over-
the-counter.
Credit Default swaps: A credit default swap (CDS) is insurance
against default on a financial instrument, usually some kind of
securitized bond. Typically, the holder of debt will buy a CDS
from an investment or insurance company, such as AIG, to shift
the risk of default to a third party. When the probability of
default is low, the cost of the CDS is similarly low. By lowering
the risk of these insured bonds with default insurance, the
market price of the bonds would increase./ a financial contract
whereby a buyer of corporate or sovereign debt in the form of
bonds attempts to eliminate possible loss arising from default
by the issuer of the bonds. This is achieved by the issuer of the
bonds insuring the buyer’s potential losses as part of the
agreement.
Benefits of Derivatives: Price discovery, risk management
(hedge risk), improve market efficiency/ help reduce market
transaction costs

17. Discuss the “too big to fail” philosophy. How did “moral
hazard” contribute to the financial crisis?
The moral hazard created by a government safety net and the
desire to prevent financial institution failures have presented
financial regulators with a particular quandary, the too-big-to-
fail problem
Which regulators are reluctant to close down large financial
institutions and impose losses on the institutions’ depositors
and creditors because doing so might precipitate a financial
crisis.
Similarly, the too-big-to-fail policy increases the moral hazard
incentives for nonbank financial institutions that are extended a
government safety net. Knowing that the financial institution
will be bailed out, creditors have little incentive to monitor the
institution and pull their money out when the institution is
taking on excessive risk. As a result, large or interconnected
financial institutions are more likely to engage in highly risky
activities, making a financial crisis more likely.
18.What is “stretch for yield”? Be prepared to cite examples of
this phenomenon in today’s money and capital markets and refer
to its effects on the rates and relationships we are following.
Stretch for yield happens in low interest rate environment--
bonds, other safer assets
Investors wants to invest in riskier assets in hope of
higher/enhancing returns
Demand increases in riskier assets caused prices to increase and
rates to decrease
In the market monitoring project, bonds like US and other

countries have seen decreases in their prices and the stock
markets are continuing to rally.
Specific rates that have gone up include DJ Corporate,
HY100, Fixed-Rate MBS, etc. - all rates have generally gone up
with exceptions of 2-3 negative weeks, causing bond prices to
drop.
19.What is a “flight to quality”? Be prepared to cite examples
of this phenomenon in today’s money and capital markets and
refer to its effect on the rates and relationships we are
following.
Flight to quality is the action of investors moving their capital
away from riskier investments to safer ones
For example, during a bear market, investors will often move
their money out of equities and into government securities and
investment grade corporate securities. Another example is
investors moving investments from high-risk countries with
political unrest like Thailand or many thriving yet still not fully
established markets like Uganda and Zambia to more stable
markets of other countries, like Germany, Australia, and the
United States. One indication of a flight to quality is a dramatic
fall of the yield on government securities, which is a result of
the increased demand for them
Many investors will monitor for a decrease bond yields as a
metric for more challenging economic conditions, including
increasing rates of unemployment, stagnating economic growth
or even a recession. As interest rates increase, bond prices also
tend to fall
Slower-than-expected economic growth, corporate scandals,
wars, high oil prices, and other factors can convince investors
that markets are about to slow or fall.
20.What is the yield curve? Why is it so important to the study

of the money and capital markets? What type of yield curve
maximizes a bank’s net interest margin?
Yield Curve: A graph that depicts the relationship between bond
yields and maturities (is an important tool in fixed-income
investing) Investors use the yield curve as a reference point for
forecasting interest rates, pricing bonds and creating strategies
for boosting total returns. Type of yield curve to maximize net
interest margin? Positive yield curve or upward Steeper (The
steeper the curve, the bigger the profit because banks lend long
term but borrow short term)
21. What are the key trends in the money and capital markets
over our base period (9/17-9/18)? Has the market followed these
trends this semester? What trends are evident this semester?
Key trends in the mcm’s over our base period:
· Short term and longterm rates increased
· Bond prices went down
· Yield curve flattened
· Stock markets increased
· Volatility increased
Key Trends this semester:
· FED increased administered rates.
· Stock markets have been volatile
· Bond prices and rates have been volatile
· Credit differentials have widened
22. What are credit differentials? Why are they important to the
study of the money and capital markets? What has happened to
credit differentials over the last year? This semester?
A credit spread is the difference in yield between a U.S.
Treasury bond and another debt security with the same maturity
but of lesser quality. Credit spreads between U.S.

IF ANYONE CAN ADD ANYTHING HERE (WOULD BE
APPRECIATED)
23. What is the term structure of interest rates? How do we
study this? What has happened over the last year? This
semester?
The term structure of interest rates is the relationship between
interest rates and time to maturity . We study this by looking at
the yield curve. Over the past year and semester, the yield curve
has flattened.
24. What are international interest rate differentials? How do
we study this? What has happened over the last year? This
semester?
International interest rate diferentials reflect the contrast in
interest rates between simmilar rates in different countries . (US
treasury compared to other countries in the project). Over the
past year they have narrowed, and over the past semester they
have widened.
25. What are the key fundamental factors affecting the money
and capital markets today? Make sure you can discuss these
with reference to the many Wall Street Journal articles
distributed this semester.
· Economic announcements
· Fiscal Policy
· Federal Reserve Policy
· Political Announcements
· Supply and Demand.
·
26. What is fiscal policy? How has fiscal policy influenced the
markets this semester?
Fiscal policy is the means by which a government adjusts its
spending levels and tax rates to monitor and influence a nation's
economy./ Fiscal policy refers to the use of government
spending and tax policies to influence macroeconomic
conditions, including aggregate demand, employment, inflation
and economic growth.

