Fina6010 Class 7

Class Money, Banking & Financial Markets
7 FINA6010
7.1 Market Update

7.2 Money and Capital Markets: US Treasuries
7.3 Money and Capital Markets: Stocks
7.4 Glossary
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Class Market Update:
7 “Morning Meeting”
A. Stocks (= Shares = Equity Markets)

B. Foreign Exchange (= FX = Currency Markets)
C. Commodities (e.g. precious metals, oil,
wheat)
D. Bonds (= Fixed Income = Debt Markets)
Come to class ready to give an update
on all 4 major markets!
Bring 2 updates for each market!
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25 Jan 2021
Market Update:
Class
7 FirstFT
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7 FINA6010
7.1 Market Update

7.4 Glossary
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Chapter 8
Money and
Capital
Markets
(cont.)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

7 US Treasuries
• The market for U.S. government securities or

“Treasuries/Treasurys” is the center of the money
and capital markets
• The U.S. Treasury has to sell hundreds of billions
of dollars of securities each year to pay off
maturing issues, and finance current government
operations
• The Treasury market provides the reference point
for the money markets (debt less than one year)
and capital markets (long-term debt/equities)
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7 US Treasuries
• When the U.S. government runs a deficit, the

Treasury Department borrows money by
selling government bonds
• Sold to anyone willing to lend money to the
U.S. government
• The US Treasury issues a wide variety of
maturities and types of government securities
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7 US Treasuries: deficit
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7 US Treasuries/GDP%
www.tradingeconomics.com Tom Bain 9

7 US Treasury 30-year auction Aug 2020
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7 $38billion US Treasury 10-year auction Jan 2021
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7 US Treasuries
3 main types of US Treasuries:

1. Treasury Bills (T-bills) 短期国债
• Short-term—maturity of 3, 6 months or 1 year (91
days, 182 days, 364 days)
• Zero-coupon—sold at a discount to face value,
receive full face value at maturity
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7 US Treasuries
2. Treasury Notes (T-notes) 美国中长期国债

• Maturity between 2 - 10 years
• Coupon instruments—interest paid semiannually
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Class Money and Capital Markets:
7 US Treasuries
3. Treasury Bonds (T-bonds) 美国长期国债
Maturity longer than 10 years, up a maximum of 30 years
• Coupon instruments—interest paid semiannually
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7 US Treasuries: STRIPS
4. Separate Trading of Registered Interest &

Principal Securities (STRIPS)
本息分离抵押贷款支持证券
• UST coupons can be “stripped” and sold as
separate instruments (zero coupon bonds)
• The final principal payment is also a zero
coupon bond
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7 US Treasuries: STRIPS
U.S. zero-coupon STRIPS allow investors to hold the interest
and principal components of eligible Treasury notes and
bonds as separate securities. STRIPS offer no interest
payment; investors receive payment only at maturity. Quotes
are as of 3 p.m. Eastern time based on transactions of $1
million or more
Maturity Bid Asked
2015 Feb 15 95.492 95.502
2015 Aug 15 94.002 94.012
2015 Nov 15 93.161 93.172
2016 Feb 15 92.224 92.234
2020 Nov 15 73.035 73.045
$50,000 costs 0.73045 × $50,000 =

$36,517.50 Tom Bain 16
7 US Treasuries: TIPS
5. Treasury Inflation Protected Securities (TIPS)

通货膨胀保护债券
• Most complicated security issued by the Treasury
• Issued in three maturities—5, 10, and 20 years
• Interest is paid semi-annually
• The principal of the TIPS grows at the same rate as
inflation
• Interest payments increase with the increased
principal
• Upon maturity, bearer receives higher of the
original principal or principal grown at the rate of
inflation
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7 US Treasuries: TIPS spread
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7 US Treasuries 2019
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7 US Treasuries June 2018
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7 US Treasuries July 2020
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7 US Treasuries
How the UST market works:
• Most trading takes place in over-the counter
(OTC) markets
• Trading in government securities averages
more than 20 times equity trading on the New
York Stock Exchange
• Increasingly traded around the clock in
different parts of the world
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7 US Treasuries
• Dealers get much of their inventory of bonds

