Exchange-Traded Funds Zhiyuan Zhou, Yulin Wang, Xiuqian Lin, Chen Chen What are Exchange-Traded Funds? Exchange-traded funds are investment securities traded in a similar manner to shares and stocks. Exchange-traded funds track the performance of share indices, commodities, assets, and bonds among others. Cost-effective and tax efficient ETF provide investors with an opportunity to speculate on the income they would receive at the end of their investment period. ETF provide hedging platform What are Exchange-Traded Funds? Exchange-traded funds also provide diversification options for investors. Diversification ensures that investors can trade in separate investment securities simultaneously. The ability of exchange-traded funds to track the performance of various investment securities provides a platform for investors to diversify their investments. When and why did these funds develop? ETF was first occurred in 1990 in Toronto Stock Exchange. The development of ETF due to the increased interest by the public to invest in funds that tracked a wide variety of asset classes. After the successful launched in Canada, the United States launched its first ETF in 1993, and continue to become mature. The full development of ETF means that more new funds will have to gain market share based on relatively narrow and more creative market. How large is the Exchage-Traded Funds market? ETF grew to 102 from 1993 to 2002. It grew at a rate of 10% every year. In 2009, ETF reached a high of almost 1000 in less than 10 years. The development of the high technology has driven the rise of the ETF. The gradual growth of about 10% in the 1990’s rose to about 100% in the early 2000’s, and the funds reached 1400 in 2011. ETF has developed rapidly in the North American stock market. There are nearly 3000 products in the market as of January 2018. According to the data, more than 465 billion US dollars of new funds flowed into the US listed ETF as of the end of 2017. Replace traditional mutual funds Exchange-traded funds trade throughout the day, unlike mutual funds that trade at the end of the day. Exchange-traded funds have low operational costs compared to mutual funds. Exchange-traded funds do not require minimum investments Exchange-traded funds enjoy tax efficiency and capital gains Reference https://zhuanlan.zhihu.com/p/38545877 Ben-David, I., Franzoni, F., & Moussawi, R. (2017). Exchange-traded funds. Annual Review of Financial Economics, 9, 169-189. Da, Z., & Shive, S. (2018). Exchange traded funds and asset return correlations. European Financial Management, 24(1), 136-168. Madhavan, A., & Sobczyk, A. (2016). Price dynamics and liquidity of exchange-traded funds. Journal of Investment Management, 14(2): 1–17 Meziani, A. S., & Meziani. (2016). Exchange-traded funds. Palgrave Macmillan. Sheet19/30/169/29/1717 vs.169/28/1810/5/1810/12/1810/18/1810/25/1811/1/1811/8/1811/15/1811/22/1811/29/189/28 vs. 11/29RateRa.

1. Exchange-Traded Funds
Zhiyuan Zhou, Yulin Wang,
Xiuqian Lin, Chen Chen
What are Exchange-Traded Funds?
Exchange-traded funds are investment securities traded in a
similar manner to shares and stocks. Exchange-traded funds
track the performance of share indices, commodities, assets, and
bonds among others.
Cost-effective and tax efficient
ETF provide investors with an opportunity to speculate on the
income they would receive at the end of their investment period.
ETF provide hedging platform
What are Exchange-Traded Funds?
Exchange-traded funds also provide diversification options for
investors. Diversification ensures that investors can trade in
separate investment securities simultaneously. The ability of
exchange-traded funds to track the performance of various
investment securities provides a platform for investors to

2. diversify their investments.
When and why did these funds develop?
ETF was first occurred in 1990 in Toronto Stock Exchange.
The development of ETF due to the increased interest by the
public to invest in funds that tracked a wide variety of asset
classes.
After the successful launched in Canada, the United States
launched its first ETF in 1993, and continue to become mature.
The full development of ETF means that more new funds will
have to gain market share based on relatively narrow and more
creative market.
How large is the Exchage-Traded Funds market?
ETF grew to 102 from 1993 to 2002. It grew at a rate of 10%
every year.
In 2009, ETF reached a high of almost 1000 in less than 10
years.
The development of the high technology has driven the rise of
the ETF.
The gradual growth of about 10% in the 1990’s rose to about
100% in the early 2000’s, and the funds reached 1400 in 2011.
ETF has developed rapidly in the North American stock market.
There are nearly 3000 products in the market as of January
2018.
According to the data, more than 465 billion US dollars of new
funds flowed into the US listed ETF as of the end of 2017.

