Chapter II:



Chapter II: Market & Instrument TIpSar nig]bkrN¾TIpSar

emeronenH sikSaeTAelIRbePTénmUlbRthirBaØvtßú nigTIpSar enAeBlBYkeKeFVIkaredaHdUr. enAkñúgTIpSarhirBaØvtßú CaFmµtaRtUv)anEbgEckkñúgBIrRbePTKW TIpSarrUbIyyvtßú nigTIpSarmUlFn This chapter covers types of financial securities and market in which they trade. Financial markets are traditionally segmented into money markets and capital markets.

2.1. The money Market TIpSarrUbIyyvtßú

]brkN¾TIpSarrUbIyyvtßúrYmman ry³eBlxøI GacedaHdUr)an GacbEgVrCasac;R)ak;)an ehIyCamUlbRtbMNulmanhaniP½ytic. ]brkN¾TIpSarrUbIyyvtßúeBlxøHeK[eQµaHfa sac; R)ak;sMrab;eBlxøI. The money market instruments include short-term, marketable, liquid, low-risk debt securities. Money market instrument sometimes are called cash equivalent or cash for short.

2.1.1. Treasury bill bNѽrtnaKa

bNѽrtnaKa manry³eBlxøI CamUlbRtrdæaPi)al EdlbEgVrsac;R)ak;)anya:gqab;rh½s ehIye)aHGb,haBItMélBitkñúgmYybNñ½ nigpþl;[vijenAcMnYntMélBit enAeBldl;Gayurbs; bNѽ. bNѽrtnaKa manGayukal ¬kalkMNt;eFVIkaredaHdUr¦ 91éf¶ b¤ 182éf¶ KWRtUv)an eKecjerogral;s)þah¾ nigGayurbs;bNѽpþl;[ 52s)þah¾ bNѽ½KWe)aHCaerogral;Ex.

Treasury bill (T-Bill), short-term, highly liquid government securities issued at discount from face value & returning the face amount at maturity. T-bill with initial maturities of 91 days or 182 days are issued weekly, offering of 52 weeks, bills are made monthly.

TinñplGb,haFnaKar bNѽrtnaKa KWminRtYUv)aneKdkRsg; ¬bgðaj¦ enAkñúgTMB½rhirBaØvtßú ¬karEst¦ dUcGRtaRbcaMqñaMmanRbsiT§PaBeT (EAR) pÞúymkvij bank discount yield RtUv)aneKeRbIR)as;.

Bank discount yields T-bill are not quoted in the financial page as effective annual rate (EAR). Instead, the bank discount yield is used.

]TahrN¾ BicarNatMélBitrbs;bNѽrtnaKa $10,000 )anlk;enAÉtMél $9600 CamYykal kMNt;ry³eBl 182éf¶. karvinieyaKenHpþl; $400 CacMNUl)anmkBIkar vinieyaK. GRta pþl;mkvijelIkarvinieyaK KWRtUv)ankMNt;cMNUlCaduløalelICaduløaEdl)anvinieyaK kñúg krNI enH cMNUlCaduløaEckduløaEdl)anvinieyaK.

$400 Eck 9600 = 4.17 % (Bak;kNþalqñaM)

dUecñH GRtaPaKryRbcaMqñaM (APR) KW 8.34 % (4.17 * 2)

RbsinebIeyIgbnþedIm,IrkcMNUleTAelIGRtapþl;[vijelImYyqñaMTaMgRsug KW 8.51% ¬eK[eQµaHfa GRtakarR)ak;pÁÜb EAR = [1 + (q / m)] m – 1]

For example, consider a $10,000 par value T-bill sold at $9,600 with maturity 182 days. The investment provides $400 in earnings. The rate of return on the investment is defined a dollars earned per dollar invested, in this case, dollars earn/dollar invested

$400/9,600 = 4.17% (semiannual)

Therefore, annual percentage rate (APR) is 8.34% (4.17 x 2)

