Ngân hàng, tín dụng - Chapter 8: Money and capital markets

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 8 Money and Capital Markets Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-2 Learning Objectives • Visualize the structure of the government bond market • Explain the interaction of Eurodollars, CDs, and Repurchase agreements and their connection to short- term government debt • Understand the market structure of the corporate and municipal debt markets • Describe the structure of equity markets and they fundamentals that help determine their price Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-3 Introduction • Market for U.S. government securities is the center of the money and capital markets • U.S. Treasury has to sell many hundred billion dollars worth of securities each year to pay off maturing issues and finance current government operations • Provides reference point for money market (debt less than one year) and capital markets (long-term debt/equities) 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-4 The Government Bond Market • When U.S. government runs a deficit, the Treasury Department borrows money by selling government bonds • Sell to anyone willing to lend money to U.S. government • Treasury issues a wide variety of maturities and types of government securities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-5 The Government Bond Market (Cont.) • U.S. securities are basically two types – Marketable [50%]--bought/sold in financial markets – Nonmarketable [50%]--sell back to Treasury • Types of Securities and Investors – Treasury Bills (T-bills) • Short-term—maturity of 3, 6 months or 1 year • Zero-coupon—sold at discount below face value Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-6 The Government Bond Market (Cont.) • Types of Securities and Investors (Cont.) – Treasury Notes • Maturity between one and ten years • Coupon instruments—interest usually paid semiannually – Treasury Bonds • Maturity longer than 10 year, up a maximum of 30 year • Coupon instruments • Coupons can be “stripped” and sold as separate instruments 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-7 The Government Bond Market (Cont.) • Types of Securities and Investors (Cont.) – Treasury Inflation Protected Securities (TIPS) • 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 principle grown at the rate of inflation Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-8 The Government Bond Market (Cont.) • Owners of marketable government securities – Federal Reserve • Purchases Open Market Operations—mostly T-bills • Provides Fed with most of its income – Private Sector • Commercial banks • Individuals • Insurance companies/Pension Funds • Money market mutual funds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-9 The Government Bond Market (Cont.) • Owners of marketable government securities (Cont.) – Foreigners • Now own about 50% of U.S. national debt • Without foreign purchases, U.S. interest rates would be much higher • Foreigners are attracted to U.S. securities: – Political stability – Financial freedom—Dollar is easily traded – Relative high interest rates 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-10 The Government Bond Market (Cont.) • How the Market Works – Most trading takes place in over-the counter markets – Trading in government securities averages more than 20 times trading on the New York Stock Exchange – Increasingly traded around the clock in different parts of the world Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-11 The Government Bond Market (Cont.) • How the Market Works (Cont.) – Dealers get much of their inventory of bonds by bidding at competitive auctions • Three- and six-month T-Bills are auctioned weekly • Notes are auctioned on a regular scheduled basis – Initially issued at auctions held by Treasury • Raise new funds • Replace funds of maturing securities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-12 r)(1 ValueFaceicePr += icePr PriceValueFace −=r The Government Bond Market (Cont.) • Treasury Bills: Auctions and Yields – Zero coupon held for one year: 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-13 The Government Bond Market (Cont.) • Treasury Bills: Auctions and Yields (Cont) – Zero Coupon held for less than one year – Where “t” is the inverse of the fraction of a year the bill takes to mature Face Value - Pricer Price = x t[ ] Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-14 The Government Bond Market (Cont.) • Treasury Bills: Auctions and Yields (Cont.) – At closing time of auction Treasury does following: • Ranks bids from highest price down • Selects bids in this order until amount sold equals amount scheduled to be sold • Successful bidders purchase bills at the same price and will earn the same yield – Yield on a discount basis—Calculated as face value minus purchase price divided by the face value – Coupon Equivalent Yield—More accurate measure since it uses purchase price rather than face value Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-15 The Government Bond Market (Cont.) • Repurchase Agreements (Repos) – An efficient mechanism for financing purchases of government securities – Along with the federal funds market, the Repo market is the focal point of overnight borrowing and lending – Securities dealer sells government security and agrees to repurchase at a higher price the next day which