27. What are the important economic indicators that influence
market behavior? Be prepared to cite specific economic
indicators that have influenced the money and capital markets
this semester. And why?
5 Economic Indicators that influence market behavior
· Employment (non-farm payrolls, unemployment rates,
hourly earnings, average workweek) Jobless claim Weekly
· Inflation: PCEIàFed’s preferred inflation measure, CPI,
PPI, GDP Deflator
· Consumer Confidence: (consumer confidence index /
consumer sentiment index/ retail sales/ purchasing managers
Index/ industrial production)
· GDP
· Housing: building permits, housing starts, new home sales,
existing home sales. Case-schiller price index (measures of
home prices)
28. Describe the role of the Federal Reserve in the money and
capital markets this semester. How did we follow the Fed this
semester?
29. What are the two major investor types in the money and
capital markets? Who are the major institutional investors? Who
are the major issuers in the money and capital markets? Be
prepared to discuss what instruments these issuers use to fund
themselves in the money and capital markets.
Two types of investors
Retail (small investors)
Institutional: pension funds, hedge-funds, mutual funds.
Major issuers in the money and capital markets: U.S
government, financial institutions, and corporations,
municipalities

Instruments they use include corporate/government securities,
stocks, and bonds
30. Why is the US Treasury so important to the study of the
money and capital markets? When following the markets, what
should we follow in terms of the US Treasury’s activities? What
is meant by the term “crowding out?”
31. How does a universal bank like Bank of America Merrill
Lynch make money?
What are their major business segments? (Bjorneby
presentation)
Banks like Bank of America make money through the net
interest net margin which is the difference between interest
income-interest expense (Aka spread banking) The larger the
spread, the higher the interest margin would be
Major Business Sectors: commercial banking, investment bank
sales and trading business, manage money and individuals and
business out of wealth management sector
Financial Services and Banking at a High Level
There are Two major types of banks
1. Global investment banks
2. Retail and Commercial banks
If a firm does both of those things, you’d refer to them as a
Universal Bank
Bank of America – Breakdown
· Global Banking & Markets
· Consumer banking
· Global wealth & investment mgmt. and other
Revenue and income for the company is split relatively evenly
amongst those groups
(around 33.3% per division.)
Within the company you can be an Industry banker, brining all
of the products to your client

Or you can focus on a particular product.
Some examples include, M&A advice, investment grade and
non-investment grade.
32. What is risk as it relates to the money and capital markets?
How is risk measured in the money and capital markets? THIS
NEEDS MORE RESEARCH - It would help if anyone adds
more.
Risk is the uncertainty of returnRisk is measured by Beta and
Standard Deviation
33. What are the two perspectives on return in the money and
capital markets? How are each of these calculated in the bond
and equity markets?
34. What is the risk/return tradeoff?
The risk-return tradeoff states that the potential return rises
with an increase in risk. Using this principle, individuals
associate low levels of uncertainty with low potential returns,
and high levels of uncertainty or risk with high potential
returns. According to the risk-return tradeoff, invested money
can render higher profits only if the investor will accept a
higher possibility of losses.
· When risk increases/ return increases
35. What is liquidity as it relates to the money and capital
markets?
Another factor that affects the demand for an asset is how
quickly it can be converted into cash at low cost—its liquidity.
An asset is liquid if the market in which it is traded has depth
and breadth, that is, if the market has many buyers and sellers.
The more liquid an asset is relative to alternative assets,
holding everything else unchanged, the more desirable it is, and
the greater will be the quantity demanded.
Market Liquidity incorporates key elements of volume, time and

transaction costs (bid/offer spread). These dimensions equate to
the amount of assets that can be sold at any time within mar
ket hours, with minimum losses and at a competitive price.
Market liquidity can be difficult to measure depending on the
asset type, whether the asset is fungible, and the time horizon to
liquidate the asset.
36. Review all of the graphs in the Wall Street Journal articles
distributed this semester.
_____________________________________________________
__________________________________________________
The Graphs are not in date ordered; based on my notes and what
was handed out in class. Did not miss any class but please add
to it just in case if I miss one
This graph shows that other countries’ stock markets are
lagging behind and US stock markets continue to rally. Other
countries have not recovered from crisis fast enough unlike the
US.
Emerging markets are weak and very speculative.
Concerns about the decline of equity and how the decline causes
investors to invest in with its effects
Emerging markets are falling behind with their currency
depreciates.
Fed funds rate moves like steps; the increase of the rate started
in 2016 and continues to this day.

I don’t remember this graph in class
Notes are in the picture
Yield curve is flattening
I don’t know
Japan stock index has been strong. It was affected by stagnation
for a while
Consumer Confidence is high
I don’t know why - will research
Backup info has arrived
MIDTERM QUESTIONS
Direct Finance: financing where borrowers borrow funds from
the financial market without using a third-party as an
intermediary ex) stock/bond market

Discount Window Borrowing: The discount window is an
instrument of monetary policy that allows eligible institutions
to borrow money from the central bank, to meet temporary
shortages of liquidity.
Old System: Banks could only borrow from the federal reserve
if they met 3 conditions
Need $ to prevent a liquidity crisis, Can’t borrow from anyone
else, No relending of funds
Triggered a mandatory evaluation audit of the institution. NOT
EVERYONE CAME TO FED
New System: All banks have access to discount window
primary–for healthy institutions. Secondary–higher rate for
unhealthy institutions. Discount rate is now HIGHER than the
Fed Funds Rate. PRICE RATIONING banks don’t borrow from
Fed. If discount rate was lower, banks would borrow from the
fed and re lend to other banks for a profit because they would
be charging (fed funds rate) at a higher rate
They made these changes b/c there was a lot of volatility in the
market. TO MAKE FED FUNDS MARKET LESS VOLATILE,
DISCOUNT RATE SERVE AS A CAP
Investment Grade: refers to the company’s quality of credit.
Anything above BBB is considered investment grade and
anything below BBB is considered non-investment grade.
Anything rated BB or lower is considered a junk grade and the
probability that a company with a junk grade repays its debt is
considered “speculative”
Financial Intermediation: A financial intermediary channels
money from lenders to borrowers. Benefits include allowing
individuals to spread risk. Greater Liquidity.
Securitization: Assemble a pool of illiquid assets, primarily
loans, and sell an interest in the pool as a liquid, tradable,
security asset.

