Index
- A
- Abnormal return, 275–277
- Acceptance credits, 232
- Accrual bond, 399–402
- Accrued interest, 144–146, 178, 214, 216, 220, 223, 254
- Active approach, selling mutual fund shares, 436
- Active orders, 471
- Actual–actual convention, 142–143
- Actual term to maturity, 187
- Additive price adjustment, 253, 254
- Add-on rate approach, 72
- Adjustable-rate mortgage (ARM), 369–372, 375
- Adjustable rate preferreds (ARPs), 96, 100
- Advising bank, 231
- Agency trade, 23
- Aggressive growth funds, 446–447
- All-in price, 416, 417
- All-or-none (AON) orders, 466, 476
- All-or-nothing (AON) orders, 466, 476
- American calls option, See American option
- American depository debenture, 39
- American depository receipts (ADRs), 35–37, 39
- American option, 17, 281
- American terms, 331–332
- Amortization, 68
- Amortization schedule, 68–70, 374–376
- Amortizing swaps, 425
- Annual operating expenses, 440–441
- Annuities, 64–67
- Appreciating currencies, 332–333
- Approximate Fisher relationship, 49
- Approximate yield to maturity (AYM), 149–150
- Arbitrage, 37–39, 98, 190, 246–248, 255, 292, 295–297, 305, 308, 314, 344–345, 347, 411, 421, 422–423
- Arrangement fee, 421
- Arrow-Debreu securities, 510–511
- Asset-allocation funds, 449
- Asset-backed securities, 19
- Assigned dealer, 23
- At the money (ATM), 285, 287, 289, 320–322
- Auctions, types of, 211–212
- Authorized capital, 78
- Authorized participants (APs), 460–461
- Automatic reinvestment plans, 451
- Average life, 388, 392–394, 398, 399, 402, 407, 409, 410
- B
- Back-end loads, 437–438
- Balanced funds, 449
- Balance of payments (BOP), 6–8
- Balance of trade, 8
- Balloon payment, 70–71
- Banker's acceptance, 229, 231–232
- Bank guarantees, 225–226
- Banks' role, in swap market, 421–422
- Barter system, 11
- Base-period capitalization, 113
- Basis risk, 262–264, 266
- Basis swap, 415, 427
- Bears, 25, 268, 303
- Bear spreads, 318–320
- Best-efforts transaction, 226
- Beta, 135, 272–273, 275, 277
- definition of, 95
- Bid–ask spread, 23, 89, 329, 337, 342, 345, 347, 367
- Bid to cover ratio, 212
- “Big bang,” 34
- Big figure, 333
- Big Mac index, 485
- Bills, 13, 200–202, 211, 229
- Bills of exchange, 228–232
- Binomial model, 307–309, 361–362
- implementation, 312
- Black model, 327–328
- Black-Scholes model, 313–316, 360
- BM&F Bovespa, 247
- Board lots, 87
- Bond equivalent yield (BEY), 203–205, 213, 389, 392
- Bond insurance, 156
- Bonds, 13, 19, 26, 27, 32–33, 43, 46–48, 79, 96, 134, 203–204, 213, 214–215, 226, 247, 251, 389, 399, 403, 405–410, 417, 418, 420, 424, 428, 429
- accrued interest, 144–146
- actual–actual convention, 142–143
- bond insurance, 156
- callable bonds, 165–167
- convertible bonds, 168
- convexity, 172–177
- corporate bonds, 144
- credit risk, 154–155
- day-count conventions, 142
- dollar duration, 172
- duration, 185–186, 446
- with embedded options, 165–169
- evolution of price, 139–140
- inflation indexed bonds, 180–182
- orders for, 465
- par, premium, and discount bonds, 138–139
- price and yield, 182–185
- price quotes, 179
- price volatility, 170–172
- putable bonds, 167
- straight value of, 168
- STRIPS, 179–180
- taxable-equivalent yield (TEY), 153–154
- Treasury auctions, 177–178
- Treasury's approach, 143–144
- valuation, 137–138
- valuation of, using short rates, 168–169
- when issued (WI) trading, 179
- yield curve and term structure, 159–165
- yields, 146–153
- zero-coupon bonds, 140–141, 156–159
- Bonus share issue, 85
- Book entry versus physical certificates, 92
- Book value, 79–80
- Bootstrapping, 158
- Borrowing rate, for Eurodollar futures, 502–503
- Bounds, of FRAs, 499
- Bridge financing, 225
- Broken-dated contracts, 343–345
- Brokerage fees, 89
- Broker call money rate, 125
- Brokers, 21–24, 44, 127, 129–130, 190
- Broker's loan, 121–122
- B shares, 437
- Budget deficit, 488–491
- Bulldog bonds, 33
- Bulls, 25, 268, 301, 302, 323
- Bull spreads, 316–318
- Butterfly spread, 320–322
- Buy and sell-back transaction, 217
- Buyback, 86, 217, 420
- Buying and selling bills, 230–231
- Buying stock on margin, 121
- Buy side, 25
- C
- Callable bonds, 134, 165–167, 169, 511–512
- Callable preferred stock, 97
- Callable swaps, 425
- Call markets, 479–480
- Call money, 193, 232
- Call options, 17, 166, 169, 280, 283, 289, 291
- Call price, 166, 169
- Cancelable swaps, 425
- Capital account, 6, 8
- Capital asset pricing model (CAPM), 95, 110, 275
- Capital expenditures, 483
- Capital gain, 12, 21, 24, 86, 101, 131, 141, 148, 149, 189
- Capital gains tax, 458–459
- Capitalization of reserves, 85, 87
- Capital loss, 12, 24, 40, 131, 141, 148, 160, 189
- Capital market, 25, 28, 30–32, 34, 36, 44, 54, 161, 187, 199, 203, 214, 225, 422, 490
- Caplets, 512–513
- Caps, 512–514
- Captions, 513–514
- Carry, concept of, 208
- Carryovers, 372
- Cash-and-carry arbitrage, 247–249, 251, 252, 254–256, 258, 273, 305, 345, 346
- Cash balance plans, 464
- Cash dividend, 84–86, 90, 128
- Cash flow, 170, 171–172, 297
- Cash-flow yield, 389–390
- Cash-management bills, 201
- Cash market instruments, 191–193
- Cash settlement, 262
- CBOT, 247
- CDs versus money market time deposits, 224
- Central banks, 490–491