reflects the overnight cost of funds 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-16 The Government Bond Market (Cont.) • Repurchase Agreements (Repos) (Cont.) – Repo market is closely related to market for borrowing and lending reserves owned by banks—Federal Funds Market • Both markets are sources of overnight funds • Both markets settle payments the same day the transaction is completed • Main difference is that a repo agreement is a collateralized loan • Federal Funds rate and rate on repo agreements tend to move together Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-17 The Government Bond Market (Cont.) • Repurchase Agreements (Repos) (Cont.) – The Repo market has evolved into a much broader use • Repros are done over a wide variety of maturities ranging from the traditional one day to three months • Repro agreements are now used to raise funds for anything the borrower chooses, simply acting as collateral for the lender Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-18 Bank-Related Securities: CDs and Eurodollars • Commercial banks have other money market options than repos and federal funds • Certificates of Deposit [CDs] – Savings deposits with a specific maturity date – CDs in excess of $100,000 are negotiable instruments and traded through network of dealers 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-19 Bank-Related Securities: CDs and Eurodollars (Cont.) • Eurodollars – Dollar denominated time deposits held abroad in foreign banks or foreign branches of U.S. banks – Used by US banks to raise funds – LIBOR (London Interbank Offered Rate)— overnight rate of borrowing eurodollars and tends to follow money market rates in the U.S. – (Figure 8.1) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-20 FIGURE 8.1 Yields on three-month Treasury bills and LIBOR move closely together. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-21 Corporate Securities • Corporate Bonds – Corporations borrow across all maturity ranges—mainly at the long end – High-quality corporate bonds usually yield more than government bonds and are safer than corporate stocks – Bonds have prior claim before stocks—payment of interest is first priority – Being long term, these bonds are subject to interest-rate risk—interest rises, prices fall 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-22 Corporate Securities (Cont.) • Corporate Bonds (Cont.) – Callable bonds • Issuer has right to pay off the bond before maturity date • Bond option will be exercised if it is in the interest of the borrower • These carry higher interest rate – Convertible bonds—holders have right to convert to common stock at predetermined price Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-23 Corporate Securities (Cont.) • Corporate Bonds (Cont.) – Corporate bonds differ in quality—danger of default by borrower • U.S. government is safest • Various bond rating agencies – Standard and Poor’s – Moody’s • Investment grade—highest quality bonds Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-24 Corporate Securities (Cont.) • Corporate Bonds (Cont.) • Junk bonds – Very risky, but pay high interest to compensate for risk – Tend to perform well when the economy is strong, but extremely risky when economy does poorly – Michael Milken [convicted of securities fraud] and Drexel, Burnham Lambert [bankrupt in 1990] are two examples of problems in the junk bond market 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-25 Corporate Securities (Cont.) • Corporate Bonds (Cont.) • Life insurance and pension/retirement funds hold most corporate bonds – Schedule cash flow based on life expectancies – Hold to maturity—little need for quick liquidation • Foreigners also hold large amount of corporate bonds • Generally traded in over-the-counter market—usually by telephone Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-26 Corporate Securities (Cont.) • Commercial Paper – Unsecured corporate borrowing in the money market (short-term) – Two categories of issuers: • Finance companies associated with well known manufacturing companies • Nonfinancial companies--generally to finance inventory – Usually purchased directly from issuer by large institutional investors Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-27 Corporate Securities (Cont.) • Commercial Paper (Cont.) – Because of possibility of default, yields are typically higher than Treasury Bills, but tend to move closely together (Figure 8.2) – Not much of a secondary market—investors generally redeem with issuer 10 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-28 FIGURE 8.2 Yields on three-month Treasury bills and commercial paper. