Cash deposits and loans out to 12 months (Has a life of less than 12 months)
Money Markets
Inter-bank market:
- Development in short-term rates market
- UK = SONIA - Sterling overnight index average based on unsecured overnight borrowing published by the Bank of England
- US = SOFR - Secured overnight financing rate based on an overnight repo rate
- Eurozone = ESTR - Euro short-term rate based on the previous day's unsecured overnight borrowing settled through Target2
Money Market Instruments:
- Treasury Bills (UK T-bills)
- Issued by the Debt Management Office (DMO) on behalf of the UK Government
- Short-term unsecured debt
- One to twelve months
- Zero-coupon
- Issued at discount redeemed at par
- Minimum market denomination = £25,000
- Benchmark risk-free rate
- Government = Least risk investment compared to lending to a company
- Commerical Paper
- Issued by companies
- Short-term unsecured debt
- Two to nine months
- Zero-coupon
- Issued at discount redeemed at par
- Typically high denominations
- E.g. $500,000
- US is the biggest market
To remember :
Treasury Bills = Issued by DMO/UK Government, One - Twelve Months & Minimum Market Denomination = £25,000
To remember :
Commercial Paper = Issued by Companies, Two - Nine Months, High Denominations = $500,000
- Certificate of deposit (CDs)
- Promissory note (Issued by banks and other financial institutions
- Purchased at nominal value and redeemed with interest
- Fixed Term
- Three and Six Months are most common
- Early redemption incurs a penalty
- Certificate shows the money at the bank, for period and interest rate
- If money is required before end of period, CD can be sold on the money market
Foreign Exchange
FX: Background:
- 100% OTC market
- Big players - Major international banks
- Spot market = Cash Market - T+2
- Forward market = Anything that is greater than T+2
- London largest centre (By some distance)
- Dollar is the major currency
Cross Rates:
- Two less known/used currency pairs
- Cross through the dollar to exchange
Two-Way Prices
- Which ever currency is quoted first is the 1 value
- GBP/USD
- GBP = £1
- All FX is quoted to 5 figures
- The last two digits are the pips
Bonds
Government bonds:
- Debt instruments
- UK Gov Bonds = Gilts
- T-Bills - Good for 3, 6, 9, 12 months
- 5, 10 years +, you would use Gilts
- Loan to the government
Nominal Value (Face value, Par Value, Redempton Value)
- Quoted per £100
- The capital payment the holder receives at redemption
Coupon:
- The interest
- Expressed as an annual percentage of the nominal value
- Paid semi annually
Name:
- The name given at issue
- E.g. 6 1/2 Per Cent Treasury Stock 2048
Redemption:
- The year when the gilt is repaid
Gilts:
- Index-Linked
- Coupon and redemption linked to RPI
- Inflation protection
- RPI = Retail Prices Index
- No default risk
- Small coupons, due to the low risk
- Non Index-Linked (Conventional Bonds)
- Has fixed coupon
- Fixed redemption value
- Fixed redemption date
- Shorts, Mediums, Long, or Undated bonds
- Undated bonds or Unredemables - Are redeemed at the discretion of the issuer
Strips Market: (Seperate Trading of Registered Interest + Principal)
- Turn conventional bond turn into a lot of zero coupon bonds
Overseas Government Bonds:
Yield Curves:
- Yield of a bond, plotted against Maturity of a bond
- Upward Tilting = Normal
- Due to Liquidity Preference Theory
- Markets prefer liquid assets
- Markets expect to be paid to wait
- Downward sloping or inverted
- Expect interest rates to fall
- Expectation of recession
Definitions
Yield Spreads:
- The difference between the yield on one investment and the yield on another investment
- The other investment is typically a benchmark
- Interest rate benchmark (SONIA, LIBOR)
- Government Bond
- Position on the swap curve
- Measured in basis points (0.01%)
Example: A
Equities
Ordinary Shares:
- Common Stock
- Variable dividends based on profits
- Voting rights
- Pre-emption rights
Preference Shares:
- Fixed dividend paid before ordinary share dividends
- Generally no voting rights
- Can be activated if preference dividend is in arrears
- Forms:
- Cumulative
- The right to receive that dividend is rolled over into the next period
- Covertible
- The right to convert into ordinary shares
- Participating
- Opportunity for further dividend (Varible dividend)
- Redeemable