- Certificate of deposit (CD), 218–219
- Cheapest to deliver (CTD) grade, 215, 254
- Check writing, on mutual funds, 452
- Chicago Board Options Exchange (CBOE), 281, 287
- Classic repo, 217
- Clean price, 145–147, 178, 179, 220, 223
- Clearing and settlement, 39, 41
- Clearinghouse, 200, 237–239, 261, 288
- Clearinghouse funds, 200
- versus federal funds, 199–200
- Clearing margin, 240
- Clearstream, 92
- Closed-end funds, 432–433
- Closeout, 420
- CME Group, 22, 236–238
- Collars, 512–514
- Collateral, 13, 19, 24, 125, 126, 128, 134, 155, 213–215, 217–218, 224, 364, 366, 381, 394, 398, 404, 407
- Collateralized mortgage obligations (CMOs), 394–399, 404
- Co-managers, 26
- Combined method, 454–455
- Command economies, 2, 4
- Commercial bank, 4, 10, 13, 14, 18, 27, 29, 34, 35, 41, 42, 44, 46, 125, 134, 161, 188, 190, 193, 195, 213, 218, 225, 229, 236, 329
- and depositories, 42
- Commercial LCs, 225
- Commercial paper, 41, 188, 189, 195, 224–227
- Commissions, 34, 38, 44, 125–126, 226
- Commitment contract, 17, 235, 236, 280, 283, 284
- Commodity funds, 449
- Comparative advantage and credit arbitrage, 422–423
- Compensating balance, loans with, 73
- Compounding, 52, 53, 55–58, 61, 63, 206
- Compound interest, 49, 51–56
- Conditional prepayment rate (CPR), 390–393
- Constant growth model, 102
- Consumption, in GDP, 482
- Consumption assets, 251
- Contingent contracts, 17–18
- Contingent deferred sales charges, 437, 439
- Continuing contracts, 213
- Continuous compounding, 57
- Continuously callable bond, 166
- Contract assignment, 288
- Contraction risk, 399, 405
- Contract terms, in swap, 413–415
- Contractual accumulation plans, 451
- Contract value, 269–271
- Convenience assets, 251, 252
- Conversion factors, 507–509
- Conversion price, 19, 168
- Conversion ratio, 97, 168
- Convertible bonds, 19, 134, 166, 168
- Convertible preferred shares, 97–98
- Convexity property, 321
- Corporate actions, adjusting for, 42, 85, 107–108, 288–289
- Corporate bonds, 144
- Correspondent bank, 199, 200, 231, 232
- Cost of carry, 249, 267
- Cost push inflation, 487
- Countertrade, 11
- Coupon effect, 157–158
- Coupon leverage, 403
- Coupon-Linkers (C-Linkers), 181
- Coupon rate, 136–138, 142, 158, 163, 167, 168, 172, 176, 218, 219, 221–222, 381, 390, 404, 418, 427
- Coupon swap, 415–417, 422, 427
- Covariance, 94–95
- Creation baskets, 461
- Creation units, 460
- Credit arbitrage, 421, 423–424
- Credit life, 366
- Credit rating, 28, 189, 194, 224–228, 366, 367
- Credit risk, 13, 40, 154–155, 189, 200, 215, 217, 232, 236, 367, 379, 421
- Crest, 92
- Cross ask, 338
- Cross bid, 338
- Cross-border borrowing, 491–492
- Cross-currency swaps, 427–429
- Cross hedging, 266
- Cross rates, 338–341
- C shares, 437
- Cum-dividend, 83, 146
- Cumulative preferred shares, 14, 98–100
- Cumulative versus statutory voting, 81
- Currency codes, 330–331
- Currency risks, 429, 492
- Currency Swaps, 19, 350, 411–415, 426–427, 429
- Current account, 6, 8, 54, 187
- Current account balance, 8
- Current term to maturity, 187, 219, 220
- CUSIP number, 180, 201–202
- Custodian bank, 35, 37, 39, 43
- Custodians, 451
- Customer loan consent, 127
- Cyclical stocks, 93
- D
- Day-count convention, 142, 145, 180, 218, 412, 414, 417, 424
- Days orders, 466
- Dealer, 22–24, 34, 125, 189, 199, 201, 213, 214, 217, 218, 226, 329, 331, 333, 338, 353, 354, 417
- Dealer paper, 226
- Debenture, 13, 46, 79, 96, 134
- Debit balance, 121, 122, 125, 200
- Debt funds, 445–446
- Debt markets, 33, 34, 187, 423
- Debt monetization, 488
- Debt securities, 8, 9, 12–14, 19–22, 26, 28–30, 41, 54, 96–97, 134, 154, 163, 168, 180, 187, 189, 200, 213, 380, 399
- Declaration date, 82
- Deep discount bonds, See Zero-coupon bonds
- Default risk, See Credit risk
- Deferred callable bonds, 166
- Deficit budget unit (DBU), 5, 9, 40, 488
- Defined benefit plans, 462–464
- Defined contribution plans, 463–464
- Deflation, 47
- Delivery price, of contract, 269–271
- Delta, 315–316
- Demand pull inflation, 487
- Dematerialization, 42
- Denomination problem, 28
- Denomination transformation, 29
- Depository receipts (DRs), 35, 39
- Depository Trust and Clearing Corporation (DTCC), 92
- Depreciating currencies, 332–333
- Derivative contracts, 14, 247
- Derivative exchanges, 247
- Derivatives, 14–15, 247, 465, 478
- Devolvement risk, 26
- Direct market transaction, 26, 28
- Directors, of mutual funds, 451
- Direct paper, 226
- Direct quotes, 331, 332, 337, 342, 344
- to indirect quotes, converting, 333–335
- Dirty float, 493
- Dirty price, 144–147, 166, 178, 214, 219, 220, 223
- Discount bonds, 138–140, 179
- Discount brokerage, 24
- Discount factor, 418, 419, 429
- Discounting, 59
- Discount rate, 59
- Discount rates and T-bill prices, 202–212
- Discount securities, 195–196
- yields on, 202
- Discount technique, 73
- Discretely callable bond, 166
- Discriminatory price/yield auctions, 211
- Distribution date, 83
- Diversification:
- Diversified debt funds, 445
- Dividend declaration, 82
- Dividend discount models, 100–101
- Dividend reinvestment option, mutual funds, 441–443
- Dividend reinvestment plans (DRIPS), 84–85
- Dividends, 12, 78, 82–83, 306
- Dividends per share (DPS), 86