If one continues to earn this rate of return over an entire year, is 8.51%

EAR = [1 + (q / m)] m - 1

= [1 + (8.34 / 2)] 2-1 = 8.51%

TinñplbNѽrtnaKa enAkñúgTMB½rhirBaØvtßú KWRtUv)aneKdkRsg; ¬bgðaj¦edayeRbIR)as;Ca viFIsaRsþGb,haFnaKar (T-bill yield in the financial pages are quoted using bank discount method (r BD))

r BD = 10,000 – P × 360 (1.1)

10,000 n

Edl P KWCaéførbs;bN½ÑrtnaKa n CakalkMNt;rbs;bNѽKitCaéf¶ kñúg]TahrN¾eyIg TinñplbNѽrtnaKa KW (where P is T-bill price, n is the maturity of the bill in days. In our example, T-bill yield is)

[pic]rBD = 10,000 – 9,600 × 360 = 7.91%

10,000 182

manbBaðabITak;TgCamYyrUbmnþGb,haFnaKar. ehIyBYkeKnigeFVIkarrYmbBa¢ÚlKañ eday eRbobeFob TinñplGb,haFnaKar CamYyGRtaRbcaMqñaMmanRbsiT§PaB

¬TImYy¦ TinñplGb,haFnaKar KWw eRbIR)as;GRtaénkarR)ak; 360éf¶ CaCag365éf¶.

¬TIBIr¦ eRbIR)as;bec©keTsRbcaMqñaM KWGRtakarR)ak;Fmµta CaCagGRtakarR)ak;pÁÜb.

¬TIbI¦ cMnYnéneRkambnÞat;¬PaKEbg¦ kñúgPaKEbgmuneK enAkñúgsmIkar 1>1 KWeKeRbItMél

Bitrbs;bNѽ ($10,000) CaCagtMélTij.

There are three problems with bank discount formula, and they all combines to reduce the bank discount yield compared with EAR.

First, the bank discount yield is annualized using a 360-day rather than 365 days.

Second, the annualization technique uses simple interest rate rather than compound interest. Finally, the denominator in the first term in equation (1.1) is the par value of $10,000 rather than the purchase price,

Figure 1.2.

Source: The Wall Street Journal, October 29, 1997.

2.1.2. Certificate of Deposit KNnIbeBaØIkñúgFnaKarmYy

A certificate of deposit b¤ehACa CD KWeBlevlakarepJIR)ak;mYy CamYyFnaKar mYy. eBlevlaénkarepJITukminGacdkenAeBlmantMrUvkar. FnaKarbg;karR)ak; nigR)ak; edIm eTAkan;GñkepJIenAeBlEtcugRKaénlkçxNнrbs; CD. CD )ane)aHecjedaykñúgbrimaNFM EdlmantMél $100,000 KWCaFmµtaGacedaHdUr)an.

A certificate of deposit or CD is a time deposit with a bank. Time deposit may not be withdrawn on demand. The bank pays interest and principal to the depositor only at the end of the fixed term of the CD. CD issued in denominations greater that $100,000 are usually negotiable.

2.1.3. Commercial Paper viBaØabnbRtBaNiC¢kmµ

A commercial paper KWbMNulminmansuvtßiPaBmanry³eBlxøImYy )ane)aHeday Rkumh‘unrYmTunFM Gayurbs;bNѽvamancab;BIrhUtdl; 270éf¶ nigGayurbs;bNѽmanry³eBl Evg GacTamTar[cuHbBa¢ICamYykMéreCIgsarpøas;bþÚrmUlbRt ehIyminsUveKe)aHlk;eLIy. vinieyaKintUc² ¬manedImTuntic¦ GacvinieyaKkñúgviBaØabnbRtBaNiC¢kmµ)an. viBaØabnbRt BaNiC¢kmµ KWRtUv)aneKBicarNaRTBüsm,tþisuvtßiPaBedaysarEt vaKWCamUlbRtry³eBlxøI ]TahrN¾ promissory note..

