Financial markets
They constitute the mechanism or place through which contact is established between the various agents interested in trading financial assets, that is, it is the ideal medium where buyers and sellers interact to exchange assets and money, and in this way channel the savings of society towards productive or service sectors, with temporary resource needs.
In order for an financial market to be efficient it must fulfill a double function: on the one hand, it provides liquidity to assets, since as the market for a new asset expands and develops, it will be easier to convert it into money without loss and, on the other hand, decrease to the minimum possible the time from the moment the operation is agreed until it is fully liquidated, that is, achieve operational agility.
There are various criteria to classify financial markets, although for the purposes of this work, those that correspond to the way of functioning, degree of organization, context in which the operations are carried out, phase in the negotiation of assets and characteristics will be taken into account. of traded assets.
Classification criteria for financial markets
Due to the way it works.
- Direct market: when the financial asset exchanges are carried out directly between the financing applicants and the fund providers, that is, the agents-buyers and sellers are in charge of finding their counterpart themselves, with limited information and without the help of specialized agents, although, as a consequence of the existence of a large volume of operations, specialized agents, brokers -commissioners- sometimes appear in these markets and have the function of relating the bidders and applicants of assets by charging a commission. Intermediate market: when at least one of the participants in. Each asset purchase or sale transaction is a financial intermediary. This type of market is essential to develop investment processes in small and medium-sized companies, since raising funds directly is more within the reach of the public sector or large companies of recognized solvency. In these markets, the role played by financial intermediaries is fundamental in their role of placing and even more transforming assets, converting them - once acquired by them - from primary to indirect or secondary titles, issued by themselves, with a series new benefits that make them fitter and more attractive for acceptance by surplus units.Banks are considered the operators par excellence of the intermediated market.
For its degree of organization.
- Organized markets: where many securities are traded simultaneously, generally in one place and under a specific series of rules and regulations; examples are the stock markets, the foreign exchange market and the interbank market. Unorganized markets: those in which, without being subject to strict regulations, assets are exchanged directly between agents or intermediaries, without the need to define the place where the transaction takes place, since the price and quantity conditions are freely set by the parties and not the intervention of a mediating agent is required, although it may exist.
By the context in which they carry out the operations.
- Interbank market: refers to wholesale and primary markets in which only transactions are crossed between credit institutions, the central bank and, in some cases, other financial institutions, for the purpose of negotiating very short-term assets with a high degree of liquidity. The growing importance of this market today is not only given by the large number of entities that participate in it, and by the high volumes traded between them, but also because they undoubtedly constitute the basic point of reference for the formation of prices in the various financial markets. Non-interbank market: The intermediaries that act can be non-banking and banks can also participate ', since the relationships extend between participants that are not purely banking.
By the phase in the negotiation of the assets.
- Primary markets: in which newly created financial assets are exchanged, and secondary markets; in which existing financial assets are traded, changing their ownership, as many times as allowed by the expiration date of the title. Secondary market: it does not imply the existence of new financing for the issuer, but it is of great importance to guarantee the liquidity of the assets, allowing the circulation of these among the agents and the diversification of their portfolio, and contributing to the promotion of savings of the collectivity
Due to the characteristics of the assets traded.
- Monetary or money market: it is a short-term market in which (assets of high liquidity, low risk and consequently, lower relative return are traded, although this has the advantage of being fixed. Capital market: financial assets are traded in the medium and long term, and their assets can generate fixed or variable returns (they depend on the existence and distribution of benefits in the issuing entity). Due to the significant development achieved in financial innovations in recent times, the derivatives market should be mentioned as part of this classification, which deals with the negotiation of hedging instruments contracts, in the face of possible market risks, either due to the variation in interest rates, exchange rates or other types of asset prices. Example of them: futures and financial options.
Treasury values
Treasury securities are issued by the US Department of the Treasury, and are backed by the full trust and credit of the US government. Consequently, market participants see them as having no credit risk. Interest rates on treasury securities are the benchmark rates for the US economy, as well as for international capital markets.
Treasury securities can be classified into: Discounted values and Coupon values.