- Dividend yield, 83–84
- Divisor, 105, 107–109
- changing, 111–112
- Documents against acceptance (DAA), 230
- Documents against payment (DAP), 230
- Dollar convexity of a bond, 175
- Dollar-cost averaging, 452–453
- Dollar duration, 172
- Dow Jones Industrial Average (DJIA), 105, 121, 247
- Downtick price, 132–133
- Dual listing, 35–37
- Dual traders, 23
- Dynamic hedging, 277
- E
- Early exercise of options, 298–299
- Earnings per share (EPS), 86
- Economic growth, 481
- Effective annual rate, 55–57, 62
- Effective date, 416
- Effective rate of interest, 49, 56
- Effective versus nominal rates of interest, 55
- Electronic markets, 478–479
- Eligible bank bills, 230
- End–end rule, 192–193
- Entry loads, 436–437
- Equally weighted index, 113–114
- Equally weighted tracking portfolio, 114–115
- Equal principal repayment approach, 71
- Equity funds, 446
- Equity income funds, 448–449
- Equity index funds, 448
- Equity markets, globalization of, 34–35
- Equity shares, 9, 12, 78, 79, 81, 92, 96, 97–98
- Escrow accounts, 365
- EURIBOR (Euro Inter-Bank Offered Rate), 417
- Euroclear, 92
- Eurocurrency deposits, 232
- Eurocurrency market, 31–32
- Euro depository receipts, 39
- Eurodollar (ED) futures, 500–505
- European options, 17, 281
- European put options, 310–311, 313
- European Short-Term Euro Rate (ESTER), 195
- European terms, 331
- European Union (EU), 333
- Excel:
- Exchange margins, 339
- Exchange rates, 363, 493–494
- Exchanges, 465
- Exchange-traded foreign currency options, 359–360
- Exchange-traded funds (ETFs), 460–461
- Exchange-traded options, 286–301
- American calls, 297–298
- American options, time value of, 290
- contract assignment, 288
- corporate actions, adjusting for, 288–289
- early exercise of options, 298–299
- flex options, 287–288
- intrinsic value and time value, 289–290
- nonnegative option premiums, 289
- option class and option series, 287
- profit profiles, 299–301
- put-call parity, 291–296
- time value at expiration, 291
- Ex-dividend date, 83, 84
- Exercise price, 17, 280, 281, 306
- Exit loads, 437, 438
- Expected return and diversification concept, 94, 95
- Expected shortfall, 245–246
- Expiration date, 17, 281
- Extendable swaps, 425
- Extension risk, 399
- F
- Face value, 79, 136, 140. See also Par value
- Far-date transaction, 350
- Federal budget deficit, 488–491
- Federal Deposit Insurance Corporation (FDIC), 27
- Federal funds, 198–199
- versus clearinghouse funds, 199–200
- Federal Funds rate, 490–491
- Federal Open Market Committee (FOMC), 213
- Federal Reserve bank, 191, 199
- Federal Reserve system, 32, 190–191, 213, 218
- Fill or kill (FOK) orders, 466, 476
- Finance, mathematics of, 46
- Financial assets, 9–10
- Financial Conduct Authority (FCA), 195
- Financial markets, macroeconomics of, 481. See also Macroeconomics of financial markets
- Financial Services Modernization Act, 35
- Fiscal deficit, 489–490
- Fiscal policies, 490
- Fisher equation, 48–49
- Fitch Ratings, 155
- Fitch's rating scale, 228
- Fixed–fixed currency swap, 413
- Fixed–floating swaps, 411
- Fixed maturity plans, 433
- Fixed-rate loans, 506–507
- Flexible exchange (FLEX) options, 288
- Floaters, 163
- Floating–floating swap, 411
- Floating-rate bonds, 163–165
- Floating-rate tranches, 403
- Floorlets, 512–513
- Floors, 512–514
- Floortions, 513–514
- Focused debt funds, 445–446
- Foreign exchange, 14, 329
- accounting principles, 7
- American terms, 331–332
- appreciating currencies, 332–333
- binomial model, 361–362
- broken-dated contracts, 343–345
- cost, 347–349
- and cross-border borrowing, 491–492
- cross rates, 338–340
- currency codes, 330–331
- depreciating currencies, 332–333
- direct quotes to indirect quotes, converting, 333–335
- European terms, 331–332
- exchange rates and competitiveness, 363
- exchange-traded foreign currency options, 359–360
- forward market, 340
- futures markets, 357
- Garman-Kohlhagen model, 360–361
- hedging, using currency futures, 357–359
- market rates and exchange margins, 339
- nondeliverable forwards, 356
- option forwards, 353–355
- outright forward rates, 341
- perfect market, 345–347
- put-call parity, 361
- range forwards, 357
- short-date contracts, 350–353
- spot markets, arbitrage in, 336–338
- spreads on returns, impact of, 335–336
- swap points, 341–343, 349–350
- value dates, 340
- Foreign exchange markets, 492–493
- Foreign-exchange risk, 41, 43–44
- Foreign-exchange swap, 346–347, 349
- Foreign trade, 483–484
- Forward and futures contract, 15–16, 235
- beta, changing, 272–273
- case of assets making payouts, 249–250
- case of multiple deliverable grades, 253–255
- cash-and-carry arbitrage, 247–248
- cash settlement, 262
- contract value, 269–271
- delivery options, 242
- estimation of hedge ratio and hedging effectiveness, 266
- expected shortfall, 245–246
- forward versus futures prices, 270–271
- hedging and speculation, 262–265
- hedging the rate of return on a stock portfolio, 271–272
- importance of future, 279
- leverage, 268–269
- marking to market, 242
- physical assets, 250–253
- portfolio insurance, 277–278
- profit diagrams, 242–243
- profit profile, 243–244
- program trading, 273–275
