Financial Markets

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Financial Markets

• Bond markets
• Stock markets
• Foreign-exchange market
• Commodities futures markets
• Mutual funds ETFs
• International stocks funds
• OTC markets of all kinds!

(c) 2001 by Russell G. Todd
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Bond Markets

• Bond-buyers lend money in exchange for interest
  payments
• Governments, companies issue bonds
• Inflation drives prices down, yields up
• 10 times larger than stock market
• Opaque marketquotes often hard to find
• Rating agencies assess risks
• Sensitive to economic indicators

(c) 2001 by Russell G. Todd
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What Moves Bonds

• Inflation sends yields up, prices down
• Corporate bonds hinge on company health
• Economic growth can send prices down
• Better opportunities elsewhere
• Growth brings inflation
• Falling currency can bring prices down as
  foreigners leave the market
• Oversupply can bring prices down
• Government bonds rise in a crisis

(c) 2001 by Russell G. Todd
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Government Bonds

• Treasurys
• Agencies of governments
• Municipals GOs and revenue bonds
• Foreign-government bonds
• Supranational bonds
• Savings bonds

(c) 2001 by Russell G. Todd
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Corporate Bonds

• Investment grade few risks, AAA
• High-yield or junk highest risk, CCC
• Everything in between
• Foreign companies issue bonds
• Companies not on stock market issue bonds
• Bond derivatives have exploded

(c) 2001 by Russell G. Todd
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Bond-Market Jargon

• Quoted in 1/32 points (ticks) 96 3/32
• Simple yield coupon/current price
• YTMyield to maturity
• 10-year Treasury is reference bond
• Yield curve assesses economic prospects
• Spreads between less risky, more risky issues
  also assess prospects

(c) 2001 by Russell G. Todd
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Other Bond Markets

• Eurobonds
• Yankee other bonds
• Brady bonds
• Other nations bonds
• Foreign company bonds
• FRNs, MTNs, etc.
• Bonds that arent bonds (minibonds)

(c) 2001 by Russell G. Todd
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The Yield Curve
Source Bloomberg.com
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Corporate Spreads
Source Freelunch.com
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Bond-Rating Firms

• Firms assess issuer ability to repay
• Ratings run from AAA (best) to DDD, with
  variations among firms
• Major firms are Moodys, Standard Poors, Fitch
• They have blown it on derivatives
• Under pressure to get act together

(c) 2001 by Russell G. Todd