3. Replace traditional mutual funds
Exchange-traded funds trade throughout the day, unlike mutual
funds that trade at the end of the day.
Exchange-traded funds have low operational costs compared to
mutual funds.
Exchange-traded funds do not require minimum investments
Exchange-traded funds enjoy tax efficiency and capital gains
Reference
https://zhuanlan.zhihu.com/p/38545877
Ben-David, I., Franzoni, F., & Moussawi, R. (2017). Exchange-
traded funds. Annual Review of Financial Economics, 9, 169-
189.
Da, Z., & Shive, S. (2018). Exchange traded funds and asset
return correlations. European Financial Management, 24(1),
136-168.
Madhavan, A., & Sobczyk, A. (2016). Price dynamics and
liquidity of exchange-traded funds. Journal of Investment
Management, 14(2): 1–17
Meziani, A. S., & Meziani. (2016). Exchange-traded funds.
Palgrave Macmillan.

4. Sheet19/30/169/29/1717
vs.169/28/1810/5/1810/12/1810/18/1810/25/1811/1/1811/8/1811
/15/1811/22/1811/29/189/28 vs.
11/29RateRatechangeRateChangeRateChangeRateChangeRateC
hangeRateChangeRateChangeRateChangeRateChangeRate
ChangeRate ChangechangeShort Term Rates18
vs.17Prime3.504.25755.25100.005.250.005.250.005.250.005.25
0.005.2505.2505.2505.2505.2500.00Discount1.001.75752.75100
.002.750.002.750.002.750.002.750.002.7502.7502.7502.7502.75
00.00Federal Funds Target Rate0.25-0.501.00-1.251002.00-
2.25100.002.00-2.250.002.00-2.250.002.00-2.250.002.00-
2.250.002.00-2.2502.00-2.2502.00-2.2502.00-2.2502.00-
2.2500.00Federal Funds
Rate0.431.07642.18111.002.22.002.222.002.220.002.231.002.23
02.2412.23-1.00NANA2.24NA6.003-Month U.S. Treasury
Bill0.251.05802.18113.002.180.002.279.002.3124.202.3-
1.202.3252.52.32-0.502.3422.3402.37319.003-Month
LIBOR0.851.3348.3892.40106.612.411.002.443.002.473.002.51
4.002.587.152.612.852.6432.6842.74634.00Commercial Paper
(AA Financial)0.821.26442.27101.002.33.002.333.002.31-
2.002.4110.002.51102.5102.48-3.002.67192.48-19.0021.00Long
Term Rates10 Year U.S. Treasury
Note1.562.3377.203.0572.203.2015.003.13-6.903.1754.403.136-
3.903.1440.83.238.63.12-11.403.06-5.203.03-3.00-1.6010 Year
Japanese Government-0.080.0714.500.125.500.164.000.145-
1.500.1551.000.115-4.000.12510.12-0.300.11-1.40.10-1.200.08-
1.40-3.8010 Year German Government-
0.120.4758.600.536.400.530.000.52-0.900.421-10.000.401-
2.000.40100.465.90.36-9.800.371.10.32-4.90-20.6010 Year
Spanish Government0.921.6168.701.51-
9.701.565.001.647.901.7319.201.581-15.001.568-
1.31.6141.632.21.640.71.51-13.10-0.40EMBI Global
Index5.2415.4218.106.80137.806.877.006.957.506.922-
2.307.0159.30NANA7.05NANANA7.28NANANANA30 Year
U.S. Treasury Bond2.282.8658.003.1832.003.3517.003.325-
2.503.3664.103.346-2.003.37633.3913.36-2.503.31-