The fundamental difference between the two types is found in the form of the payment flow received by the holder, which is reflected at the same time in the price where the securities are issued. Coupon securities pay interest every six months plus the principal at maturity. Discounted securities pay only a contractually set amount at maturity, called the maturity value or face value. Discounted instruments are issued below their maturity value, and the investor's return is the difference between the issue price and the value at maturity.
Treasury Notes
The current practice of the Treasury is to issue all securities that have a maturity of one year or less as discounted securities. Such securities are called Treasury Notes.
All securities with a maturity of two years or more are issued as coupon securities. Treasury coupon securities issued with original maturities between two and ten years are called Treasury notes, and those with original maturities greater than ten years are Treasury bonds.
Treasury notes are issued in the primary market based on an auction. Those that expire in three to six months are auctioned every Monday, and those that expire in one year are auctioned the third week of each month.
Primary agents include several commercial banks and investment banking companies, both domestic and foreign.
Secondary markets for treasury securities is an over the counter market, where a group of government securities dealers offer bid or ask prices to the general public and other dealers. The secondary market is the most liquid in the world.
The issue auctioned for each maturity is named as current issue or current coupon. Previous issues auctioned at the current coupon issue are mentioned as past due issues, and are not as liquid as current issues.
Offer price of the Treasury notes.
The convention for the quotation of offer and proposal for the treasury notes establishes that these are quoted based on a bank discount and not based on the price, and is calculated as follows:
Y = D / FX360 / t.
Where:
Y: annualized yield based on bank discount (expressed in decimal).
D: Discount, which is equal to the difference between the face value and the price.
F: Nominal value.
.t: Amount of time until expiration.
Example of calculating the yield of a Treasury note:
Suppose you buy a Treasury note with 100 days to maturity, a face value of $ 100,000 and a selling price of $ 97,569. What is the annualized yield based on a bank discount?
D = Nominal value - Market price.
D = $ 100,000 - $ 97,569
D = $ 2431.
Y = ($ 2,431 / $ 100,000) X (360/100)
Y = 8.75%.
The annual yield on the Treasury note is 8.75%.
Knowing the yield based on the bank discount, the price of the Treasury note can be calculated as follows:
Yes:
Y = D / FX360 / t.
Then solving for D.
D = YXF t / 360
So the price is:
Market price = F- D
For the 100-day Treasury note with a face value of $ 100,000, if the yield based on the bank discount is quoted at 8.75%, D is equal to:
D = 0.0875 X $ 100,000 X 100/360
D = $ 2431
Price = $ 100,000 - $ 2431
Price = $ 97569
The return quoted on a bank discount basis is not a meaningful measure of the return on possession of a Treasury note for two reasons: 1) the measure is based on an investment of nominal value, rather than present value, and 2) the Yield is annualized according to a 360-day year, making it difficult to compare the returns obtained with notes and treasury bonds that pay 365-day interest. Aside from the drawbacks of this performance measure, this is the method that agents have adopted to price Treasury notes.
The corporate bond market
The corporate bond market can be classified into five sectors:
1) markets for commercial paper, 3) market for bank loans, 4) market for bank acceptances, 5) market for term certificates and 6) market for mortgages.
Unlike Treasury securities, corporate bonds expose the investor to credit risk, because the issuer may default on its obligations to the lender. In any period, the yield offered in the market for a corporate debt instrument varies according to the expectations of investors about the probable ability of the issuer to satisfy its obligations with the lender. The higher the credit risk is perceived, the higher the return that investors demand.
Commercial paper markets
Commercial Paper: Title of credit in which an issuer promises to pay a certain amount of money to its holders at the expiration date. These are issued in the short term (between 30, 50 and 270 days) by public limited companies that have previously obtained the corresponding authorization to offer them to the public.
Commercial paper is a short-term unsecured note, issued on the open market, which represents the obligation of the issuing corporation.
The issuance of commercial paper is a bank loan alternative for large corporations (financial and non-financial) with strong credit values.
While the original purpose of commercial paper was to provide short-term funds for temporary working capital needs, companies have used this instrument for other purposes in recent years. It is very often used as a “bridge loan”. For example, if a corporation needs long-term funds to build a plant or purchase equipment. Instead of getting the long-term funds immediately, you choose to postpone the offering until more favorable capital conditions prevail in the market. The funds acquired by issuing commercial paper are used until the long-term securities are sold.