- The right for the issuer to buy back the shares
Warrants:
- Right to subscribe for new shares from a company at a fixed price on a future data
- Not part of ordinary share capital of company
- E.g. Right to buy 100 new shares in "Company" for £1.20 in 2030
- This has been issued by the company, unlike options, in years not months
- Warrents don't increase share capital until exercised
Issuance:
- Typically issued as a sweetener with other investments (e.g. corporate debt)
- Detachable or non-detachable form
Valuation Techniques:
- Dividend Discount Model - E.g. Gordon's Growth Model
- Calculates the share's value based on discounting future dividends
- Similar to calculating the present value of a bond
- Look at dividends and discount them to present value
- Earnings per share
- An indicator of the company's profitability from the point of view of a shareholder
- Earnings growth is a key metric in equity valuation
- How much profit did each share actually generate
- Sustainable growth = good
- Price/earnings Ratio
- Considers the earnings per share in relation to the share price
- The result is multiple that can be used to compare with companies in similar sectors or with the company's historic multiples
- Divide the earnings per share by price, gives a comparable number against other similar companies
To remember :
Higher Price/Earnings Ratio = Higher the Valuation
- Net Asset Value per Share
- Typically used for investment vechles
- Considers the value of the company after liabilities have been met i.e. net assets
- Useful for companies with tangible assets such as plant property and equipment
Definitions
Corporate Actions:
- Rights Issue
- Company wishes to raise further capital by issuing more shares
- Has to offer it to existing shareholders first
- Usually at a discount on a pro-rata basis
- Share price likely to fall afterwards due to the discount given
- Bonus Issue
- Issues new shares free of charge to existing shareholders
- The objective is to lower the share price to increase liquidity / marketability
- Stock Split
- An alternative to a bonus issue if a company is not able to issue new shares
- Existing share are split to increase into a greater number
- Results in lowering of nominal value and also share price
- Mergers
- Two companies combgine to create a new and joint organisation
- Acquisitions
- One company has taken the action to buy another company's shares to gain legal control
- Could be friendly or hostile
- Not set rules as to the effect on company's valuation
- Share buyback
- A company uses spare cash or additional borrowing to buy back its own shares#
- Methods
- Tender process - price is typically set above market price
- Open market purchase
- Effect
- Returns cash to shareholders
- Reduces outstanding stock
- Increases share price
Commodities and Exotics
Definitions
Agricultural Markets: Influences on Supply and Demand
Supply:
- Land
- Natural Factors: Weather, Disease
- Production Costs: Technology, Location
- Government Intervention: Subsidies, Tariffs
- Transport and Storage
Demand:
- Wealth
- Growth
- Tastes
Base Metals
Definitions
Precious
Definitions
Base and Precious Metals: Influences on Supply and Demand
Supply:
- Availability
- Cost of extraction/production
- Government Intervention: Subsidies, tariffs
- Transport & Storage
- Scrap and Secondary Markets
Demand:
- Economic Growth/Decline
- Substitutes
Energy
Definitions
Energy Markets: Supply and Demand
Supply:
- Availability
- Natural Disasters
- Costs of Discovery and Extraction
- Government Intervention: Political Unrest
- Organisation of Petroleum Exporting Counties (OPEC)
- Transport and Storage
Demand:
- Consumption
- Economic Expansion
- Economic Forecasts
Crude Oil (Potential Questions):
- Field
- E.g Brent, Dubai, West Texas (Name of the Oil Field)
- Light or Heavy
- Light pours like water
- Heavy pours like ketchup
- Light Good
- Heavy Bad
- Measure = A.P.I.
- Sweat or Sour
- Sweat is good
- Sour is bad
- Sulphur content (Less than 1% is Sweat, Above 1% is Sour)
Other Commodities (Exotics)
Freight:
- E.g. Baltic Dry Index
Weather:
- Heating Degree Days (HDD)
- Cooling Degree Days (CDD)
Emissions:
- Caps
- Credits
Cryptocurrencies:
- Bitcoin
- Question: What is a Cryptocurrency
- Non-Central Bank type Entity
Hybrids:
- Combine two different derivatives in one contract
- E.g. Swaption = Interest Rate Swap + Option