5. 5.503.332.114.70DJ Corporate2.572.9740.604.15117.704.08-
7.004.080.20NANAN.AN.ANANANANANANANANANANAN
AHigh Yield 1005.474.98-
49.305.8284.306.1230.006.3927.306.348-
4.506.5621.206.6266.49-13.006.9646.97.0711.26.90-
17.30107.80Fixed-Rate
MBS2.022.8179.003.6180.003.676.003.758.003.73-2.003.72-
1.003.7423.7843.74-4.003.69-5.003.66-3.005.00Muni
Master1.521.9239.302.7078.302.799.002.856.202.847-
0.502.825-2.202.8815.62.901.92.85-5.402.80-4.402.73-
6.903.30Foreign Exchange
RatesY/US$101.03112.511.35113.380.78113.90.46112.16-
1.53112.190.03112.420.21112.710.26114.06001.20113.6300-
0.38112.9400-0.61113.48000.480.09US$/British
Pound1.29671.33993.331.3031-2.751.302-
0.081.32351.651.3018-1.641.2818-
1.541.30041.451.30610.441.2774-2.201.28780.811.2788-0.70-
1.86US$/Euro1.12231.18145.271.1643-1.451.1516-
1.091.15960.691.1453-1.231.1377-0.661.14110.301.1365-
0.401.1332-0.291.14040.641.1394-0.09-2.14Chinese
Yuan/US$6.66676.6366-0.456.89033.826.8689-
0.316.88990.316.9380.706.94890.166.9234-
0.376.93430.166.93910.076.9321-0.106.94290.160.76Brazilian
Real/US$3.26053.1627-3.003.9625.213.8751-2.143.7799-
2.463.725-1.453.7058-0.523.7017-
0.113.76031.583.78420.643.80470.543.85271.26-
2.71CommoditiesGold (per troy oz.)1321.701281.50-
3.041182.30-
7.741197.21.261224.32.261226.50.181229.10.2112360.561222.
90-1.061212.80-0.831225.801.071224.10-0.143.54Crude Oil
(per barrel)47.8351.678.0372.1239.5874.333.0671.34-
4.0268.65-3.7767.33-1.9263.69-5.4160.67-4.7456.46-6.9454.63-
3.2451.45-5.82-28.66Equity IndexesDow Jones Industrial
Average18143.4522405.0923.4926439.9318.0126627.480.71250
52.83-5.9125379.451.3024984.55-
1.5625380.741.5926191.223.1925289.27-3.4424464.69-

6. 3.2625338.843.57-4.16S&P
5002151.132519.3617.12291415.662901.61-0.432728.37-
5.972768.781.482705.57-2.282740.371.292806.832.432730.20-
2.732649.93-2.942737.763.31-6.05NASDAQ
Composite5269.156495.9623.288041.9723.807879.51-
2.027329.06-6.997485.142.137318.34-
2.237434.061.587530.881.307259.03-3.616972.25-
3.957273.084.31-9.56Russell
20001237.751490.8620.451690.5313.391646.91-2.581545.38-
6.161560.750.991500.4-3.871544.982.971578.212.151524.12-
3.431488.28-2.351525.392.49-
9.77Nikkei16693.7120356.2821.9423796.7416.9023975.620.752
2590.86-5.7822658.160.3021268.73-
6.1321687.651.9722486.923.6921803.62-3.0421646.55-
0.7222262.602.85-6.45Stoxx Euro
600342.72388.1613.26386.38-0.46375.09-2.92359.65-
4.12361.670.56355.07-1.82363.082.26367.081.10358.43-
2.36352.57-1.63358.101.57-7.32Sao Paulo
Bovespa58350.5774293.5127.3280000.097.6882952.813.698292
1.08-0.0483847.121.1284083.510.2888419.055.1685620.14-
3.1785973.060.4187477.441.7589709.572.5512.14Shanghai
Composite2998.483348.9411.692791.77-
16.642821.351.062583.46-8.432486.42-
3.762603.84.722606.240.092635.631.132668.171.232645.43-
0.852567.44-2.95-8.04Other BenchmarksVIX Index (CBOE
Volatility)14.029.51-
32.1712.1227.4414.2215.4924.9875.6720.06-
19.7024.2220.7419.34-20.1516.72-
13.5519.9819.5020.804.1018.79-9.6655.03Key
RelationshipsTerm Structure30 yr vs. 3 mo203181-10.84100-
44.75117.0017.00105.50-9.83105.40-0.09104.60-
0.76105.100.48106.601.43102.10-4.2296.60-5.3995.70-0.9310
yr vs. 3 mo131128-2.1487-31.92102.0017.2486.1-
15.5986.30.2383.6-3.1381.9-2.039111.1177.6-14.7372.4-
6.7066.4-8.29Credit Differentials3 mo L vs. 3mTB6028-
52.6922-22.5123.004.5517.00-26.0915.8-