Reserve Requirements: changing the amount of bank reserves
that banks need to keep at the FED
Moral Hazard: Moral hazard is risk in regulated environment
that managers will take riskier positions because of the
protection of the regulations (a safety net.) Individuals act
irresponsibly b/c of the safety net that the govt implies. The
market implies that they have a government guarantee. Helped
lead to many people acting irresponsibly and purchasing terribly
rated mortgage loans that they could not afford.
This refers to Financial Institutions who are so big and
ingrained in the economy that if they were to fail it would have
a huge ripple effect throughout the economy.
Quantitative Easing: introduction of new money into the supply
by the central bank. During the financial crisis, the Fed started
buying longer-term bonds to inject money into the market in an
attempt to stimulate the economy.
Commercial Paper: short term debt securities issued by
corporations. Sold at discount. Companies do it to pay short
term liabilities. Unsecured, no collateral. Highly credit sensitive
market. Only the highest quality issuers can issue commercial
paper. Little bit of the flight to quality in the commercial paper
market.
Credit Default Swap: A credit default swap is a swap to transfer
the credit of fixed income products between two or more
parties. Buyer makes payments to the swap’s seller up until the
maturity date of contract. Seller agrees in the event of default,
the seller will pay buyers premium & interest payments that
would have been paid. Protect lenders against credit risk.
Companies that sell swaps protect themselves with

diversification.
1) Buyer of the bond 2) Issue of the bond 3) The seller of the
CDS.
Repurchase Agreement: A form of short-term borrowing in
which - The dealer sells the government securities to investors
(usually overnight basis) and buys them back the following day.
Open Market Operations: OMO – buying and selling of
securities primary t bills to either ease or add reserves, they
buy, or tighten by selling. Tightening right now, draining
reserves to raise the fed funds rate. Manipulating the amount of
reserves in the banking system by buying and selling treasuries
PCEI: The personal consumption expenditure price index
(PCEPI) is one measure of U.S. inflation, tracking the change in
prices of goods and services purchased by consumers
throughout the economy.
Prime Rate:Rate that commercial banks lend to their largest
highest quality borrowers. Prime Rate is important because it is
a benchmark for bank lending.
Foreign Bonds:
1. US vs Japan (10-year bonds issued by developed countries
governments)
2. US vs German (10-year)à Bunds
3. US vs Spanish (10-year) à Bonos
FOMC: FOMC: 7 Board of Governors + President of NY Fed
+Presidents of 4 other Fed Banks who vote on rotating policy.
**FOMC sets monetary policy**
- hawks are inflation concerned
- doves are on recession.
- Minutes released a month after a meeting, meet 8 times a year.

There are 12 members who can vote on the FOMC. Board of
Governors which includes the chair and 5 district bank
presidents. There are 12 district banks.
Callable Bonds: A callable bond is a type of bond that allows
the issuer of the bond to retain the privilege of redeeming the
bond at some point before the bond reaches its date of maturity.
Dual Mandate: The dual mandate is the line that the FED walks
trying to balance between inflation and recession. Keep
inflation at ideal rate (2%) while minimizing unemployment
Essay Questions
1) Discuss key trends in the money and capital markets. Cite a
minimum of 6 trends:
· Gold has been increasing - Flight to Quality
· Oil has been decreasing
· Yield Curve has continued to flatten/stay positive: when the
yield curve flattens,One reason the yield curve may flatten is
market participants may be expecting inflation to decrease or
the Federal Reserve to raise the federal funds rate in the near
term. ... Consequently, the slope of the yield curve would
flatten as short-term rates increase more than long-term rates.
· Shanghai Composite is typically the worst foreign equity
index
· US administered rates have changed minimally since we’ve
been tracking them, however compared to 2017 they have
increased

· US interest rates have slowly continued to rise (Federal Funds
rate)
a. Have these trends continued this semester? What trends
continued, what trends have emerged?
All of them have continued this semester during our study of
money and capital markets
EMERGED Trends:
· Year on year hourly rate has increased over the year
· Expectations of housing have stabled/steadied to prevent
overshooting
2) Functions of the Federal Reserve?
Functions of the Federal reserve:
1. Control monetary policy: (Monetary policy – controlling the
supply of money in the banking system to achieve the dual
mandate)
2. Coordinate monetary policy with foreign banks
3. Foreign exchange intervention
4. Bank regulation and supervision - DODD Frank
5. Lender of last resort
6. System for check clearance
7. Fiscal Agent- for US treasury holds all the auctions, social
security payments, government payroll.
a. How do we follow the Federal Reserve in the money and
capital markets?
Follow the FED in the money and capital markets by looking at:
1. Release of the FOMC minutes. Must be released 30 days after
last meeting.
2. Humphrey Hawkins testimony. Chairperson of FED is
required to go into front of congress and release their balance
sheet.
3. FOMC statement released every 8 weeks

b. Discuss the tools the Fed uses to control monetary policy.
How do they control monetary policy?
1. OMO: Buying and selling of securities primary t bills to
either ease or add reserves. Manipulating the amount of reserves
in the banking system by buying and selling treasuries
- Easing=Adding reserves buying/T Bills/Lower Fed Funds
Rate
- Tightening=Draining Reserves/selling T Bills/Raise Fed
Funds Rate
- FED Funds Rate - target and market
2. Discount Rate Policy
3. Reserve requirements- changing the amount of bank reserves
that banks need to keep at the FED
3) What are the 5 most important economic categories of
announcements today? For each, cite 2 important indicators.
· GDP: Flash (first GDP report of the year) and the Final (last
of the year - most important)
· Employment: employment situation, Jobless claims weekly
· Housing: case-shiller price index, new home sales, existing
home sales
· Inflation: PCEI (personal consumption expenditure index) and
CPI (consumer price index)
· Consumer/Business confidence: Purchasing managers index
(PMI), Consumer Sentiment Index (CSI)