by bidding at competitive auctions
• Three- and six-month T-Bills are auctioned
weekly
• Notes and bonds are auctioned on a regular
scheduled basis
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7 US Treasuries
US Treasury auctions
• At closing time of auction the Treasury does
following:
• Ranks bids from highest price down
• Selects bids in this order until amount sold
equals amount scheduled to be sold
• All successful bidders purchase the new
securities at the same price and will earn the
same yield
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7 US Treasuries: 10-year Note auction
Announcement of details:
• Term and Type of Security: 10-Year Note
• Offering Amount: $24,000,000,000
• Currently Outstanding: $0
• CUSIP Number: 912828QN3
• Issue Date: May 16, 2011
• Maturity Date: May 15, 2021
• Original Issue Date: May 16, 2011
• Dated Date: May 15, 2011
• Series: C-2021
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Competitive bids:
Tendered Accepted
Primary Dealer $48,189,000,000 $10,616,992,000
Direct Bidder $8,681,000,000 $2,007,000,000
Indirect Bidder $15,061,200,000 $11,274,371,000
Total Competitive $71,931,200,000 $23,898,363,000
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Non-competitive bids:
Tendered Accepted
Competitive $71,931,200,000 $23,898,363,000
Noncompetitive $61,681,200 $61,681,200
FIMA (Noncomp) $40,000,000 $40,000,000
Subtotal $72,032,881,200 $24,000,044,200
Total $72,032,881,200 $24,000,044,200
Bid-Cover ratio = 3.00
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Price of the new issue (i.e. yield):
Stop
• Interest Rate: 3-1/8%
• High Yield: 3.210%
• Allotted at High: 18.26% “tail” 尾巴
• Median Yield: 3.175%
• Low Yield: 3.096%
• Price: 99.277862
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7 FINA6010
7.1 Market Update

7.4 Glossary
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7 Stocks financial instruments are issued to borrow
ABC Co. Ltd.

Assets Liabilities
Cash Bank loans

Inventory Seniority
Bonds in bankruptcy
Plant, Property
& Equipment
Equity/Stock
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7 Stocks: types of stock/equity
A. Common stock (Ordinary share) 普通股
• Shares that give the holder the right to receive dividends and
the right to vote on certain company related issues
B. Preferred stock (Preference share) 优先股
• Holders must receive their fixed dividend before ordinary
shareholders are repaid. They rank above ordinary shares in the
event of liquidation
C. Cumulative preferred stock 累计优先股
• With this instrument if the dividend is not paid one year, it must be
paid in the following year or whenever the company generates
sufficient profits. The arrears must be paid off before any
dividends are paid on ordinary shares
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D. Treasury stock 库存股
• Shares that are repurchased and held by the
issuing company
E. Convertible preferred stock 可转换优先股
• Preferred stock that can be converted into
ordinary shares/common stock. Before conversion
they are lower risk than ordinary shares as they
have a higher ranking and typically pay a fixed
dividend
F. Convertible bond
A bond that can be converted into a fixed number of
shares at the option of the holder, on or before a
fixed date Tom Bain 32
seniority
Convertible Bonds
Cumulative
Preferred Stock
Treasury Stock
not really equity
Non-Cumulative
Preferred
Common Stock
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7 Stocks: Structure of the Stock Market
• New York Stock Exchange—most visible part of

stock market
• Posts—location where individual stocks are traded
• Traders—receive orders from brokerage houses
• Specialists—individuals who maintain orderly
trading for securities in their charge
• May just match publicly tendered buy and sell
orders
• Floor traders stand at posts and compete for
orders not matched by specialists
• If neither of these occur, specialists will buy or sell
for their own account to prevent excessive price
swings
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7 Stocks: Structure of the Stock Market
Physical Exchanges Electronic Trading
How are Stocks Traded?
35
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7 Stocks: Equity indexes
A single number representing many share prices:
• An index is a hypothetical portfolio of securities
representing a particular market or a portion of it
• An equity index can be used for a number of
purposes
• As a measure of the market sentiment or health
• As a benchmark to assess the performance of a
portfolio of shares or an individual share
• As a way of expressing a view on the movement of
a market
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An index can be calculated in one of two ways:
1. Price index 物价指数 : unweighted arithmetic
index; an average of the constituent share
prices
Example: Dow Jones Industrial Average
道琼斯工业平均 (or “DJIA” or “Dow”)
2. Market cap index 市值指数: weighted index;