7. 7.062132.9125.6522.142913.06303.453413.33378.82H-Y vs. 10
yr US Treasury391265-
32.322774.57292.005.42326.2011.71317.3-
2.73342.47.91347.61.52326-6.21384.317.88400.74.27386.4-
3.57International I-R Difference10 yr US vs.
Japan16422638.3329329.47304.003.75298.60-
1.783021.14302.10.03301.9-0.07310.82.95300.8-3.22296.8-
1.33295.2-0.5410 yr US vs.
Germany16818611.1025235.34267.005.95261.00-
2.25275.45.52273.5-0.69274.30.292770.98275.4-0.58269.1-
2.292710.7110 yr US vs.
Spain647213.36154113.59164.006.49149.20-9.02144.4-
3.22155.57.69157.61.35162.22.92148.6-8.38142.7-
3.97152.87.08
JULIO : Hey Guys, SO the questions highlighted in yellow are
the ones that I found answers to. The ones highlighted in red are
the ones that I have NO clue about LOL hope this and whatever
you share helps
*****Page 33 has the questions and what we believe are correct
answers to the midterm that is posted below
Finance 141: The Money and Capital Markets
Midterm Review
The following topics will be covered on this examination:
1. Definitions of all rates/markets we are following in the
market monitoring project.
Short term rates
Prime: rate that commercial banks charge their most
creditworthy customers (admin rate)
Discount rate: The discount rate is the interest rate charged to

8. commercial banks and other depository institutions for loans
received from the Federal Reserve's
Federal Funds: the rate at which banks borrow from other banks
on an overnight basis.
`Why is the fed funds rate closely monitor?
Describe the federal funds futures contract: agreement btw two
entities to borrow or lend in the fed funds market at a certain
point in the future.
What about non-banks?
Question 4: How do institutions utilize federal funds contracts?
to hedge against short term interest rate markets
Federal Funds Target discount window. (admin rate)
: (admin rate)à rate target by the FED
3 month-U. S Treasury Bill (risk free rate): (market rate) short-
term debt obligation backed by the Treasury (less than 1 year)
3-month Libor à rate that banks borrow and lend US dollar
deposits off shore (benchmark for interest swap rates) (market
rate) is a benchmark rate that some of the world’s leading banks
charge each other for short-term loans.
3-Month Prime (A1/P1) Commercial Paperà short term debt
instrument of a corporation (market rate) (unsecured debt) As a
result, only firms with high-quality debt ratings will easily find
buyers without having to offer a substantial discount (higher
cost) for the debt issue
Long Term rates
· 10 Year-U. S Treasury Note: treasury borrow for 10 years
debt obligation issued by the United States government with a
maturity of 10 years upon initial issuance.
· 10-Year Japanese Government
· 10-Year German Government