4) What are the themes of money and capital markets? Refer to
events, announcements that reflect these themes.
1. When & how aggressively will Fed raise int. rates.
· Fed will not increase rates at the next FOMC meeting
(wednesday) but are expected to raise rates in December FOMC
meeting in an attempt to cool the economy
2. How will monetary policy shifts in other countries affect
a. Monetary policy – controlling the supply of money in the
banking system to achieve the dual mandate
3. Will global equity markets continue to lag the US?
· Recently US equity has been volatile and seemingly closing
the gap between itself and the rest of the world. However,
whatever the US does, since its an economic leader, it has a
trickle down effect and other countries are also affected.
4. How will trade disputes affect financial markets?
· Foreign Investors lose confidence in the United States
protectionist trade policies and pull money out of our equities
market. Tariffs and Quota increases also make it harder for
importers and exporters to do business.
5. As the inflation rate has hit the FED’s target, will
concerns about inflation affect financial markets?
6. How will historically high consumer business confidence
affect the markets?
· Economy will overheat if consumer confidence continues to be
high. This will force fed to tighten (increase rates) in an attempt
to discourage spending and level out the economy (control
inflation)

Sheet19/30/169/29/1717
vs.169/28/1810/5/1810/12/1810/18/1810/25/1811/1/1811/8/1811
/15/1811/22/1811/29/18RateRatechangeRateChangeRateChange
RateChangeRateChangeRateChangeRateChangeRateChangeRate
ChangeRateChangeRateChangeShort Term Rates18 vs.17begin
vs.
endPrime3.504.2575.005.25100.005.250.005.250.005.250.005.2
50.005.250.005.250.005.250.005.250.005.250.00Discount1.001.
7575.002.75100.002.750.002.750.002.750.002.750.002.750.002.
750.002.750.002.750.002.750.00Federal Funds Target Rate0.25-
0.501.00-1.25100.002.00-2.25100.002.00-2.250.002.00-
2.250.002.00-2.250.002.00-2.250.002.00-2.250.002.00-
2.250.002.00-2.250.002.00-2.250.002.00-2.250.00Federal Funds
Rate0.431.0764.002.18111.002.22.002.222.002.220.002.231.002
.230.002.241.002.23-1.00n.a.n.a.2.246.003-Month U.S.
Treasury
Bill0.251.0580.002.18113.002.180.002.279.002.3124.202.3-
1.202.3252.502.32-0.502.342.002.340.002.3719.003-Month
LIBOR0.851.3348.392.40106.612.411.002.443.002.473.002.514
.002.587.002.613.002.643.002.684.002.7434.00Commercial
Paper (AA
Financial)0.821.2644.002.27101.002.33.002.333.002.31-
2.002.4110.002.5110.002.510.002.48-
3.002.6719.002.4821.00Long Term Rates10 Year U.S. Treasury
Note1.562.3377.203.0572.203.2015.003.13-6.903.184.403.13-
4.503.141.203.238.803.12-11.403.06-5.203.03-1.6010 Year
Japanese Government-0.080.0714.500.125.500.164.000.15-
1.500.161.000.12-4.000.131.000.12-0.300.11-1.400.10-
1.200.08-3.8010 Year German Government-
0.120.4758.600.536.400.530.000.52-0.900.42-10.000.40-

2.000.400.000.465.900.36-9.800.371.100.32-20.6010 Year
Spanish Government0.921.6168.701.51-
9.701.565.001.647.901.739.201.58-15.001.57-
1.301.614.001.632.201.640.701.51-0.40EMBI Global
Index5.2415.4218.106.80137.806.877.006.957.506.92-
2.307.029.30n.a.n.a.7.05n.a.n.a.n.a.7.28n.a.n.a.n.a.30 Year U.S.
Treasury Bond2.282.8658.003.1832.003.3517.003.33-
2.503.374.103.35-2.003.383.003.391.003.36-2.503.31-
5.503.3314.70DJ Corporate2.572.9740.604.15117.704.08-
7.004.080.20N.AN.AN.AN.An.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.
a.High Yield 1005.474.98-
49.305.8284.306.1230.006.3927.306.35-
4.506.5621.206.626.006.49-
13.006.9646.907.0711.206.90107.80Fixed-Rate
MBS2.022.8179.003.6180.003.676.003.758.003.73-2.003.72-
1.003.742.003.784.003.74-4.003.69-5.003.665.00Muni
Master1.521.9239.302.7078.302.799.002.856.202.85-0.502.83-
2.202.885.602.901.902.85-5.402.80-4.402.733.30Foreign
Exchange
RatesY/US$101.03112.500011.35113.38000.78113.90000.46112
.16-1.53112.190.03112.420.21112.710.26114.061.20113.6300-
0.38112.9400-0.61113.48000.09US$/British
Pound1.29671.33993.331.3031-2.751.3020-
0.081.32351.651.3018-1.641.2818-
1.541.30041.451.30610.441.2774-2.201.28780.811.2788-
1.86US$/Euro1.12231.18145.271.1643-1.451.1516-
1.091.15960.691.1453-1.231.1377-0.661.14110.301.1365-
0.401.1332-0.291.14040.641.1394-2.14Chinese
Yuan/US$6.66676.6366-0.456.89033.826.8689-
0.316.88990.316.9380.706.94890.166.9234-
0.376.93430.166.93910.076.9321-0.106.94290.76Brazilian
Real/US$3.26053.1627-3.003.960025.213.8751-2.143.7799-
2.463.725-1.453.7058-0.523.7017-
0.113.76031.583.78420.643.80470.543.8527-
2.71CommoditiesGold (per troy oz.)1321.701281.50-
3.041182.30-