A commercial paper is a short-term unsecured debt issued by large corporation, its maturity ranges up to 270 days; longer maturity would require registration with Securities Exchange Commission (SEC) and so are most never issued. Small investor can invest in commercial paper, it is considered safe asset because it is a short-term security, example, promissory note…

2.1.4. Banker’s Acceptance sVIkarFnaKarik

A banker’s acceptance: cab;epþImdUcCa karbBa¢aeTAkan;FnaKarmYyedayGtifiCn rbs;FnaKaredIm,Ibg;sac;R)ak;srubmYy eTAelIkalbriecäTGnaKtCatYya:geRcInkñúg6Ex. enA eBlFnaKarTTYlyknUvkarbBa¢asMrab;karbg;enaH mann½yfaFnaKarsVIkar. FnaKarTTYlxus RtUvTaMgRsug cMeBaHkarbg;EdlRbesIrbMputeTAkan;Gñkkan;sVIkar¬GñkTTYl¦ enAÉcMnucenHsVIkar GaceFVIkaredaHdUrenAkñúgTIpSarTIBIr dUcCakarGHGagmYycMnYnrbs;FnaKar.

A banker’s acceptance: started as an order to a bank by a bank’s customer to pay a sum of money at future date, typically, within six months. When the bank endorses the order for payment as “accepted,” it assumes responsibility for ultimate payment to the holder of the acceptance. At this point, the acceptance may be traded in secondary markets like any other claim on the bank.

2.1.5. Eurodollars

enAkñúghirBaØvtßúGnþrCatielIBiPBelak CD ry³eBlxøICageK)anKitCaduløa nig)ane)aH edaysarxaénFnaKarGaemriceRkARbeTs ¬FnaKarmanTItaMgenAeRkAGaemric ehIyeKeXIjCa jwkja:b;CageKenAlundun¦KWRtUv)aneKdwgfa Eurodollar CDs ¬Fmµta Euro CDs.vak¾manpg EdrcMeBaHkarvinieyaK KWRtUv)anKitduløaCaeKalelIR)ak;beBaØIenAkñúgFanaKareRkARbeTsGaemric eK[eQµaHfa Eurodollar deposits. eKaledAsMxan;epSgKñarvag Euro CDs nig Eurodollar deposits KWfa Euro CDs GaceFVIkaredaHdUr)an cMENkÉ Eurodollar deposits KWminGaceFVIkaredaHdUr)aneT. mYyepSgeTotBI CDs )ane)aHedayFnaKarGaemric KWfa Eurodollar CDs minmankarFanaelIbeBaØIrbs;shBn§½eLIy. In the world international finance, large short-term CDs denominated in dollar and issued by foreign branches of America banks (banks locating outside the United States, most often in London) are known as Eurodollar CDs (or simply Euro CDs). Also available for investment are dollar-denominated time deposits in banks outside the United States, known as Eurodollar deposits. A key distinction between Euro CDs and Eurodollar deposits is that Euro CDs are negotiable, whereas Eurodollar deposits are nonnegotiable. One difference from CDs issued by U.S bank is that the Euro CDs do not have federal deposit insurance.

2.1.6. Repurchases Agreement kic©RBmeRBogTijeLIgvij

GñkvinieyaKmñak; ¬CaFmµtaCasßab½nhirBaØvtßúmYy¦ niglk;eTAkan;GñkvinieyaKd¾éTeTot ¬CaFmµtaCasßab½nvinieyaKd¾éTeTot¦]bkrN¾TIpSarrUbIyyrtßúenHnigyl;RBmTijmkvijsMrab; éføx cUrBnül;BIlkçN³ T-bill.

4> cUrBnül;BI CDs?

5> cUrBnül;BI Commercial Paper?

5> cUrBnül;BIeKalbMNgBI Banker’s Acceptance nigsUmpþl;]TahrN_bBa¢ak;.

6> cUrBnül;BI Eurodollars?

7> cUrBnül;BI Repurchase Agreement?

lMhat;

1. In early 2000, long-term high-quality corporate bonds were yielding about 8%. At the same time, long-term, high quality munis were yielding about 5.8%. Suppose an investor was in a 30% tax bracket. All else being the same, would this investor prefer a Aa corporate bond or a Aa municipal bond? Give reason?

2. Muddy Ruel is considering purchase one or two bonds: a corporate bond with a 9% coupon interest rate, selling at par, or a tax-free municipal bond with a 6% coupon interest rate, likewise sell at par. Given that Muddy is in the 30% tax bracket, and assuming that all other relevant factors are the same between the two bonds, which bond should Muddy select?