9. · 10-Year Spanish Government
· EMBI Global Index: The emerging markets bond index is a
benchmark index for measuring the total return performance of
international government bonds issued by emerging market
countries that are considered sovereign (issued in something
other than local currency) and that meet specific liquidity and
structural requirements.
· 30-Year U.S Treasury Bond (long bond) (60 coupon
payments)
· U.S Corporates Double-A-Rated: (high quality) corporate
bonds
· High Yield 100: Speculative bonds. a high paying bond
with a lower credit rating than investment-grade corporate
bonds, treasury bonds, and municipal bonds. Since there is a
higher risk of default, these bonds pay better. (IDK what else to
add - alec)
· Fixed-Rate Mortgage-Backed ???? - can be bought and
sold through a broker; rate that is issued by either a federal
gov’t agency company, government sponsored enterprise, or
private financial company. It is secured by a mortgage or
collection of mortgages. (feel free to correct add more or be
more specific)
· Muni Master : municipalities
Foreign Exchange Rates
· Y/US $
· US$/British Pound
· US $/ Euro
· Chinese Yuan/ US $
· Brazilian Real/ US $
Commodities
1.Gold (per oz.)
2.Oil (per barrel)
Equity Indexes
1.Dow Jones Industrial Average: The Dow Jones Industrial
Average (DJIA) is a price-weighted average of 30 significant

10. stocks traded on the New York Stock Exchange (NYSE) and the
Nasdaq.
2.S & P 500: The S&P 500 Index (formerly Standard & Poor's
500 Index) is a market-capitalization-weighted index of the 500
largest U.S. publicly traded companies by market value, The
index is widely regarded as the best single gauge of large-cap
U.S. equities
3.Russell 2000: The Russell 2000 index is an index measuring
the performance of approximately 2,000 small-cap companies in
the Russell 3000 Index, which is made up of 3,000 of the
biggest U.S. stocks. The Russell 2000 serves as a benchmark for
small-cap stocks in the United States.
4.NASDAQ Composite: The Nasdaq Composite Index is the
market capitalization-weighted index of over 3,300 common
equities listed on the Nasdaq stock exchange.
5. Nikkei- Japanese stock exchange / the leading and most-
respected index of Japanese stocks. It is a price-weighted index
composed of Japan's top 225 blue-chip companies traded on the
Tokyo Stock Exchange.=
6.Stoxx Euro 600 - has a fixed number of 600 components
representing large, mid, and small cap companies among 17
European countries.
7.San Paulo Bovespa
8.Shanghai Composite -made up of all A-shares and B-shares
that trade on the shanghai stock exchange.
Other Benchmarks
VIX Index (CBOE Volatility): Measure of market expectations
of future volatility AKA fear index
2. Why are the money and capital markets important?
**function of the money and capital markets is the efficient
transfer of money

11. Capital markets Importance: provide an opportunity for the
public community/ enables a nation to achieve economic
growth/ , only through capital markets long-term funds are
raised by the business community./ capital markets are more
frequently used for long-term assets, which are those with
maturities of greater than one year.
Money Markets: Money markets are used by government and
corporate entities as a means for borrowing and lending in the
short term, usually for assets being held for up to a year
These markets. allow funds to move from people who lack
productive investment opportunities to people who have such
opportunities.
These markets are critical for producing an efficient allocation
of capital (wealth, either financial or physical, that is employed
to produce more wealth), which contributes to higher production
and efficiency for the overall economy.
3) Factor that’s characterize the instruments are:
Negotiability: All of the instruments can be buy and sold
Liquidity: how quickly you can turn assets into cash without
losing value (time, value, and volume component)
Market-Determined Prices: forces of supply and demand
4. What are the two ways money can be exchanged in the
economy?
Money can be exchange indirectly or directly
Indirectly-Financial Intermediation: it involves a financial
intermediary that stands between the lender-savers and the
borrower-spenders and helps transfer funds fromone to the
other. Banks take in deposits from lenders and borrows these
deposits to borrowers