7.741197.21.261224.32.261226.50.181229.10.2112360.561222.
9-1.061212.80-0.831225.801.071224.103.54Crude Oil (per
barrel)47.8351.678.0372.1239.5874.333.0671.34-4.0268.65-
3.7767.33-1.9263.69-5.4160.67-4.7456.46-6.9454.63-3.2451.45-
28.66Equity IndexesDow Jones Industrial
Average18143.4522405.0923.4926439.9318.0126627.480.71250
52.83-5.9125379.451.3024984.55-
1.5625380.741.5926191.223.1925289.27-3.4424464.69-
3.2625338.84-4.16S&P
5002151.132519.3617.12291415.662901.61-0.432728.37-
5.972768.781.482705.57-2.282740.371.292806.832.432730.20-
2.732649.93-2.942737.76-6.05NASDAQ
Composite5269.156495.9623.288041.9723.807879.51-
2.027329.06-6.997485.142.137318.34-
2.237434.061.587530.881.307259.03-3.616972.25-3.957273.08-
9.56Russell 20001237.751490.8620.451690.5313.391646.91-
2.581545.38-6.161560.750.991500.4-
3.871544.982.971578.212.151524.12-3.431488.28-2.351525.39-
9.77Nikkei16693.7120356.2821.9423796.7416.9023975.620.752
2590.86-5.7822658.160.3021268.73-
6.1321687.651.9722486.923.6921803.62-3.0421646.55-
0.7222262.60-6.45Stoxx Euro 600342.72388.1613.26386.38-
0.46375.09-2.92359.65-4.12361.670.56355.07-
1.82363.082.26367.081.10358.43-2.36352.57-1.63358.10-
7.32Sao Paulo
Bovespa58350.5774293.5127.3280000.097.6882952.813.698292
1.08-0.0483847.121.1284083.510.2888419.055.1685620.14-
3.1785973.060.4187477.441.7589709.5712.14Shanghai
Composite2998.483348.9411.692791.77-
16.642821.351.062583.46-8.432486.42-
3.762603.84.722606.240.092635.631.132668.171.232645.43-
0.852567.44-8.04Other BenchmarksVIX Index (CBOE
Volatility)14.029.51-
32.1712.1227.4414.2217.3324.9875.6720.06-
19.7024.2220.7419.34-20.1516.72-
13.5519.9819.5020.804.1020.4868.98Key RelationshipsTerm

Structure30 yr vs. 3 mo203181-10.84100-
44.75117.0017.00105.50-9.83105.40-0.09104.60-
0.76105.100.48106.601.43102.10-4.2296.60-5.3995.70-0.9310
yr vs. 3 mo131128-2.1487-31.92102.0017.2486.1-
15.5986.30.2383-3.8281.7-1.579111.3877.6-14.7372.4-
6.7066.4-8.29Credit Differentials3 mo L vs. 3mTB6028-
52.6922-22.5123.004.5517.00-26.0915.8-
7.062132.9125.5021.4329.0013.7330.003.4534.0013.3337.008.8
2H-Y vs. 10 yr US Treasury391265-
32.322774.57292.005.42326.2011.71317.3-
2.733438.10347.801.40326.00-
6.27384.3017.88400.704.27386.40-3.57International I-R
Difference10 yr US vs.
Japan16422638.3329329.47304.003.75298.60-
1.783021.14301.5-0.17301.70.07310.83.02300.8-3.22296.8-
1.33295.2-0.5410 yr US vs.
Germany16818611.1025235.34267.005.95261.00-
2.25275.45.52272.9-0.91274.10.442771.06275.4-0.58269.1-
2.292710.7110 yr US vs.
Spain647213.36154113.59164.006.49149.20-9.02144.4-
3.22154.97.27157.41.61162.23.05148.6-8.38142.7-
3.97152.87.08
DATA INTERPRETATION
Week Ending September 28th, 2018
Week 1
Economic indicators/Announcements (Bloomberg Calendar)
Market Reflections
The consumer confidence index continued to rise sharply,
reaching a new high in 18 years. Interest rates rose slightly
before the Federal Open Market Committee raised interest rates.
After the FOMC announced the results, the stock market
reversed and the Dow Jones index fell 0.4% to 26,385 points.
GDP
According to the third estimate of GDP for the second quarter,
it is basically the same as the second forecast. The overall

annual growth rate is 4.2%, and consumer spending is 3.8%.
Jobless Claims
In this week, the actual new claims level is 214k and it
increased 13k from last week. The actual 4-week moving
average didn’t increase to much and it is 206.25k. Affected by
the hurricane, the Carolina claim rate rose to 12,000, reaching
214,000, lower than Econoday's consensus. The number of first-
time applicants in North Carolina increased by 8,000 to 10,209,
and South Carolina increased by nearly 1,900 to 3,362.
Consumer Confidence
In the September report, consumer confidence rose sharply to
138.4 and exceeded Econoday's consensus to reach the highest
data in 18 years. For future estimates, revenues for the next six
months may fall, but plans to buy homes and cars will rise.
New Home Sales
In August, the annual New Home Sales was 629k. The supply of
new homes rose by 1.6% and there are still 318,000 new homes
for sale. Sales speed is 6.1 to 6.2 months.
Wall Street Journal
Bond Yields
According to the article from Wall Street Journal, the yield of
10-year U.S. Treasury note has Continued grow up to 3.11% and
is close to the highest in 7 years. The rise in yields is based on
investors’ increased interest in add risk. In the picture below we
can see the rising trend of this year's 2-year treasury note and
10-year treasury note. As of September, 2-year Treasury yields
have grown faster than the 10-year yield. This reflects the
narrowing of the gap between short-term and long-term interest
rates, called the flattened yield curve.
Federal Reserve
The Federal Reserve Bank said it would raise short-term interest