- speculation, 266–268
- spot futures equivalence, 246–247
- stock picking, 275–277
- synthetic securities, 248–249
- trading volume and open interest, 259–262
- value at risk, 244–246
- Forward contracts, 281
- Forward margin, See Swap points
- Forward market, 340
- Forward price, 269–271
- Forward rate agreements (FRAs), 497–500
- Forward rate of interest, 159, 197–198
- Forward-to-forward swaps, 346
- Forward versus futures prices, 270–271
- Fractions, handling, 91–92
- Free-floating market, 493
- Free-floating market capitalization, 120–121
- Free-market economies, 1
- Front-end loading, 436–437
- Front-end loads, 436–438
- Full employment inflation, 487
- Full price, 145
- Full-service broker, 24
- Fund of funds, 448
- Fungibility, 37–39
- Futures contracts, 281
- Futures exchange, 16
- Futures markets, 279, 357
- Futures options, 326–327
- Future value (FV), 58–59, 63, 66, 67, 74–76
- Future value interest factor (FVIF), 58
- Future value interest factor annuity (FVIFA), 66
- G
- Gamma, 315
- Garman-Kohlhagen model, 360–361
- General collateral, 214–215
- versus special repos, 215
- Generally accepted accounting principles (GAAPs), 36
- General partnership, 4
- General valuation model, 101
- Gilt funds, 445
- Global depository receipts (GDRs), 39
- Globalization, 43–45
- of equity markets, 34–35
- Gold exchange standard, 494
- Good this month (GTM) orders, 466
- Good this week (GTW) orders, 466
- Good till canceled (GTC) orders, 475
- Good till days (GTD) orders, 466, 475
- Good today limit orders, 466
- Gordon growth model, See Constant growth model
- Government insurance, 366–367
- Government spending, 483
- Graduated-payment mortgage, 376–379
- Gramm-Leach-Bliley Act, 35
- Greeks, The, 315–316
- Gross domestic product (GDP), 481–485
- Gross national product (GNP), 481, 484
- Growing equity mortgages (GEMs), 378–379
- Growth funds, 447
- Growth option, mutual funds, 441–443
- Growth stocks, 93
- H
- Haircut, 216
- Hedge ratio and hedging effectiveness, estimation of, 266
- Hedging, 262–265, 422
- High yield, 211
- High yield debt funds, 446
- H model, 105
- Holding period return, 207
- Holding-period yield, 153
- Horizon yield, See Holding-period yield
- Household sector, 484
- Humped yield curve, 159–161
- Hybrid securities, 19
- I
- Immediately available funds, 199
- Immediate or cancel (IOC) orders, 476
- Immunization, 175–176
- Implied repo rate (IRR), 248, 389
- Implied reverse repo rate (IRRR), 248
- Independent public accountants, 451
- Index futures, 262, 271, 273, 277
- Indication of portfolio value, 461
- Indirect markets, 26–27
- Indirect quote, 331–333
- Individual retirement accounts (IRAs), 464
- Inflation, 485–487
- Inflation indexed bonds, 180–182
- Inflation risk, 40
- Inherent risk, 416
- Initial margin, 239, 240
- Interbank market, 193–197, 329
- Intercontinental Exchange (ICE), 195
- Interdistrict settlement account, 199
- Interest, 46, 125–126
- Interest computation, 71–73, 195–197
- Interest conversion period, 49
- Interest equalization tax, 33
- Interest-only (IO) class, 405
- Interest rate derivatives, 497
- callable and putable bonds, 511–512
- caps, floors, and collars, 512–514
- captions and floortions, 513–514
- conversion factors for, 507–509
- Eurodollar futures, 500–505
- fixed-rate loans, 506–507
- forward rate agreements, 497–500
- interest rate options, 510
- no-arbitrage pricing equation, 505
- and state prices, 510–511
- 30-year T-bond futures contracts, 507
- Interest rate options, 510
- Interest-rate parity condition, 345
- Interest-rate risk, 367
- Interest rates, 488
- Interest-rate swap, 18, 411, 415, 429
- Interest-sensitive stocks, 93
- Internal rate of return (IRR), 61, 137, 389
- Internal Revenue Service, 135
- International bond market, 32–34
- International Monetary Fund (IMF), 7
- In the money (ITM), 285, 289
- Intraday Indicative Value (IIV), 461
- Intraday money, 194
- Intraday NAV, 461
- Intrinsic value, 289–290
- Inventories, 483
- Inverse floater, 403
- Investment advisers, of mutual funds, 451
- Investment banker, 25–26
- Investment grade ratings, 155
- Investments, nature and objectives of, 444
- Investments advisory fees, 440
- Investment techniques, 452–455
- Issued capital, 72
- J
- Japanese yield, See Simple yield to maturity
- Jumbo mortgages, 367
- Junk bond, See Speculative grade ratings
- L
- Lead manager, 26
- Lending rate, for Eurodollar futures, 503–504
- Letters of credit (LC) and bank guarantees, 225–226
- Level annuity, 64
- Level loads, 437
- Leverage, 96, 124, 135, 268–269
- LIBID, 194, 214
- Life-boat provisions, 432
- Limited liability, 4
- Limited partnership, 4
- Limit order books (LOB), 468–469
- Limit orders, 21, 466, 467–468
- Limit price, 468
- Liquid asset, 11–12
- Liquidity management, 188
- Liquidity premium hypothesis, 160–161
- Liquidity risk, 40–41, 367
- Load funds, 436–437
- Load mutual funds, 438–439
- Loan rate, 121
- Loans:
- Loan value, 121
- Local traders, 478
- London Inter-Bank Mean Rate (LIMEAN), 194
- London interbank offer rate (LIBOR), 18, 194, 195, 214, 411, 497, 500
- Long, 281
- Long call option, 299, 300
- Long put option, 299, 300
- Losses, on Eurodollar futures, 501–502
- M