3. A municipal bond carries a coupon of 63/4% and is trading at par, to a taxpayer in a 34% tax bracket, this bond would provide taxable equivalent yield of:

i. 4.5%

ii. 10.2% r(1-t)rm So r = 6.75./0.66

iii. 13.4%

iv. 19.9

4. A U.S. Treasury bill has 180 days to maturity and a price of 9,600-par face value. The bank discount yield to the bill is 8%

a. Calculate the bond equivalent yield for the Treasury bill. Show calculation.

b. Briefly, explain why a Treasury bill's bond equivalent yield differs from the bank discount yield.

5. A bill has a bank discount yield of 6.81% based on asked price, and 6.90% based on bid price. The maturity of the bill is 60 days. Find the bid and asked prices of the bill.

6. Reconsider the T-bill of question 5. Calculate its bond equivalent yield and effective annual yield based on asked price. Confirm that these yield exceed the discount yield.

7. Which security offers a higher effective annual yield?

a. A three-month bill selling at $9,764, A six-month bill selling at $ 9,539

b. Calculate the bank discount yield on each bill.

8. A Treasury bill with 90 days maturity sells as a bank discount yield of 3%

a. What is the price of bill?

b. What is the 90-holding period return of the bill?

c. What is the bond equivalent yield of the bill?

d. What is the effective annual yield of the bill?

9. Find the after-tax return to a corporation that buys a share of preferred stock at $40 sells it at year-end at $40, and receives a $4 year-end dividend. The firm is in the 30% tax bracket.

10. An investor is in a 28% tax bracket. If corporation bond offers 9% yield, what must municipal offer for the investor to prefer them to corporate bond?

11. Short-term municipal bonds currently offer yield of 4%, while comparable taxable bonds pay 5%, which gives you the higher after-tax yield if your tax bracket is:

a. Zero, b = 10%, c = 20%, d = 30%

12. Find the equivalent taxable yield of the bond in the previous question for tax bracket of zero, 10%, 20%, and 30%.

13> ]bmafa bond RtUvbg;Bn§KWbc©úb,nñmanTinñpl 12% EdleBldMNalKñaEdr munis manTinñpl 8.4% . ebIkenSamBn§man 30%

k> etI bond mYyNaEdlTak;TajGñkvinieyaK? edaysarmUlehtuGVI?

x> etI break-even GRtabnÞab;BIBn§esµIb:unµan?

14> elak Ly Yui Sun Kat;)anBicarNaelIkarTijb½NÑBIrRbePT EdlTak;Tg Corporate Bond nig Municipal Bond Edl corporate bond pþl; 15% coupon. ehIyeKdwgfa Municipal bond pþl; 8.5% coupon. cMeBaHkarTij Corporate Bond RtUvCab;bg;Bn§ 30% (tax bracket).

k> etI Bond mYyNaEdlGñkvinieyaKsMerccitþTij? ehtuGVI?

x> etI Corporate Bond esµIb:unµnaeTIbGñkvinieyaKsMerccitþTijmYyNak_)an?

15> bNѽrtnaKamanGayukalrbs;va 180 éf¶ ehIyTinñplGb,haFnaKarman 4.5%

k> etIéførbs;bNѽesµIb:unµan?

x> etIebIGayukalrbs;va 60 éf¶ return rbs;bNѽesµIb:unµan?

K> etI bond equivalent yield rbs;bNѽesµIb:unµan? (Day to maturity 180days)

X> etI effective annual yield rbs;bNѽesµIb:unµan? (Day to maturity 180days)

16> b½NÑrtnaKa United State mYy)anlk;b½NÑtMél $9,500 nigmancMnYnéf¶énGayukal rbs;va 180éf¶ . eKdwgfab½NÑrtnaKapþl;nUv bank discount yield rbs;b½NÑ 7.8%.

k> KNna bond equivalent yield rbs;b½NÑrtnaKa .

x> Bnül;edaysegçbfa ehtuGVI)anCa bond equivalent yield rbs;b½NÑrtnaKa

manPaBxusKñaBI bank discount yield.

