Interest Rate Markets Quiz 1 - Revision history

Egge at 04:19, 27 July 2008

2008-07-27T04:19:33Z

← Older revision		Revision as of 04:19, 27 July 2008
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	{ The relationship between term to maturity and interest rates is known as the term structure of interest rates. The four main theories are:		{ The relationship between term to maturity and interest rates is known as the term structure of interest rates. The four main theories are:
	\|type="{}"}		\|type="{}"}
	{ pure (i) _4 } expectations		{ pure (i) _4 } { expectations } hypothesis states that the shape of the term structure is solely determined by investors' expectations regarding short-term interest-rates over the life of long-term securities.
	{ liquidity } premium		{ liquidity } { premium } hypothesis states the only uncertainty about future interest rates is due to uncertainty about the underlying real interest rates. Since it is unlikely that the amount of money and desired terms available for investment would match the borrowers needs, a premium must be paid to offset the risk of fluctuation.
	{ inflation } { risk } premium		{ inflation } { risk } premium suggest the only risk is due to unexpected changes in inflation.
	{ market } ~~segmenation~~		{ market } { segmentation } hypothesis implies there is a distinct group of investors for certain maturity ranges.

	{		{
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	* a { secondary } market where existing securities are traded.		* a { secondary } market where existing securities are traded.
	Short-term and long-term securities may be issued on the primary market by:		Short-term and long-term securities may be issued on the primary market by:
	* { tender } / { auction }		* { tender } / { auction }: Bids are accepted for a fixed volume of stock to be issued.
	* { private } placement		* { private } { placement }: Specific deals are negotiated privately between the borrower and lender.
	* { dealer } panels		* { dealer } { panels }: The arrangement between issuer ______ is such that the issuer pays each ______ _____ member a fee (retainer) in exchange for an agreement whereby each panel member will make a market (buy/sell spread) in each of the issuer's stocks and purchase stock from the issuer on an exclusive basis. This method of issuance is preferred by the { semi }-{ government } authorities.
	* { public } loan		* { public } { loan }: This is where a borrower sets an interest rate for a particular period of time and issues a prospectus.

	{		{
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	{		{
	\|type="{}"}		\|type="{}"}
	{ Commonwealth } bonds provide the { reference } { point } for evaluating yields on other fixed interest securities.		{ Commonwealth } bonds provide the { reference } { point } for evaluating yields on other fixed interest securities. Most prices for corporate bonds are quoted as spreads over Government bonds. Given the increased liquidity in the Australian interest rate { swap } market in recent years, corporate bonds are often prices as a spread to { swap }.

	{		{
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	\|type="{}"}		\|type="{}"}
	Approaches to interest rate forecasting include:		Approaches to interest rate forecasting include:
	* { scenario } analysis		* { scenario } { analysis } will allow a better assessment of the risks to the forecasts.
	* { judgmental } forecasting		* { judgmental } forecasting
	* { econometric } ~~modelling~~		* { econometric } modeling
	* { technical } analysis		* { technical } { analysis } is important to understand short-term pricing conditions in markets.

	{		{
	\|type="{}"}		\|type="{}"}
	There are four components to building an interest rate forecast:		There are four components to building an interest rate forecast:
	* assessment of { market } { expectations }		* assessment of { market } { expectations }. The start point is to look at the money markets.
	* creating an { economic } { outlook }		* creating an { economic } { outlook }. It is important for the forecaster to construct a view on the future course of economic growth and inflation.
	* the { interest } { rate } forecasts		* the { interest } { rate } forecasts. The starting point is the cash rate.
	* strategy and { implementation }		* strategy and { implementation }
	</quiz>		</quiz>

	Next quiz [[Interest Rate Markets Quiz 2]]		Next quiz [[Interest Rate Markets Quiz 2]]

Egge at 23:56, 25 July 2008

2008-07-25T23:56:57Z

← Older revision		Revision as of 23:56, 25 July 2008
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	{		{
	\|type="{}"}		\|type="{}"}
	{ The debt securities market consists of { borrowers } and investors who negotiate the { interest } { rate } at which the investor lends money to the { borrower }.		The debt securities market consists of { borrowers } and investors who negotiate the { interest } { rate } at which the investor lends money to the { borrower }.

	{		{
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	{		{
	\|type="{}"}		\|type="{}"}
	A tightening of monetary policy { reduces } liquidity in the financial system and in the short term puts { upward } pressure on interest rates. As this will tend to { reduce } inflation, this policy in the longer term will ~~lread~~ to an { easing } of interest rates. Conversely, an easing of monetary policy will { lower } interest rates in the short term and may lead to an { increase } in the longer term.		A tightening of monetary policy { reduces } liquidity in the financial system and in the short term puts { upward } pressure on interest rates. As this will tend to { reduce } inflation, this policy in the longer term will lead to an { easing } of interest rates. Conversely, an easing of monetary policy will { lower } interest rates in the short term and may lead to an { increase } in the longer term.