- Macaulay duration of a bond, 170
- Macroeconomics of financial markets, 481
- Big Mac index, 485
- budget deficits and capital market, 490
- central banks, 490–491
- central banks and foreign exchange markets, 492–493
- cross-border borrowing, 491–492
- cross-border implications of central bank actions, 494–495
- economic growth, 481
- exchange rates, 493–494
- federal budget deficit, 488–491
- fiscal policies, 490
- gross domestic product, 481–485
- gross national product, 481, 484
- inflation, 485–487
- interest rates, 488
- monetary policies, 490–491
- quantitative easing, 495–496
- quantitative easing versus open-market operations, 496
- reserve currencies, 494
- sterilized and unsterilized interventions, 493
- Maintenance margin level, 126–127, 216, 240
- Major currencies, symbols for, 330
- Managed float, 493
- Management fees, 440
- Margin, 24, 28, 126, 128, 130, 165, 215–216, 239–241
- Marginal convenience value, 252
- Margin call, 126, 127, 240
- Margin rate, 121, 124
- Margins, 339
- Margin trading, 123–125, 127, 128
- and short selling, 121
- Market(s), 1
- bond market, 136–137
- capital markets, 30–31, 63, 187
- direct and indirect, 26–27
- equity markets, 34–35
- Eurobond market, 32–34
- Eurocurrency market, 31–32
- forward market, 340
- futures markets, 357
- interbank market, 193–197
- international bond market, 32–34
- money market, 30, 54, 187
- open-market operations, 213–224
- OTC markets, 21–22
- participants, 364–366
- perfect market, 345–347
- primary, 19–21
- secondary, 19–21
- swap market, 421–422
- terminology, 415–416
- Marketable limit orders, 470–471
- Market capitalization, 86, 88, 89, 105, 110–114, 117–119, 273, 274, 448
- Market economy, 2–3, 30, 279
- Market makers, 23, 214, 229
- Market method, 419
- Market orders, 466, 467–468
- versus limit orders, 469–470
- Market portfolio, 95, 110
- Market power inflation, 487
- Market rates, 339
- Market risk, 40, 175, 272. See also Price risk
- Market-segmentation hypothesis, 161
- Market supervision, 190–193
- Market to limit (MTL) orders, 474
- Market value, 80, 121, 122–123, 130, 216, 366
- Marking to market, 239, 240, 256–259, 262, 263, 265–270
- Matched book, 421
- Mathematics of finance, 46
- amortization method, 68–70
- amortization with balloon payment, 70–71
- annuities, 64–67
- compensating balance, loans with, 73
- compound interest, 51–53
- continuous compounding, 57
- equal principal repayment approach, 71
- evaluating an investment, 63
- Fisher equation, 48–50
- future value (FV), 58–59
- handling series of cash flows, 60–61
- interest computation, types of, 71–73
- interest rates, 46
- internal rate of return, 61
- perpetuities, 67–68
- present value (PV), 59–60
- principle of equivalency, 56
- properties, 53–55
- real rate of interest, 46–47
- simple interest, 50–51
- symbolic derivation, 56
- Maturity problem, 29
- Maturity transformation, 29
- Measurement period, 49–51, 54
- Modified following business day convention, 192, 340
- Monetary policies, 490–491
- Money, 10
- Money market(s), 30, 31, 41, 43, 54, 187, 340, 424
- acceptance credits, 232
- bills of exchange, 228–232
- commercial paper, 224–225
- correspondent banks, 200
- credit rating, 227–228
- discount rates and T-bill prices, 202–212
- discount securities, yields on, 202
- Eurocurrency deposits, 232
- federal funds, 198–200
- forward rates, 197–198
- interbank market, 193–197
- interest-computation methods, 195–197
- letters of credit and bank guarantees, 225–226
- market supervision, 190–193
- primary dealers and open-market operations, 213–224
- securities, 189, 190
- T-bill related functions in Excel, 209–211
- term money market deposits, 197
- treasury bills, 200–202
- Yankee paper, 226–227
- yield, 205–207
- Money market funds, 444–445
- Moneyness, 285–286
- Money rate of interest, 40
- Money rate of return, 47
- Money substitute hypothesis, 161
- Moody's Investors Service, 155
- Moody's ratings scale, 227
- Mortgagee, 19, 364
- Mortgage insurance, 366
- Mortgage insurers, 364, 366
- Mortgage lending, risks in, 19, 367–369
- Mortgage loan, 19, 46, 364–368, 376, 379, 380, 399, 406
- Mortgage originators, 364–365
- Mortgages and mortgage-backed securities, 19, 364
- accrual bonds, 399–402
- contraction risk, 399
- extension risk, 399
- floating-rate tranches, 403
- government insurance and private mortgage insurance, 366–367
- graduated-payment mortgage, 376–379
- interest-only (IO) class, 405
- market participants, 364–366
- mortgage lending, risks in, 367–369
- negative amortization, 374–376
- notional interest only tranche, 404–405
- PAC bonds, 405–410
- pass-through securities, 379–398
- principal-only (PO) class, 405
- structures, 369–374
- weighted-average coupon (WAC), 379
- weighted-average maturity (WAM), 379
- Mortgage servicer, 364–366
- income for, 365–366
- Mortgagor, 19, 364, 365
- Multiple deliverable grades, 253–259
- Multiple listing, 35–37
- Multiplicative price adjustment, 253, 255
- Mumbai Stock Exchange (BSE), 38
- Mutual fund, 27–30, 44
- Mutual funds, 430
- alternatives to, 459–464
- costs related to, 436–441
- dividend options of, 441–443
- investing in, 430–431
- investment techniques for, 452–455