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-29 Municipal Securities • Issued by state and local governments • Lowest yield because interest earnings are exempt from federal tax • By law Congress does have the power to tax, but has decided not to tax this source of revenue Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-30 Municipal Securities (Cont.) • “Serial” maturity form – Portion of the issue matures each year until entire issue is retired – Each portion carries its own interest rate and is separate from the rest of the issue – In essence a 10 year serial bond is really 10 separate issues, each maturing at different times • Sold through underwriting syndicates who sell to ultimate investors at slightly higher prices 11 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-31 Municipal Securities (Cont.) • Two types of municipal bonds – General Obligation Bonds—Backed by general taxing power of the state or local government – Revenue Bonds—Issued to finance a specific project; interest and principal are paid solely out of receipts from the project – General obligation bonds are safer than revenue bonds and pay lower interest Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-32 Municipal Securities (Cont.) • Secondary trading in the over-the-counter market—not much activity • Tax-anticipation notes (TAN) and bond- anticipation notes (BAN)—short-term securities cover cash flow problems of taxes (TAN) or upcoming capital projects (BAN) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-33 Mortgage Securities • Most complicated of all debt instruments • Borrowing by individuals using real estate as collateral • Most mortgages are insured by some type of government agency minimizing potential default of borrowers – Governmental National Mortgage Association – Federal Home Loan Mortgage Corporation 12 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-34 Mortgage Securities (Cont.) • Mortgages can be repaid prior to maturity date – Prepayment or refinancing due to lower rates – Investors are not sure of maturity – Investments undesirable to institutional investors • Innovations in mortgage terms – Shorter maturity period – Adjustable rate—minimizes interest rate risk of lender – Balloon payments—low front end with large lump sum payment at end Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-35 Mortgage Securities (Cont.) • To reduce uncertainty and broaden the appeal of mortgages, dealers developed Collateralized Mortgage Obligations (CMOs) – Number of mortgages are placed in a trust – Interest and principal repayments are divided by trustee into four (or more) segments according to a predetermined formula – Investors select which segment from which to receive their payments – Makes the cash flow more predictable Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-36 The Stock Market • Structure of the Stock Market – About 90 million individual shareholders in U.S. – During past decade institutional investors (pension funds, mutual funds, and insurance) have begun to dominate the market – Stock Market—refers principally to secondary market for common stock – Primary issues are handled through investment banks 13 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-37 The Stock Market (Cont.) • Structure of the Stock Market (Cont.) – 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 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-38 The Stock Market (Cont.) • Structure of the Stock Market (Cont.) – Other markets • American Stock Exchange • Over-the-counter [OTC] – Network of dealers and brokers who deal via telephone and computer terminals – National Association of Securities Dealers Automated Quotation System [NASDAQ]—Shows bid and asked prices of OTC traded securities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-39 DiscountofRateAnnual DividendAnnualExpectedicePr = The Stock Market (Cont.) • What Determines Whether Stock Prices Rise or Fall – Stocks (equities) represent ownership company – Investor receives future cash flows in form of dividends – In its simplest form the price of a stock with constant dividends forever is: 14 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-40 The Stock Market (Cont.) • What Determines Whether Stock Prices Rise or Fall (Cont.) – Therefore, the price will rise if: • Expected future dividends increases • Annual rate of discount decreases – Rate of discount is higher than the government bond rate to compensate for the risk of stocks – However, the rate of discount will follow movements in the government bond rate Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-41 The Stock Market (Cont.) • What Determines Whether Stock Prices Rise or Fall (Cont.) – Therefore, price of stocks move in same direction of earnings and inversely with interest rates – To predict movements of stock prices must predict: • Expected future earnings • Expected future interest rates • This requires knowledge of future movements of the entire economy which is notoriously difficult Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-42 The Stock Market (Cont.) • Money and Stock Prices – Some economists believe that fluctuations in the money supply will provide key to movements in stock prices – Increase in money supply will increase stock price: • Individuals hold larger cash that they need • Spend some on stock which increases demand and increases price (assume supply fixed in short-run) – Opposite for a decrease in money supply 15 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-43 The Stock Market (Cont.) • Money and Stock Prices (Cont.) – Therefore, rapidly expanding money supply generally leads to higher stock prices; inadequate growth of money leads to a fall – Difficult to determine if stock and money growth are related to each other or reacting to a third causal force (Figure 8.3) – However, other economic forces may cause stock prices and growth of money supply to move in opposite directions Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-44 FIGURE 8.3 Stock prices and other variables, 1960–1966. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 8-45 TABLE 8.1 Results of a Typical Treasury Bill Auction