rates by another 25 percentage points. In the seven years prior
to December 2015, the federal-funds rate has been 0%. It has
risen slowly since December of 15 and broke 2% this year.
Relevant personnel said that in order to prevent the economy
from overheating, the federal-funds rate may continue to grow
until 2020, which is expected to reach 3.4%.
Week Ending October 5th, 2018
Week 2
Market Reflections
This week, the US-Canada trade agreement increased North
American vehicle content and the US opportunity to enter the
Canadian dairy market. The stock market rose and the Dow rose
0.7% to 26,651. Because Iran’s decline in oil exports led to an
increase in oil prices of more than $2 to $75.50, reaching a
four-year high. However, gold has risen strongly to $1,200 to
$1,205. The Dow Jones index rose 0.7% to 26,773, setting a
new record. To prevent inflation, the risk of a Fed rate hike this
week has increased. Treasury bonds fell sharply, 2-year
Treasury yields rose to 2.87%, while 10-year Treasury yields
rose to 3.16%.
Jobless Claims
The actual new claims level is 207k in this week and it
decreased 7k from prior week. The consensus Range is 210k to
220k. Hurricane Florence and the floods in Carolina did not
have a big impact on jobless claims. The number of people
applying for jobless claims for the first time this week fell by
8,000 to 207,000, which is within Econoday’s consensus range.
The 4-week average for continued applications fell by 13,000,
currently at 1.665 billion, is the lowest in 45 years.

Wall Street Journal
Foreign exchange rate:
From this week's data, the dollar's decline against other
countries' currencies means a depreciation of the dollar. From
the previous market Reflections, we can see that the biggest
reason for the dollar's depreciation is trade. Beginning in early
October, President Trump imposed tariffs on $200 billion in
Chinese goods. The US dollar index broke above 95.75. Also,
because President Trump’s sanctions against Iran have caused
oil prices to rise, this is one of the reasons for the depreciation
of the dollar.
10-Year Treasury Note:
Benchmark 10-year Treasury yields and many other borrowing
costs associated with common mortgage rates have recently
reached a new seven-year high. This is the Federal Reserve's
three major policy rates this year.
Week 3
Market Reflections
President Trump largely accepted criticism of the Fed and
called it a rate hike plan. But this news does not help the stock
market. The Dow closed down 0.2% to 26,431 and Nasdaq
closed at 7,738 due to higher interest rates. This week's bond
yields have remained basically unchanged, but stocks have sold
a large portion of recent gains. The Dow fell 3.2% and the
Nasdaq fell 4.1%. Oil surrendered to $2, close to $73. Gold is
also stable below $1,200.
Jobless Claims
increased 7k from prior week. The consensus Range is 200k to
210k. The 4-week moving average increase a little bit to
209.50k. The first jobless claims caused by the hurricane rose
slightly, and it rising 7,000 to 214,000. The 4-week average

rose by 2,500 to 209,500, a little higher than last month.
CPI
This week's report shows that consumer prices are very low. In
September, the CPI only rose by 0.1%, overall 2.3%. The pre-
energy food core interest rate is also 0.1%, overall 2.2%. A
0.5% energy decline per month indicates a drop in gasoline and
electricity and a lower overall tax rate. As new car prices fell
0.1% this month, used cars fell by 3.0%. Housing only increased
by 0.1%
Wall Street Journal
Equity indexes:
This week, both u.s. stock market and international stock
market performed very poorly. All stocks are in a downward
trend. The world's major stock market, the highest valuation is
the US stocks. The S&P 500 index has reached a 25-fold P/E
ratio this year and has entered an over valuable area. It fell a lot
this week and fell back to 24 times P/E. US stocks are
undervalued, and any negative factors will trigger a correction,
such as the mid-term elections, the rise in US bond yields, and
the more aggressive Fed rate hike policy.
Week 4
Market Reflections
Stock trading suddenly soared on Tuesday, the Dow soared
2.2% to 25,798. The yield on the 10-year government bond
yield has barely changed, at 3.16%. The US dollar index has
barely changed to 95.05. However, on Wednesday, the stock
market was lower at the end of the day due to a few basis points
and interest rate hikes. The Dow fell 0.4% to 25,076.
Jobless Claims
decreased 5k from prior week. The consensus Range is 210k to
217k. The 4-week moving average increase 2,000 to reach
211.75k. The number of jobless claims affected by the hurricane

this week has not been noticeable in the past few weeks.
Existing Home Sales
The demand for housing is currently in a very good state. Sales
of existing homes fell by 3.4% in September, reaching the low
end of the Econoday consensus. In terms of the sales price of
existing houses, it fell 2.8% to US$258,100. Comparing the
year-on-year price, plus 4.2% of the price and sales rate, it is
negative 4.1%. While the growth of the stock market and
consumer confidence has had a positive impact on home sales,
the lack of wage growth is negative for homebuyers due to the
scarcity of available labor.
Wall Street Journal
VIX Index:
Since the VIX rose sharply to 25 last weeks, this week's VIX
index dropped to 20. As stock prices continue to fall, the index
tracking the industry's volatility climbed for the third
consecutive week, the longest consecutive gain since February.
Week 5
Market Reflections
This week, the Dow fell 0.5% to 25,191 points after being hit by
a sharp fall in the Chinese market. However, the stock market
rebounded from a low level and interest rates fell slightly.
Money fell 6 basis points to 3.10% compared to the 10-year US
Treasury yield.
Jobless Claims
increased 5,000 from prior week. The consensus Range is 205k
to 220k. The 4-week moving average did not change at this
time. The unemployment rate of insured personnel fell by only
1.1%. Continuing claims, after last week, fell 5,000 to a new
45-year low of 1.63 million.
GDP
The real GDP decreased from 4.2% to 3.5%, which is 20%
higher than Econoday's forecast. The biggest problem of the