Placement of commercial paper is classified into direct paper or paper by means of brokers. Direct paper is sold by the issuing company to investors without the help of an intermediary agent. Commercial paper through brokers requires the services of an agent to sell the paper of an issuer.
There are several differences between US commercial paper and European commercial paper with respect to the market structure and characteristics of the paper. 1) US commercial paper usually has a maturity of less than 270 days, with order expiration of 30 to 50 days or less; while the European can be considerably broader, 2) in the USA it must have unused bank lines of credit, in the European it can be issued without guarantees, 3) the issuer in the USA can be directly placed or by through agents, the European is almost always installed through agents and 4) due to the long maturity of the European paper, it is traded more often on the secondary market than in the US.
Bank loan market
Bank loans
An alternative to investing in securities is for a corporation to raise its funds by borrowing from a bank. Bank debt is most widely used as a major financing for a leveraged purchase. There are several resource alternatives for a corporation: 1) a domestic bank in the corporation's home country, 2) a subsidiary of a foreign bank that is established in the corporation's home country, 3) a foreign bank domiciled in a country where the corporation does business, 4) a subsidiary of a national bank that has been established in a country where the corporation does business, 5) a European or transnational bank.
Bank loans can be classified in different ways, such as:
1) According to the interest rate:
Loans can be of fixed or variable interest.
Fixed-interest loans maintain a single interest throughout their lives, previously agreed in the contract negotiated between the parties.
Variable interest loans are the result of adding a fixed margin, predetermined in the contract, at a variable interest rate, agreed as the reference base rate. The variable interest rate is not determined quantitatively in the contract, but rather by means of a differential rate added to a specified reference rate and known in a certain way on the interest settlement dates to determine the rates to be paid at all times, which which means that the loan rate is based on a benchmark rate, for example the London Interbank Offered Rate (LIBOR) or the rate on certificates of deposit.
In banking practice, when contracting loans, the differential rate is expressed in percentage points and the reference rate can be any interest rate observable in a regulated market, either offered by an entity, or an average of those offered by certain entities, or an average published in a market.
The fundamental reason for the implementation of variable interest by banks is to share the interest risk with the borrower in medium and long-term operations. The turnover of bank liabilities occurs to a greater extent in the short term and, consequently, the costs they must bear are those of short-term funds, with which the interest rate risk derived from the variation of the rates at the times of settlement will be zero if the loan financing funds vary in the same direction and with the same periodicity.
In relation to the borrowers, the acceptance of variable interest rates in a long-term operation, assuming the interest rate risk, should be a decision based on the assessment of that risk, the awareness of assuming fixed costs for the coverage of the same and the return on the investment that this financing will allow.
2) According to the form of amortization:
Loans with no repayment and loans with no installments.
Loans with no amortization are those in which the payment of the part corresponding to the amortization of the principal is deferred during certain periods.
The need to defer the repayment of a loan is conditioned by the requirements of the projected cash flows of the borrower. It is necessary to emphasize that the lack of amortization has nothing to do with interest payments, which continue to be made, regardless of the deferral of the amortization amounts.
The periods in which it is agreed to defer the amortization payment can be in three temporary positions: in the initial moments of the life of the loan, at the end of the operation or they can be in intermediate periods.
Loans with no installments are those that the borrower does not make any payment during a series of established periods.
In loans with no installments, the lender grants the borrower deferral of the payment of any amount, but does not consent to the exemption of interest. Therefore, despite the fact that interest payments are not made, the borrowed capital is increased by the part corresponding to accrued and unpaid interest, with which, the amount amortized at the end of the loan does not coincide with the loan granted to the start, but will be higher by an amount equal to the interest not paid.
3) Loans from unionized banks
A syndicated bank loan is one where a group (or syndicate) of banks provides funds to the borrower. The need for a group of banks arises, because the amount sought by a borrower may be too great for only one bank to expose itself to the credit risk of that borrower. Therefore, the syndicated loan market is used by those seeking to raise a large amount of funds in the loan market, rather than through the issuance of securities.