- Net Asset Value calculations, 433–436
- open-end versus closed-end funds, 432–433
- price quotes, 440
- prospectus for, 450
- risk categories of, 450
- services provided by, 451–452
- shares and units, 431
- structure of, 450–451
- taxation of, 458–459
- Total Return of, 455–458
- types of, 443–449
- unit trusts, 433
- N
- NASDAQ 100 index, 121
- NASDAQ with OMX, 247
- National Stock Exchange (NSE), 38
- Near-date transaction, 347, 350
- Negative amortization, 374–376, 399, 401
- Negotiable CDs, 218–221
- Net Asset Value (NAV), 27–28
- Net domestic product (NDP), 484
- Net foreign assets, 8–9
- Net interest margin, 28, 32
- Net national product (NNP), 484
- Net present value (NPV), 86
- New York Stock Exchange (NYSE), 20, 22, 23, 36, 39, 84, 88, 235
- with Euronext, 247
- Next-day value/value tomorrow, 191, 350–352
- Nikkei, 247
- n:m reverse split, 88, 288
- No-arbitrage pricing equation, 505
- No-load mutual funds, 437, 438–439
- Nominal rate of interest, 40, 49, 56
- Nominal rate of return, 48, 49
- Noncallable preferred stock, 97
- Noncumulative preferred shares, 98, 99
- Nondeliverable forwards, 356
- Noneligible bank bills, 230
- Noninvestment grade ratings, See Speculative grade ratings
- Nonnegative option premiums, 289
- Nostro accounts, 200
- Notes, 13, 47, 329
- Notice money, 194
- Notional, meaning of, 404
- Notional interest-only securities, 404
- Notional interest-only tranche, 404–405
- Notional principal, 404, 411, 417, 422, 423
- n:1 stock split, 87, 88, 128
- O
- Obligation, of pension plans, 463
- Odd lot, 87
- Off cycle, 202
- Offsetting, meaning of, 238
- Offshore funds, 447
- Off-the-run securities, 202
- On cycle, 201
- One-point arbitrage, 336
- On-the-run securities, 201
- Open-end funds, 432–433
- Open interest, 259–262
- Open-market operations:
- and central banks, 491, 492
- and primary dealers (See Primary dealers and open-market operations)
- versus quantitative easing, 496
- Open-outcry markets, 478–479
- Open-outcry rule, 477
- Open-outcry trading systems, 477–478
- Operating expenses, 440–441
- Option class and option series, 287
- Option contracts, 281, 287, 316
- Option forwards, 353–355
- Option income funds, 448
- Option premium, 17, 281, 282, 289, 306, 310, 311, 315, 316, 319, 360–361. See also Option price
- Option price, 17, 281, 309, 314, 315
- Options contracts, 16–18, 280
- Option to change maturity, for ARMs, 371
- Option writer, 281, 353
- Oral auctions, 477, 479
- Orders, 465–467
- equivalence with options, 474–475
- good till canceled orders, 475
- good till days orders, 475
- limit order books, 468–469
- limit orders versus market orders, 469–470
- limit price, 468
- marketable limit orders, 470–471
- market orders and limit orders, 467–468
- market to limit orders, 474
- order specification, 476
- with quantity restrictions, 476
- stop-loss and stop-limit orders, 472–473
- trade pricing rules, 471–472
- trailing stop-loss orders, 473–474
- validity conditions for, 475
- Order size, 465
- Ordinary annuity, 64, 67
- Organization of Petroleum Exporting Countries (OPEC), 32
- Original term to maturity, 30, 187–188, 230
- Originators, 19, 364–365
- income for, 365
- Out of the money (OTM) options, 285, 287–290, 303, 304, 315, 320–322
- Out-of-the-money strangle, 324–325
- Outright forward rates, 341–343, 345
- Outstanding capital, 78–79
- Overnight money, 193, 350
- Over-the-counter (OTC) market, 14, 21, 22, 236, 281, 285, 287, 288, 414, 421
- Owner's equity, 121, 122, 126
- P
- PAC collars, 405–406
- Par bonds, 138–140
- Participating preferred shares, 100
- Partnership, 4–5, 79
- Par value, 87, 88, 136, 138
- versus book value, 79–80
- Passive approach, selling mutual fund shares, 436
- Passive orders, 471
- Pass-through securities, 379–398
- Payer, 415
- Payment caps, 372–374
- Payment period, 64, 412
- Payment-to-income (PTI) ratio, 367
- Penny stock trap, 88
- Pension plans, 462–464
- Perfect hedge, 263
- Perfect market, 345–347
- Perpetuities, 67–68
- Phillips Curve, 485
- Physical assets, 250–253
- Physical certificates versus book entry, 92
- Pips, 333
- Plain vanilla bond, 134, 140, 141, 156, 158, 165–167, 170, 172, 174, 175, 180, 399
- Planned amortization class (PAC):
- bonds, 405–410
- Points, 333–334, 341
- Portfolio insurance, 277–278
- Preemptive rights, 89–91
- Preferred habitat theory, 161–162
- Preferred shares, 14, 78, 96–97, 100
- Premium bond, 138, 140, 179
- Prepayment conventions, 381–382
- analysis, 384–388
- Prepayment risk, 368, 379, 399, 405
- Prepayments, 368, 379, 381, 383, 386, 388, 391, 393, 394, 396–397, 399, 405, 409
- Prepayment speed, 381–382, 389–391, 405
- Present value (PV), 59–60, 64–66, 68, 75–76, 100, 138, 141, 146, 148, 166, 170, 172, 175, 177, 221–223, 269, 291–293, 295, 314, 356, 369
- approach for investment evaluation, 63
- Present value interest factor (PVIF), 59
- Present value interest factor annuity (PVIFA), 64
- Price priority rule, 22, 468, 477
- Price quotes, for mutual funds, 440
- Price risk, 40, 175, 262, 264, 266, 303
- Price volatility, 170–171
- and duration, 171–172
- Price-weighted index, 105–107, 109, 110–111, 114, 116, 117
- Price-weighted portfolios, 116–117