quarter was trade. The net export deficit increased by $99
billion this quarter, bringing GDP down by 1.8 percentage
points. The consumer spending change from 3.8% to 4.0%.
New Home Sales
The new home sales decrease 5.5% in this period; it decreases
from 629k to 553k which is far below Econoday's consensus
range. The housing data is very unstable, and the sales of new
homes that are not available are declining this year. The price
of the house was basically flat this month, only rising by 0.3%.
The real estate industry is currently in a weak period.
PMI Composite
This month, both PMI manufacturing and PMI service sample
growth increased slightly, bringing the PMI Composite Index up
1.4 points to a higher than expected 54.8.
Wall Street Journal
U.S. stock
On October 25, US stocks plunged again in panic. The Nasdaq
Composite Index fell 4.43% to 7108.40 points, the biggest one-
day drop since August 2011. The Dow fell 608.01 points, down
2.41% to close at 24,583.42 points, and all the gains in 2018
have been erased.
Week Ending November 2nd, 2018
Week 6
Market Reflections
This week, employee wages and salary growth were limited, but
consumer spending continued to grow. President Trump's trade
agreement with China has boosted the stock market. The Dow
Jones index rose 1.8% to 24,874. The US dollar index rose 0.3%
to 96.98.
Jobless Claims
decreased 2,000 from prior week. This is very healthy for the
labor market. The consensus Range is 209k to 215k. The 4-week

moving average increase 2000 reach to 213.75k.
Employment Situation
The number of non-agricultural employment in October
increased by 250,000, exceeding expectations. However, the
labor force in the construction industry is scarce. The
unemployment rate remained at a low level and a favorable
3.7%, and the labor participation rate increased by 20% to
62.9%.
PMI manufacturing
The overall growth of the PMI manufacturing sample in October
was stable and stable at 55.7. New orders have increased
significantly and are at a five-month high.
Consumer Confidence
In October, the consumer confidence index was 137.9 and
remained near the 18-year high. At present, the employment
prospects are very good, and the growth rate of employment
opportunities is 22.1%. The percentage of revenue growth rose
by 2.2 percentage points to 24.7%.
Wall Street Journal
EMBI Global Index
The EMBI Global Diversification Index fell 2.16% in October,
which is the negative yield for the 7th month of 2018. Although
the rise in US Treasury yields has also dragged down returns,
most of the negative yields in October were driven by spreads.
U.S. Dollar
Recently, the value of the dollar has strengthened. The
continued trade negotiations between China and the United
States and the loose monetary policy have devalued the
renminbi. The exchange rate of the RMB against the US dollar
reached its lowest level in more than a decade.
Week Ending November 9th, 2018
Week 7

Market Reflections
The headline news this week is the midterm election. Because
the expected voter turnout rate will change the balance of power
in Congress, it is also a national referendum for President
Trump. After the election results were announced on
Wednesday, the Republican Party continued to control the
Senate, and the Democratic Party gained control from the House
of Representatives. This is the same as most people expect. But
many investors believe that this result may lead to fiscal
tightening, but it is beneficial to both stocks and bonds.
Jobless Claims
The jobless claims down 1,000 in this week and approach
historic low. The number is 214,000. Compared to last week,
the 4-week average has not changed, it is still 213.75k. But
compared to the data in early October, the 4-week average
increased by 4,000.
Wall Street Journal
Inflation
Affected by rising energy prices, inflationary pressures in
the United States have risen markedly. Since the beginning of
this year, the US CPI has been increasing by more than 2%
year-on-year. Japan’s inflation rate has been below 2%. The
inflation rates in major emerging markets such as Russia, India
and Brazil are basically stable and controllable, and they are
completely free from high inflationary pressures.
Stock Market
Since the beginning of this year, the three major US stock
indexes have achieved strength. As of November 9, the Nasdaq
index grew by 7.29%, becoming one of the best stock markets in
the world. At the same time, the US dollar has appreciated
significantly and the US dollar index has risen above 128, up
8.5% from the beginning of the year; other countries such as
Brazil, India, Russia and other emerging market currencies have
depreciated significantly, exchange rate declines and capital
outflows have spread to more and more developing countries.
The financial market situation faced by emerging economies is

not optimistic.
Week 8
Market Reflections
In this week, in order to prevent inflation, the Federal Reserve
may be to raise interest rates to keep inflation flat. The Dow
ended a four-session losing streak with a 0.8 percent gain to
25,289.
Jobless Claims
increased 2,000 from prior week. The consensus Range is 210k
to 215k. The 4-week moving average increase 1,500 to a
215,250 level. However, the continuing claims increase 46,000
and it is much higher than before.
CPI
According to the report, energy prices rose by 2.4% in October,
while gasoline prices rose by 3.0%. However, due to the decline
in oil prices, the November data will definitely decline. For
housing, Rents rose by 0.2%. Clothing rose by 0.1%. But the
price of food and new cars has fallen.
Wall Street Journal
10- Year Japanese Government Bond
The benchmark 10-year Japanese Government Bonds yield has
climbed to around 0.08 percent, after crossing into positive
territory in mid-November. Bond yields are inversely
proportional to prices. The Bank of Japan policy uses the yield
curve control as a monetary policy tool to set the benchmark
bond's target rate of return to zero.
Week Ending November 23rd, 2018
Week 9

Market Reflections
The housing market is not doing well this year. After the
housing market index declines this week, it is likely to continue
to fall to the end of this year. Oil is the focus of this week.
After President Trump stood in Saudi Arabia despite the killing
of Jamal Khashoggi, the oil prices fell by $4.
Jobless Claims
This week, initial jobless claims increased significantly. The
data shows that jobless claims increased from 216k to 224k
which is 9,000 above Econoday's consensus and outside
Econoday's consensus range. The consensus Range is 210k to
220k. The 4-week moving average increase 3,2500 to a 218,500
level. However, there is no reason can explain why the data
increase a lot in this week.
Existing Home sales
In October, the annualized rate of existing home sales was 5.22
billion, higher than the expected 5.21 million. And in the wake
of the hurricane in October, sales in the South increased by
1.9%. Sales in the western region increased by 2.8%, 1.5% in
the Northeast, and negative 0.8% in the Midwest. However, the
supply of existing homes fell by 1.6% in October.
PMI Composite
From this week's perspective, both PMI manufacturing and
services are growing slowly. The manufacturing industry has
fallen sharply but is currently in a relatively stable state due to
the growth of orders.
Wall Street Journal
Trade War
Since 2018, the fundamentals of the US economy have remained
stable, and inflationary pressures have fallen slightly. The scale
of foreign trade continued to expand, but the trade deficit
reached a seven-month high, which led to a unequal financial
situation and a high level of government debt. The G20 summit
in Argentina provides an important opportunity for China and
the United States to ease trade tensions. It is recommended to