The interest rate on a syndicated loan is a variable rate.
The maturity of the loan term is fixed and is often structured to be repaid according to a predetermined schedule, and the repayment of principal generally begins after a specified number of years (less than or equal to 6 years).
Syndicated loans are distributed in two ways:
- Transfer method: In this procedure, the seller fully assigns all rights to the transfer holder, now called the attorney-in-fact. Participation method: In this procedure, the contract's privacy is not conferred on the holder of the participation, since it does not arrive to be a party to the loan agreement and is not related to the borrower, but to the seller of the share.
Bank acceptances market
A corporation that seeks to raise short-term funds can issue short-term securities, for which it can use a commercial paper program to disseminate, through an agent, the securities to investors. The risk you face is that when the paper matures and additional financing is required, market conditions may be such that the corporation fails to sell its new paper.
To eliminate this risk, the acceptances issuance facility was developed.
An acceptances issuance facility (or note) is a contract between a borrower and a group of banks (syndicate), in which banks ensure that the borrower can issue short-term promissory notes (usually with a maturity of three to six months), over a period established in the future, called bank acceptances.
The bank syndicate ensures that the borrower can raise short-term funds by agreeing to extend credit to the borrower or to buy the acceptances issued by the borrower, if these cannot be sold at a predetermined minimum price. The term of the agreement is normally five to seven years. The bank union receives a commission for this task.
The use of bank acceptance has decreased since capital requirements have been imposed on banks that underwrite a note issuance facility and because those multinational corporations that have strong credit values feel that this backup facility was unnecessary and only increased the cost of raising funds in the short term, due to the commitment commission that had to be paid. Consequently, instead of using note issuance facilities, they relied more on the European commercial paper market to raise short-term funds.
Seen in a simpler way, a bank acceptance is a vehicle created to facilitate the transactions of commercial operations. The instrument is called a bank acceptance, because a bank accepts the ultimate responsibility for repaying a loan to its holder. The use of bank acceptances to finance a business transaction is called "financial acceptance."
Example:
Bucanero SA, is a Cuban joint venture dedicated to the production of Beers and Malts, this entity establishes a purchase - sale contract with FEMSA, a company dedicated to the production and sale of beer bottles. Bucanero SA. It offers $ 68,500 per thousand thousand of the set of caps and cans. The credit terms that the payment will be made within 90 days after shipping said materials. Suppose that FEMSA agrees to the terms and conditions of the contract, but is concerned about Bucanero SA's ability to meet the promised payments.
Therefore, Bucanero SA agrees with its bank, Banco Financiero Internacional (BFI) to issue a letter of credit, which states that BFI will finance the payment of the $ 68,500 that Bucanero SA must make to FEMSA, 90 days after shipment.
The letter of credit or forward bill of exchange will be sent by BFI to the FEMSA bank, which is Banco de Comercio de México (BANCOMER).
When BANCOMER receives the letter of credit, it will notify FEMSA, which will ship the thousand thousand of the materials described above.
After the materials are shipped, FEMSA presents the shipping documents to BANCOMER and receives the present value of $ 68,500, for which it exits the negotiation.
BANCOMER presents a forward bill of exchange (according to the days remaining to the 90 days) to the BFI, the latter will stamp on the forward bill of exchange “Accepted”, with which it has created a bank acceptance. This means that the BFI agrees to pay the bank acceptance holder $ 68,500 on the due date.
Bucanero SA will sign an agreement with BFI, with which it will receive the shipping documents and materials.
At this time, the holder of the bank acceptance is the BFI and it has two decisions: 1) to continue supporting the bank acceptance in its loan portfolio and 2) to request BANCOMER to make the payment of the same at the present value of $ 68,500. Suppose BACOMER accepts.
Now the holder of the bank acceptance is BANCOMER, which has two alternatives: 1) continue to hold the bank acceptance in its loan portfolio and 2) sell the bank acceptance to an investor at the present value of $ 68,500.