- Price with respect to yield, partial derivative of, 171, 180
- Primary dealers and open-market operations, 213–224
- CDs versus money market time deposits, 224
- collateral, 217
- cost of CD for issuing bank, 221
- general collateral versus special repos, 215
- margins, 215–216
- negotiable CDs, 218–219
- repos and open-market operations, 217–218
- repurchase agreements, 213–214
- reverse repos, 214–215
- sale and buyback, 217
- term CDs, 221–224
- Primary deficit, 490
- Primary market transaction, 19–20
- Prime rate, 125
- Principal-only (PO) class, 405
- Principal value, 136, 196
- Principle-Linkers (P-Linkers), 181
- Principle of equivalency, 56
- Private limited companies, 5
- Private mortgage insurance (PMI), 366–367
- Profit after tax (PAT), 135–136
- Profit diagrams, 242–243
- Profit profiles, 299–301
- Profit push inflation, 487
- Profits, on Eurodollar futures, 501–502
- Program trading, 38, 273–275
- Proprietary trade, 23
- Proprietorship. See also Sole proprietorship
- Prospectus, for mutual funds, 450
- Proxies, 81–82
- 30/360 PSA, 144
- Public debt, 488
- Public Securities Association (PSA):
- prepayment benchmark, 391–394
- Pull to Par effect, 140
- Purchasing Power Parity (PPP), 485
- Pure expectations hypothesis, 160
- Pure securities, 510–511
- Putable bonds, 134, 167, 511–512
- Putable swaps, 425
- Put-call parity, 291–295, 314, 327, 361
- with dividends, 295–296
- Put options, 17, 167–169, 280–283, 306, 313, 315, 316
- R
- Range forwards, 357
- Rate caps, 371–372
- Rate of return approach, 63
- Ratios:
- Real estate, in GDP, 482
- Real estate funds, 449
- Realized compound yield, 152
- Real rate of interest, 46–47
- Rebalancing tracking portfolios, 114
- Receiver, 415
- Record date, 82
- Redemption baskets, 461
- Refixing dates, 416
- Registrar, See Share transfer agent
- Reinvestment risk, 40, 152, 175, 399, 402
- Rent, 46–47
- Repo and Reverse Repo Rates, 248
- Report cards, 93
- Repos, 213, 214–215, 217
- Requited transfer, 6
- Reserve, 32, 193
- Reserve account, 6
- Reserve asset, 7, 8
- Reserve currencies, 494
- Reserve rate, 491
- Reset date, See Refixing dates
- Residual claimants, 21, 79
- Retained earnings, 78
- Revenue deficit, 489
- Reversal, 421
- Reverse cash-and-carry arbitrage, 247–249, 255, 258–259, 345
- Reverse repos, 214–215, 217–218
- Reverse splits, 88, 111
- Rho, 315
- Right, value of, 89
- Right of foreclosure, 364
- Rights issues, 90, 91, 107, 116, 117, 119–120
- Rights record date, 90
- Right versus obligation, 280
- Risk, 39–41
- basis risk, 262
- contraction risk, 399
- credit risk, 13, 40, 154–155
- currency risks, 429
- default risk, 236, 367
- devolvement risk, 26
- extension risk, 399
- foreign-exchange risk, 41
- inflation risk, 40
- interest-rate risk, 367
- liquidity risk, 40–41, 367
- in mortgage lending, 367–368
- of mutual funds, 444
- prepayment risk, 368
- price risk, 40, 175, 262
- reinvestment risk, 40, 152
- sovereign risk, 41
- value at risk (VaR), 244–246
- Risk arbitrage, 255, 256
- Risk aversion, 29–30
- Risk categories, of mutual funds, 450
- RiskMetrics, 244
- Risk-neutral probabilities, 308, 310, 361
- Rolling hedge, 264
- Roth IRAs, 464
- Round lots, 87
- Round-trip transaction, 23
- S
- Sale, 199, 329
- Sales charges, 436–439
- Same-day value/value today, 191
- Samurai bonds, 33
- Secondary marketing profit, 365
- Secondary sales, 366–367
- Sector funds, 447
- Secured Overnight Financing Rater (SOFR), 195
- Securities and Exchange Commission (SEC), 25, 33, 93
- Securities depositories, 92
- Securitization, 19, 394
- Segregated accounts, 461–462
- Sell side, 23, 25
- Semi–semi swaps, 414
- Separately managed accounts, 461–462
- Sequential pay CMO, 394–399, 404
- Services:
- Settlement, of FRAs, 499
- Settlement cycle, 83
- Settlement price, 240, 241
- Shareholders, 5, 12, 14, 78–79, 81, 89–90, 96
- Share premium, 80
- Shares:
- Share transfer agent, 33
- Short-date contracts, 350–353
- Short interest rebate, 130
- Short position, 25
- Short put option, 299, 300–301
- Short rate of interest, 162–163
- Short rates, 162
- for bond valuation, 168–169
- Short selling, 25, 127–133, 281
- Short squeeze, 132
- Simple interest, 50–51, 53–54
- Simple interest approach, 72
- Simple margin, 165
- Simple yield to maturity, 148
- Single-month mortality rate (SMM), 382–385
- Small cap equity funds, 447–448
- Sole proprietorship, 4, 5, 79
- SONIA, 194–195
- Sovereign risk, 41
- S&P 500, See Standard & Poor's 500 Index
- Special drawing rights (SDRs), 7
- Specialist, 23
- Specialty funds, 447
- Speculation, 266–268, 421–422
- Speculation, with options, 301–309
- Speculative grade ratings, 155
- Speculative value, See Time value
- Split and reverse split, 87–88, 108
- Spot–futures equivalence, 246–247
- Spot markets, arbitrage in, 336–338
- Spot/next (S/N), 350
- Spot rates, 156–157, 159, 162
- Spot transaction, 15, 191, 235, 350
- Spot value, 191
- Spread, 23, 329. See also Bid–ask spread
- Spreads on returns, impact of, 335–336
- Stagflation, 487
- Standard and Poor's Corporation, 155
- Standard deviation, 94
- Standardization, 15–16
- Standardized contracts, 15–16, 237, 281
- Standard & Poor's 500 Index (S&P 500), 38, 121, 245, 247, 262
- rating scale, 227–228
