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Financial Markets

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. Bond Markets. Bond-buyers lend money in exchange for interest payments

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Financial Markets

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  1. 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

  2. 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 market—quotes often hard to find • Rating agencies assess risks • Sensitive to economic indicators (c) 2001 by Russell G. Todd

  3. 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

  4. Government Bonds • U.S. Treasurys • Agencies of governments • Municipals: GOs and revenue bonds • Foreign-government bonds (sovereigns) • Supranational bonds • Savings bonds (c) 2001 by Russell G. Todd

  5. 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

  6. Bond-Market Jargon • Quoted in 1/32 points (ticks): 96 3/32 • Simple yield= coupon/current price • YTM=yield 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

  7. Other Bond Markets • Eurobonds • Yankee & other $ bonds • Brady bonds • Other nation’s bonds • Foreign company bonds • FRNs, MTNs, etc. • Bonds that aren’t bonds (swaps, minibonds) (c) 2001 by Russell G. Todd

  8. The Yield Curve Source: Bloomberg.com, March 26. 2010

  9. Bond-Rating Firms • Firms assess issuer ability to repay • Ratings run from AAA (best) to DDD, with variations among firms • Major firms are Moody’s, Standard & Poors, Fitch • They have blown it on derivatives • Under pressure to get act together (c) 2001 by Russell G. Todd

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