Term deposit market
Term Deposit Certificates (CDT): It is a freely negotiable title with which a person, natural or legal, may deposit an amount of money, to withdraw it after a certain time, obtaining a return on their investment as a benefit. The terms can be from 30 days onwards, the most common being 30, 60, 90, 180, and 360 days. They can be issued by commercial banks, savings corporations, financial corporations, etc. The rate of return for your deposit is determined by the amount, the term, the responsible corporation and the conditions existing in the market at the time of its incorporation. They are nominative, that is, their value is the one that appears in the document, and they cannot be redeemed before expiration.
They can also be defined as a document proving a fixed-term imposition and transferable by endorsement. Sometimes the intervention of the entity that uses the deposit is necessary. The supporting document includes the holder of the fixed-term deposit, the maturity, the interest rate and the interest payment method. In this way, if the depositor needs liquidity before the expiration of the fixed term, he can sell the certificate of deposit without having to cancel the underlying term deposit contract.
Suppose a deposit of one million pesos is made in a commercial bank for 180 days at 10% annual interest. If the nominal interest rate is 10% and with monthly interest payment, how much interest is the interest, using the American amortization method?
As you can see, the interests amount to $ 600,000.00.
Mortgage market
The mortgage market is a collection of markets that includes a primary (or granting) market, and a secondary market where mortgages are traded.
By definition, a mortgage is a property guarantee to ensure the payment of a debt, without the property leaving the possession of its owner. In the event that the debtor does not pay, breaching the guaranteed obligation, the creditor may request the sale of the asset and collect what is owed to him with the amount of the sale, which is called foreclosure (procedure by which, and before the non-payment of a debt, the creditor urges the public sale of the mortgaged property of the debtor).
The elements involved in a mortgage are:
- Mortgage Borrower - Borrower in a mortgage loan Mortgage creditor - Lender / investor in a mortgage loan Debt Real estate ownership
When an investor grants a loan to a home buyer, which is taken as collateral, it is a typical example of a mortgage.
The buyer of the house is the mortgagor, the one who sells it is the mortgagee, the house is the property of real estate, the loan granted is the debt.
Two types of real estate properties are recognized: 1) residential properties and 2) non-residential properties.
Residential properties can be subdivided into a single family structure (one to four families) and multi-family structures (apartment buildings in which more than four families reside).
For its part, non-residential properties include: houses, cooperatives, apartments, and commercial and agricultural properties.
Generally, the property refers to real estate, which in a broad sense are: the land and everything that is attached to it: lots, buildings, factories, etc., which are the object of transactions in the real estate market.
The main grantors of residential mortgage loans are savings institutions, commercial banks, mortgage loan banks.
Grantors can generate income from mortgage activity in a number of ways: First, they charge an award fee, which is expressed in terms of points, where each point represents 1% of the funds loaned. For example, a two-point award fee on a $ 100,000 home loan is $ 2,000. The second source is the profit that can be generated by selling a mortgage at a price higher than the original cost.
This profit is obtained in the secondary market. If the mortgages rise, the grantor will have a loss when they are sold on the secondary market. The third is a potential source and consists of providing the service to the mortgages that they granted, for which they obtain a service commission, which consists of collecting the monthly payments to the debtors of the mortgages and issuing the income to the owners of loans, send payment notices to mortgages, remind mortgages when payments are due, maintain mortgage balance records, provide tax information to mortgages, manage an account for real estate taxes and for insurance purposes, and if necessary, start the enforcement procedure.The service fee is a fixed percentage of the mortgage balance due, typically 50 to 100 basis points per year.
The grantor can sell the mortgage services to another party, who will then receive the commission for the services. The fourth potential source is that the grantor can hold the mortgage in its investment portfolio and speculate on gaps in an imperfect market.
Someone who wants to ask for funds to buy real estate will apply for a loan from a mortgage grantor. The prospective homeowner fills out the application providing the applicant's financial information and pays an application fee, then the mortgagee performs a credit assessment of the applicant. The two primary factors in determining whether funds will be loaned are: 1) monthly payment-income ratio, which measures the applicant's ability to make monthly payments, and 2) loan-value ratio, which is the ratio of the market value of the good and the purchase price of the real estate.