strengthen special meetings with high-level Americans, expand
the import of key products from the United States, jointly
promote the reform of the World Trade Organization, and
continue to deepen cooperation in the field of intellectual
property to ensure Sino-US cooperation.
Week 10
Market Reflections
From this week's report, the deepening of the trade deficit in
October led to a decline in GDP in the fourth quarter. Corporate
profits have risen, but government revenues have fallen.
Jobless Claims
This week, Initial jobless claims continued to increase by
10,000 to 234,000. This is the third consecutive week of Initial
claims growth. The consensus Range is 210k to 228k.The 4-
week average has risen by 4,750 to 223,250.
GDP
During the quarter, GDP remained at 3.5% and did not change
much. However, Consumer Spending fell by 0.4% to 3.6%. The
main reason is that the reduction of the housing market has led
to a decline in Consumer Spending.
New Home sales
Since November last year, new home sales have continued to
decline until now. It has fallen by 12% throughout the year.
This is not a very good phenomenon for the real estate industry.
Moreover, house prices have also fallen by 3.6%. At present, by
the end of 2018, the real estate industry has not rebounded.
Consumer confidence
In November, the consumer confidence Index is 135.7k and it
decrease a little bit from last month. Interest rate expectations
continue to rise by 1.2 points to 74.4%. Higher interest rates
mean higher mortgage rates, but this does not help the home
purchase plan.
Wall Street Journal

Crude oil: Throughout November, crude oil prices fell by 22%,
the largest decline in a decade. The main reason is that traders
are worried about the global supply of crude oil due to possible
oil production cuts.
Finance 141: Final Examination – Fall 2018 –
Answer all questions on this examination. Your responses must
be typed. All students must sign and submit the attached honor
code. The final is due no later than 5 p.m. on Monday,
December 17th. No late examinations will be accepted. The
honor code that appears on the last page must be signed and
submitted. The examination will not be graded if the honor code
is not signed and attached. Do not answer these questions by
cutting and pasting from the internet. If that is done, no points
will be given for that question. Do not work together on this
examination. If collaboration is detected, all parties involved
will be severely penalized.
I. General Essay Questions (5pts each)
1. What are TIPs? How do these securities provide a hedge
against inflation? Discuss the spread between traditionally-
structured Treasury notes and TIPs. What factors influence this
spread relationship?
2. Fully describe the fixed-income instruments of the money and
capital markets. Make sure you cover all the money and bond
markets we discussed. Do not just list the instruments.
3. Fully discuss the concept of risk in the bond market. Describe
the different types of risk and how these risks can cause
realized return to be different from expected return.
4. What is securitization? Discuss the benefits of securitization
from the issuer and investor perspective. What is a CMO? How
does it differ from a pass-through security? How did the
development of the CMO structure expand the appeal of
mortgage securities? What is negative convexity as it relates to
mortgage securities?
5. What types of securities does the Treasury issue? Fully

explain the Treasury auction system process. Discuss the
Treasury’s decision to move to a single-price system. How does
the auction system differ from a traditional underwriting?
6. Fully explain the two perspectives of return in the money and
capital markets. Fully describe the models of return in the bond
and equity markets.
II. Presentation Questions (5pts each)
1. What are the major types of derivatives? Define futures,
forwards and options. What benefits do derivatives provide to
2. What are emerging markets; converging markets and frontier
markets? What characterizes the emerging markets of Brazil and
Eastern Europe?
3. What countries make up the Eurozone? What are the benefits
of the use of a single currency in the Eurozone? How has the
evolution of the Eurozone impacted the money and capital
markets?
4. Define all the governmental agencies involved in the
securities regulation process. Discuss the major aspects of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010, including the Volcker Rule.
5. What are hedge funds and private equity funds? What
strategies do these entities employ? How are these types of
firms regulated today? Explain the structure of a private equity
firm.
III. Market Monitoring Questions
1. You are a reporter for a major financial newspaper. You are
asked to write a concise, well-organized article on the major
movements in the money and capital markets over the
September-November 2018 period, highlighting not only market
movements but also the major themes that effected the
marketplace during this period. Limit your response to 500

words. (10pts)
2. Clearly economic indicators are an important fundamental
factor that influences rates and relationships in the money and
capital markets. What do you believe are the four key economic
indicators (make sure you cite specific indicators)? Why? What
do these indicators tell us about the market? What happened to
each of these indicators this semester? (10pts)
3. Discuss the “flight to quality” phenomenon. What is it? Cite
examples of the effect of “flight to quality” from market
movements this semester. (5pts)
4. We began the semester with a discussion of the key themes
currently influencing the money and capital markets. What are
these themes? Which of these themes are still driving rates and
relationships today? (10pts)
5. The Federal Reserve is clearly a dominant influence on the
money and capital markets. Discuss how the markets monitor
the Fed and what this information has revealed this semester.
What has the market focus been regarding the Fed this
semester? (10pts)
Honor Code
I pledge on my honor that I have done this work with honesty
and integrity, without giving or receiving unauthorized
assistance. (From the Hofstra Honor Code)
By signing the statement below, I am pledging that the answers
to the questions on this examination have been completed solely
by myself. This submission does not reflect a group effort and I
have worked independently. I fully understand that any
indication of a group effort will have severe consequences for
all students involved.

____________________________________________
Signature
____________________________________________
Print name
_____________________________________________
Date

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