17> b½NÑrtnaKmYyman bank discount yield 7.85% GaRs½yelI asked price nig 7.90% GaRs½yelI bid price cMnYnéf¶énGayukalrbs;b½NÑ 120 éfø.

k> EsVgrktMélrbs;b½NÑtamry³ bid and asked prices .

x> cUrKNna bond equivalent yield and effective annual yield eday

GaRs½yelI asked price

18> b½NÑrtnaKmYyman bank discount yield 7.85% GaRs½yelI asked price nig 7.90% GaRs½yelI bid price cMnYnéf¶énGayukalrbs;b½NÑ 120 éfø.

1> EsVgrktMélrbs;b½NÑtamry³ bid and asked prices.

2> cUrKNna bond equivalent yield and effective annual yield eday

GaRs½yelI asked price

3> eFVIkarbBa¢ak;fa Effective Annual Yield xusBI Bond Equivalent Yield

nigxusBI Bank Discount Yield.

19> Rkumh‘unrYmTun Daiyun )ane)aHnUvesrIfµIrbs; bonds enAEx January 1, 1999 dl;Ex December 31, 2019 KWdl;Gayukalrbs;b½NÑ EdlRkumh‘unpþl;eGay 13 coupon. karpþl;eGay coupon enaHKWRtUv)an eKeFIVeLIgral;Bak;kNþalqñaM (on June 30 & December 31). \LÚvsmµtfaGñkcg;lk; bond enAEx August 01, 2012 enAeBlenaHGRtakarR)ak; )anekIneLIgesµI 14.5 %.

k> etIGñkRtUveGayGñkTijRtUvbg;bu:nµansMrab;éføvik½ybR½t ? x> cUrbgðajGMBIGRtakarR)ak;ekIneLIg (Accrued Interest)

20> Rkumh‘unrYmTun Exoon )ane)aHnUvesrIfµIrbs; bonds enAEx January 1, 1991 dl;Ex

December 31, 2015 KWdl;Gayukalrbs;b½NÑ EdlRkumh‘unpþl;eGay 12 coupon. kar

pþl;eGay coupon enaHKWRtUv)an eKeFIVeLIgral;Bak;kNþalqñaM (on June 30 & Dec 31)

\LÚvsmµtfaGñkcg;lk; bond enAEx March 31, 2007 enAeBlenaHGRtakarR)ak; )anFøak; cuHmkRtwm 10.5 %

1> etIGñkRtUveGayGñkTijRtUvbg;bu:nµansMrab;éføvik½ybR½t ?

2> cUrbgðajGMBIGRtakarR)ak;ekIneLIg (Accrued Interest)

21> enAkñúgRkumh‘unsaCIvkmµCaeRcIn GñkvinieyaK raCasm,tþi )ansMerccitþvinieyaK 50% eTAelIsþúk 5 RbePT Edlman eQµaH cMnYnedaHdUr nigtMél dUcxageRkam ³

KNnatam Value Weighting

|Stock Price Outstanding P0 P1 P2 |

| A 1,500 50 45 60 |

|B 2,000 65 70 55 |

|C 3,800 55 44 60 |

|D 4,300 48 45 42 |

|E 2,700 76 65 59 |

k> KNna Value of Index I1 nig Value of Index I2

x> KNna Return rbs;GñkvinieyaK raCasm,tþi cMeBaHpleFobrvag ³

- I1 eFob I0 - I2 eFob I1 - I2 eFob I0

K> eFVIkarepÞogpÞat; sMNYr x xagelI.

22. GñkvinieyaKmñak;)andak;TuncMnYn $600,000 elIRbePT Stock 3 mandUcxageRkam ³

|Stock Price (P0) Final (P1) sell |

| A 80 74 |

|B 105 121 |

|C 68 75 |

cUrKNna Return rbs;GñkvinieyaKtamviFIsaRsþ Price Weighting?

-----------------------

Maturity Day to maturity Bid Asked Chg Ask yield

Jan 29’ 10 92 5.11 5.10 + 0.20 5.24

April 30’ 10 183 5.12 5.11 + 0.16 5.32

Stock Share outstanding P0 P1 P2

A 1000 50 52 49

B 1000 10 10 11

C 100 60 60 63

D 100 10 11 12

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