For example, if an applicant wants to borrow $ 150,000 on a property with an appraisal of $ 200,000, the loan-to-value ratio is 75% (150,000/200,000).
In the event that the lender decides to lend the funds, it will send a letter of commitment to the applicant, in which it agrees to provide funds to the applicant, in a period ranging from 30 to 60 days. As of the date of the letter, the lender will require the applicant to pay a commitment fee. It is important to understand that this letter obligates the lender, not the applicant, to perform. The commitment commission that the applicant must pay is lost if he decides not to buy the property.
On the date the application is signed, the mortgagee will give the applicant a choice between various types of mortgages. Basically the choice is between a fixed rate mortgage (commonly called a traditional mortgage) or an adjusted rate mortgage.
The fixed rate or traditional mortgage the home loan is based solely on the borrower's credit and the mortgage guarantee. The idea of this type of mortgage is for the borrower to pay the interest (granting commission) and repay the principal in equal terms over an agreed period of time. The payment frequency is typically monthly and the prevailing term of the mortgage is 15-30 years.
Example:
The BPA grants a mortgage loan for $ 100,000 to Compañía Tierra Roja SA., For the purchase of apartment buildings in the Ciudad del Niquel, with a mortgage rate of 9.5% per annum for 30 years with payment of interest and amortization of the monthly principal, calculated by the French amortization method. Don't consider commissions. Calculate the monthly payments and the interest paid at the end of the mortgage.
The French method involves repaying the loan through constant, identical installments for each of the settlement periods. The capital granted at the beginning is amortized through increasing amortization installments, based on a geometric progression of ratio (1 + i). The interest installments, on the other hand, decrease as the life of the loan progresses. However, the sum of the amortization and interest installments must be equal to the installment or amortization term, which is calculated in advance.
The amount of the annuity is calculated by the mathematical formula that will be shown later or with the help of financial tables. The amount of interest is determined by applying the interest rate to the outstanding capital at all times and the repayment fee as the difference between the repayment term and the interest fee. The outstanding capital is calculated as the outstanding capital in the previous period less the part that has been amortized during that period.
To calculate the installment or amortization term, the following formula is used:
TA = Co X i /
TA = $ 100,000 X 0.007916667 / -360
TA = $ 840.85
Two risks are attached to mortgages: price risk and precipitation risk.
Mortgages are at risk of price, when there are adverse effects on the value of the mortgage, if mortgage rates rise and the grantor has made a commitment of a lower rate, the mortgages will have to be sold when they approach the lower value of the funds loaned to property owners, or retain the mortgage as a portfolio investment, earning a lower-than-market rate.
The risk of precipitation occurs when the mortgagee gives the potential borrower the right but not the obligation to cancel the agreement. The main reason potential borrowers can withdraw their mortgage application is that mortgage rates have dropped enough that it is economical to seek alternative funding sources.
Grantors have several alternatives to protect against these risks. For example, they can obtain a commitment from an agency or private conduit, to sell you the mortgage at a future time. This kind of commitment is effectively a forward contract, as the grantor agrees to send a mortgage at a future date, and another party (the agency) agrees to purchase the mortgage at that time at a predetermined price.
However, consider what happens if the mortgage rate drops and borrowers choose to cancel the deal. The mortgagee agrees to send a mortgage at a specified mortgage rate. If the prospect does not close and the mortgagee made a commitment to deliver the mortgage to a private agency or conduit, the grantor cannot evade the transaction. For this reason, you will record a loss, as you must send a larger mortgage in an environment of lower mortgage rates. This is a precipitation hazard.
Mortgage grantors can protect themselves against the risk of precipitation by establishing an agreement with an agency or private conduit for an optional, rather than mandatory, delivery of the mortgage. With such an agreement, the mortgage grantor is buying an option that gives him the right, but not the obligation, to send the mortgage.
In the presence of high and variable inflation, fixed or traditional rate mortgages suffer from two deficiencies: the lag problem and the slope problem.
The mismatch problem arises because mortgages and very long-term assets are generally financed by institutions that accept primary deposits that are very short-term and lending for a very long term (15 to 30 years), therefore there is a gap of the maturity of the assets (mortgages) and the liabilities obtained to provide funds to the former, which results in the same thing happening when inflation increases interest rates.