	{		{
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	* the { interest } { rate } forecasts		* the { interest } { rate } forecasts
	* strategy and { implementation }		* strategy and { implementation }

	</quiz>		</quiz>

	Next quiz [[Interest Rate Markets Quiz 2]]		Next quiz [[Interest Rate Markets Quiz 2]]

Egge: New page: { The relationship between term to maturity and interest rates is known as the term structure of interest rates. The four main theories are: |t...

2008-07-20T06:36:20Z

New page: <quiz display=simple shuffle=true case=(i)> { The relationship between term to maturity and interest rates is known as the term structure of interest rates. The four main theories are: |t...

New page

<quiz display=simple shuffle=true case=(i)>
{ The relationship between term to maturity and interest rates is known as the term structure of interest rates. The four main theories are:
|type="{}"}
{ pure (i) _4 } expectations
{ liquidity } premium
{ inflation } { risk } premium
{ market } segmenation

{
|type="{}"}
{ The debt securities market consists of { borrowers } and investors who negotiate the { interest } { rate } at which the investor lends money to the { borrower }.

{
|type="{}"}
In Australia there are two distinct segments to the debt market: the { short }-{ term } securities market ( often called the money market ) and the { long }-{ term } securities market ( often called the fixed interest market ).

{
|type="{}"}
Money market instruments generally do not have any { coupon } { payments } and mature in { less } than one { year }.

{
|type="{}"}
Fixed interest securities have maturities of greater than one { year } and have regular { cash } flows called { coupons }.

{ Identify each security as short-term or long-term
|type="()"}
| short-term | long-term
-+ indexed securities
-+ Commonwealth Government bonds
+- cash
-+ semi-government loans (semis)
+- promissory notes (PNs) or commercial paper (CP)
-+ bank transferable certificates of deposit
+- bank endorsed bills of exchange
-+ corporate bonds
+- commercial bills
-+ asset-backed securities
+- bank-accepted bills of exchange
-+ floating-rate notes and bonds
+- Treasury Notes (TNs)
+- certificates of deposit (CDs)

{
|type="{}"}
The { retail } debt market is made up of all the individual private investors with their relatively { small } amounts of money.

{
|type="{}"}
The { wholesale } debt market consists of the large pool of funds gathered together from the retail market. The participants are financial { intermediaries } and { large } corporations (professional investors).

{
|type="{}"}
Financial markets have two sub-markets:
* a { primary } market where new securities are issued
* a { secondary } market where existing securities are traded.
Short-term and long-term securities may be issued on the primary market by:
* { tender } / { auction }
* { private } placement
* { dealer } panels
* { public } loan

{
|type="{}"}
The basic objective of trading debt securities on the secondary market is to profit from { interest } { rate } { movements }.

{
|type="{}"}
{ Commonwealth } bonds provide the { reference } { point } for evaluating yields on other fixed interest securities.

{
|type="{}"}
The price paid for the use of money is the { interest } { rate }.

{
|type="{}"}
The RBA uses monetary policy to influence the { supply } of { money } and the { level } of { interest } { rates } in the economy.

{
|type="{}"}
A tightening of monetary policy { reduces } liquidity in the financial system and in the short term puts { upward } pressure on interest rates. As this will tend to { reduce } inflation, this policy in the longer term will lread to an { easing } of interest rates. Conversely, an easing of monetary policy will { lower } interest rates in the short term and may lead to an { increase } in the longer term.

{
|type="{}"}
{ Loanable } funds theory assumes an equilibrium interest rate is set by supply an demand being in balance.

{
|type="{}"}
The { Fisher } equation explains the relationship between interest rates, inflation and the real rate of return mathematically.

{
|type="{}"}
{ Purchasing } { power } { parity } states that the interest rates between countries vary only be expected exchange rate movements.

{
|type="{}"}
An increase in the level of inflation puts upward pressure on interest rates as:
* production costs { rise }, making Australian products { less } competitive
* the real rate of return on investment { declines } and hence investors will require { higher } interest rates to compensate for this loss.
* wages { rise } and hence the price of producing goods { rises }: this can lead to spiraling { inflation }.

{
|type="{}"}
If plans to borrow exceed plans to lend, interest rates may { rise }. If plans to borrow fall short of plans to lend, interest rates may { fall }.

{
|type="{}"}
{ News } is an important indicator of how short-term interest rates will move.

{
|type="{}"}
Approaches to interest rate forecasting include:
* { scenario } analysis
* { judgmental } forecasting
* { econometric } modelling
* { technical } analysis

{
|type="{}"}
There are four components to building an interest rate forecast:
* assessment of { market } { expectations }
* creating an { economic } { outlook }
* the { interest } { rate } forecasts
* strategy and { implementation }

</quiz>

Next quiz [[Interest Rate Markets Quiz 2]]