- Standby LCs, 225, 226
- Stated value, See Par value
- State prices, 510–511
- Statutoryversus cumulative voting, 81
- Sterilized interventions, 493
- Stock:
- Stock dividend, 85–87, 89, 107, 111
- costs associated with, 89
- Stock exchange, 5, 38
- Stockholders, 5
- Stock market index, 105
- Stock picking, 275–277
- Stock price, 308–310
- Stock split, 87, 111
- Stop-limit orders, 472–473
- Stop loss books (SLB), 472
- Stop-loss orders, 472–473
- Stop orders, 472
- Stop-out yield, 211
- Straddle, 323
- Strangle, 324–326
- Strike price, 17, 280, 281. See also Exercise price
- STRIPS program, 179–180
- Subprime mortgages, 367
- Support bonds, 405
- Surplus budget unit (SBU), 5, 9, 488
- Swap deal, 341
- Swap market, banks' role in, 421–422
- Swap points, 341–343
- interpretation of, 349–350
- Swap rate, 416–417
- Swaps, 18–19, 411
- comparative advantage and credit arbitrage, 423–424
- contract terms, 413–415
- cross-currency swaps, 427–429
- currency risks, 429
- currency swaps, 426–427
- determining, 417–418
- hedging with currency swaps, 429
- illustrative swap rates, 417
- inherent risk, 416
- market method, 419
- market terminology, 415–416
- matched payments, 424–426
- quotations, 424–426
- role of banks, 421–422
- swap rate, 416–417
- terminating, 420–421
- valuation of swap during its life, 419–420
- Swaptions, 425–426
- Swiss Average Rate Overnight (SARON), 195
- Switching, within family of funds, 452
- Switching fees, 441
- Syndicated underwriting, 26
- Synthetic ask rate, 338
- Synthetic bid rate, 338
- Synthetic rate, 337
- Synthetic securities, 248–249
- Synthetic T-bill, 248, 251
- Systematic risk, 95
- T
- Tail, concept of, 208
- Targeted stocks, See Tracking stock
- Taxable-equivalent yield (TEY), 153–154
- Taxation:
- Tax-exempt funds, 449
- T-bill prices and discount rates, See Discount rates and T-bill prices
- T-bills, 13, 200–204, 209–211, 251
- T-bonds, 13, 154, 507–509
- Term CDs, 221–224
- Term money, 194
- Term money market deposits, 197–198
- Term repos, 213
- Term structure, 159
- Term to maturity, 136, 170, 187
- Theta, 315
- 30-year T-bond futures contracts, 507
- Three-stage model, 103–104
- Tick, 132
- Time preference rule, 477–478
- Time priority rule, 22
- Time to maturity, 306
- Time value, 289–290
- T-notes, 13
- Tokyo Overnight Average Rate (TONAR), 195
- Tokyo Stock Exchange, 34, 132
- Tom/next (T/M), 350
- Total Return:
- of mutual funds, 455–458
- Tracking portfolios, 114–120
- Tracking stock, 92
- Trade, foreign, 483–484
- Trade pricing rules, 471–472
- Trading at a discount, 138, 340, 432
- Trading at a premium, 138, 340, 354–355, 432
- Trading positions, 24–25
- Trading volume, 259–260
- Trailing stop-loss orders, 473–474
- Transaction date, 191, 236, 281, 415–416
- Transfer agents, 451
- Treasury bills, 200–202
- reopenings, 201–202
- Treasury's formula, 143
- Treasury stock, 86–87
- Triangular arbitrage, 337–338
- Triffin paradox, 494
- Trigger price, 473
- T+3 settlement cycle, 84, 91
- 12b-1 fees, 440–441
- Two-period model, 309–310
- Two-point arbitrage, 336–337
- Two-stage model, 102–103
- U
- Unbiased expectations hypothesis, 160
- Underwriting, 25–26
- Undivided, meaning of, 380
- Uniform customs and practices for documentary credits (UCPDC), 226
- Uniform price/yield auctions, 211–212
- Unilateral transfers, 8
- Unit capital, 432
- Unit investment trusts, 433
- Units, in mutual funds, 431
- Unit trusts, 433
- Unlimited liability, 4
- Unrequited transfer, 6, 8
- Unscheduled principal, 380, 391
- Unsterilized interventions, 493
- Uptick price, 132–133
- V
- Validity conditions, for orders, 475
- Valuation, 104, 248–249, 305–306, 427–429
- Value at risk (VaR), 244–246
- Value averaging, 453–454
- Value date, 191, 193, 340, 346, 350
- Value funds, 448
- Value today, 350, 352, 420
- Value tomorrow, 191, 350–352
- Value-weighted index, 110–112, 273
- Value-weighted portfolios, 117–119
- Variable currency, 330–333, 339, 341
- Variance, 94–96, 265, 306
- Variation margins, 239, 240
- Vega, 315, 316
- Volatility, 244, 306, 315, 328, 361
- Voluntary accumulation plans, 451–452
- Voluntary withdrawal plans, 452
- Vostro accounts, 200
- Voting rights, 80–81, 86, 92, 96
- W
- Wage spiral inflation, 487
- Wasting assets, 306, 315
- Weekend money, 193
- Weighted-average coupon (WAC), 379, 381, 404
- calculation of, 379
- Weighted-average maturity (WAM), 379, 381
- calculation of, 379
- When issued (WI) trading, 179
- Wholesale Markets Brokers' Association (WMBA), 195
- Withdrawal plans, 452
- Y
- Yankee bonds, 33
- Yankee paper, 226–227
- Yield curve, 159–161, 177
- Yields, 47, 54, 83–84, 147–153, 160, 161, 177, 212, 337
- approximate yield to maturity (AYM), 149
- computing, of bonds, 182–185
- current yield, 147
- on discount securities, 202
- holding-period yield, 153
- realized compound yield, 152
- reinvestment risk, 152
- simple yield to maturity, 148
- taxable-equivalent yield (TEY), 153–154
- yield to maturity (YTM), 148–151
- zero-coupon bonds and YTM, 150, 152
- Yield to call (YTC), 166–167
- Yield to maturity (YTM), 137, 140, 142, 145, 147–153, 157–159, 164, 170, 175, 177, 205, 416
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