Another way to describe the mismatch problem is in terms of the balance sheet, rather than the income statement. Differences between active and passive interest rates will cause the lending institution to become technically insolvent, in the sense that the market value of its assets will be insufficient to cover its liabilities.
Slope refers to what happens to the mortgage payment problem over the life of the mortgage as a result of inflation. If the general price level rises, the real value of the mortgages will go down over time. Therefore, the mortgage obligation represents a greater problem in real terms for the owner of the real estate in the first years. In other words, the actual overload is "skewed" towards the early years.
One way to solve the mismatch problem is to redesign the traditional or fixed-rate mortgage to produce an asset whose return matches short-term market rates, and thus better matches the cost of liabilities. One instrument that has gained popularity is the so-called adjustable rate mortgage.
The adjustable rate mortgage asks to adjust the interest rate periodically according to some appropriately chosen index, reflecting short-term market rates, which allows investors a better match of their returns to the cost of their funds, adjusting the interest rate over time (six months, one year, two or three years, etc.). The interest rate as of the adjustment date is equal to the benchmark index, plus a spread of between 100 and 200 basis points.
Generally, mortgage rates include periodic caps that limit the amount the interest rate can increase (ceiling) or decrease (floor) on the reset date.
Treasury note exercises:
Assume that the price of the Treasury note maturing in 90 days and with a face value of $ 1,000,000 is $ 980,000. What is the yield based on a bank discount?
The yields from the offer and purchase of a Treasury note due on January 31, 2006, are quoted by an agent as 5.91% and 5.89%, respectively. Should the yield on offer be less than the yield on buy, because the yield on offer indicates how much the agent wants to pay and the yield on buy is what the agent is willing to sell the treasury note?
Exercises on commercial paper.
Why is commercial paper a short-term bank loan alternative for a corporation?
What is the difference between straight laid paper and runner laid paper?
What is European commercial paper?
Exercise on bank acceptances.
Unico SA, is a company dedicated to the production of nickel plus cobalt, this entity establishes a purchase - sale contract with Volvo SA, a company dedicated to the production and sale of automotive equipment for the transportation of minerals. Unico SA offers $ 70,000 per team. The credit terms that the payment will be made within 90 days after shipping said materials. Suppose Volvo SA. agrees with the terms and conditions of the contract, but is concerned about Unico SA's ability to meet the promised payments. The banks of Unico SA and Volvo SA are the BFI and the Swiss National Bank. Explain the mechanism of the bank acceptance that would occur.
Exercises on loans.
What is a syndicated bank loan?
What is the benchmark rate typically used for a syndicated bank loan?
What is the difference between an amortized bank loan and a single amortization bank loan?
Explain the ways a bank can sell its position in a syndicated loan.
Exercises on term deposits.
Suppose a deposit of $ 200,000 is made to a commercial bank for 90 days. If the nominal interest rate is 10% and with monthly interest payments, how much is the interest, using the constant amortization method?
Exercises on mortgages:
Suppose that the BPA grants you a mortgage loan for $ 4000, for the purchase of a PANDA television, with a mortgage rate of 5% per annum for 4 years with monthly interest payments and principal amortization, calculated by the French amortization method. Don't consider commissions. Calculate the monthly payments and the interest paid at the end of the mortgage.
Suppose that the BPA grants you a mortgage loan for $ 10,000, for the purchase of an apartment in the City of Nickel, with a mortgage rate of 6% per annum for 5 years with interest payment and monthly principal amortization, calculated by the method French amortization. Don't consider commissions. Calculate the monthly payments and the interest paid at the end of the mortgage.
Consider the following fixed rate payment level mortgage:
Maturity: 360 months.
Amount borrowed: $ 100,000.
Annual mortgage rate: 10%.
Monthly mortgage payment: $ 877.57.
a) Build an amortization schedule for the first 10 months.
b) What will be the balance of the mortgage at the end of month 360?
Financial derivatives are instruments that "derive" their prices from the returns recorded by the underlying assets in the money, currency and stock markets.