the value of each component is weighted by the
market capitalisation (= share price x total shares)
of the company
Example: S&P 500
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Price Index:
Company Share price Price Weight
Company #1 $50 5%
Company #2 $250 25%
Company #3 $600 60%
Company #4 $90 9%
Company #5 $10 1%
INDEX VALUE $1,000
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DJIA: Price index
IBM
Equity indexes: price index 10.08%
Dow Jones Industrial Average DJIA
Exxon
5.20%
IBM = 10.08%
Exxon = 5.20%
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DJIA: Price index
Company Price DJIA weight % Market cap
IBM $167.75 10.08% $203.18B
Exxon $81.96 5.20% $403.74B
• Market capitalization = share price x total shares
• Exxon’s market cap is nearly twice that of IBM, but

IBM’s weight in the DJIA is nearly twice Exxon’s!
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7 Stocks: DJIA by price Jan 2021
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7 Stocks: DJIA by market cap Jan 2021
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From which countries do these equity indexes

originate?:
• S&P 500 标普500

• Nikkei 225 日经指数
• CAC 40 法国CAC 40股票指数
• FTSE 100 英国富时100指数
• Hang Seng 恒生指数
• DAX 30 德国DAX指数
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Index Weighting? Changes?

S&P 500 market cap occasionally
Nikkei 225 price Annually
CAC 40 market cap Quarterly
FTSE 100 market cap Quarterly
Hang Seng(50) market cap occasionally
DAX (30) market cap Quarterly
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7 FINA6010
7.1 Market Update

7.4 Glossary
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Class Prep:
7 Quiz 7 Glossary
• 3 main types of US Treasuries:
1. T-bills 短期国债
2. T-notes 美国中长期国债
3. T-bonds 美国长期国债
• STRIPS 本息分离抵押贷款支持证券
• TIPS 通货膨胀保护债
• Common stock 普通股
• Preferred stock 优先股
• Cumulative preferred stock 累计优先股
• Treasury stock 库存股
• Convertible preferred stock 可转换优先股
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Class Prep:
7 Quiz 7 Glossary (cont.)
• Price index 物价指数
• Market cap index 市值指数
• DJIA (US) 道琼斯工业平均
• S&P 500 (US) 标普500
• Nikkei 225 (Japan) 日经指数
• CAC 40 (France) 法国CAC 40股票指数
• FTSE 100 (UK) 英国富时100指数
• Hang Seng (Hong Kong) 恒生指数
• DAX 30 (Germany) 德国DAX指数
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Class Prep:
7 Optional reading
Ritter: Chapter 10
Review Glossary
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Fina6010 Class 7

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Class Money, Banking & Financial Markets

7.1 Market Update

A. Stocks (= Shares = Equity Markets)

7.1 Market Update

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

• The market for U.S. government securities or

• When the U.S. government runs a deficit, the

www.tradingeconomics.com Tom Bain 9

3 main types of US Treasuries:

2. Treasury Notes (T-notes) 美国中长期国债

4. Separate Trading of Registered Interest &

$50,000 costs 0.73045 × $50,000 =

5. Treasury Inflation Protected Securities (TIPS)

• Dealers get much of their inventory of bonds

Bid-Cover ratio = 3.00

7.1 Market Update

ABC Co. Ltd.

Cash Bank loans

• New York Stock Exchange—most visible part of

Physical Exchanges Electronic Trading

How are Stocks Traded?

Tom Bain 3636

2. Market cap index 市值指数: weighted index;

• Market capitalization = share price x total shares

• Exxon’s market cap is nearly twice that of IBM, but

Tom Bain 4141

Tom Bain 4242

From which countries do these equity indexes

• S&P 500 标普500

Tom Bain 4343

Tom Bain 4444

Tom Bain 4545

Tom Bain 4646

Tom Bain 4747

Tom Bain 4848

Index Weighting? Changes?

Tom Bain 4949

7.1 Market Update

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