12. Directfinance: method of financing where borrowers borrow
funds directly from the financial market without using a third-
party service,
5. What is the composition of the global money and capital
markets? Be prepared to identify and define major market
segments (ie. fixed income; equity and derivatives). What are
the major differences between fixed income and equity?
Differences between Fixed Income and Equity à main difference
is they make profit for investors/ manner in which they traded/
level of risk
Fixed income - Equity
· Fixed income is a market segment that consists of money
markets and bonds. This area of investment is one of less risk.
So investors will see little return since they are in a low-risk
environment. Investors also buy and trade these bonds on the
market but they see little return to what was invested. Buying
T-Bills are generally regarded as taking on no risk since the
gov’t would have to default which is highly unlikely.
· The equity market consists of common stock. Common stock
is the purchasing of a share(s) of a publicly traded company to
take part ownership. The capital invested is more risky to the
investor since there is no guarantee of them making their money
back. Stocks are mostly long term investments since the price of
a stock fluctuates daily, but for the most part continuously
increases over time.
· Derivatives are a broad term for the 5 subcategories that make
it up. Forwards, futures, options, interest rate swaps, and credit
default swaps all make up the derivative market. Options are a
form of a derivative that use puts and calls to trade among the
market.

13. 6. Describe the instruments of the money markets, including
treasury bills; commercial paper; federal funds; repurchase
agreements; certificates of deposit; Eurodollar.
US Treasury Bills: Most widely held and most liquid security/
Treasury bills are sold with 4-, 13-, 26-, and 52-week
maturities/ A Treasury Bill (T-Bill) is a short-term debt
obligation backed by the Treasury Department of the U.S.
government with a maturity of less than one year,
Commercial Paper: (unsecured/debt instrument) Commercial
paper securities are unsecured promissory notes, issued by
corporations, that mature in no more than 270 days. Because
these securities are unsecured, only the largest and most
creditworthy corporations issue commercial paper. The interest
rates the corporation is charged reflects the firm’s level of risk.
Bankers’ Acceptance: A banker’s acceptance is an order to pay
a specified amount of money to the bearer on a given date/
traded at a discount from face value on the secondary market,
which can be an advantage because the banker's acceptance does
not need to be held until it matures.
Federal funds: Federal funds are short-term funds transferred
(loaned or borrowed) between financial institutions, usually for
a period of one day/ excess reserves that commercial banks and
other financial institutions deposit at regional Federal Reserve
banks;
Repurchases agreements: A repurchase agreement (repo) is a
form of short-term borrowing for dealers in government
securities. The dealer sells the government securities to
investors, usually on an overnight basis, and buys them back the
following day. (collateralized)
Certificates of deposit: A certificate of deposit (CD) is a
savings certificate with a fixed maturity date, specified fixed
interest rate and can be issued in any denomination aside from

14. minimum investment requirements. A CD restricts access to the
funds until the maturity date of the investment/ Customers buy
CDs to earn interest while keeping their money safe.
Euro Dollar: The term eurodollar refers to U.S. dollar-
denominated deposits at foreign banks or at the overseas
branches of American banks. By being located outside the
United States, eurodollars escape regulation by the Federal
Reserve Board, including reserve requirements.
7. What is a bond? What are the important features of a
bond? Who are the major issuers of bonds?
Bonds are securities that represent a debt owed by the issuer to
the investor. Bonds obligate the issuer to pay a specified
amount at a given date, generally with periodic interest
payments. / A bond is a fixed income investment in which an
investor loans money to an entity (typically corporate or
governmental) which borrows the funds for a defined period of
time at a variable or fixed interest rate.
Important features of a bond:
Face/par value: Principal portion of the loan/ Amount you get
back from the issuer on the day bond matures
Maturity: The maturity is the date at which the bond’s principal
comes due and must be repaid to lenders in full. Maturities for
corporate bonds are typically in the range of one to five years,
with some bonds maturing in 10 or even 30 years
Coupon/Yield: is the rate of interest that the issuer must pay,
and this periodic interest payment is often called the coupon
payment. This rate is usually fixed for the duration of the bond
and does not fluctuate with market interest rates.
** Federal Government (treasury bonds), State governments

15. (munis), and companies are major issuers of bonds (corporate
bonds)
8. Why are credit ratings important to the money and capital
markets?
Investors use credit ratings (e.g., Aaa or Baa) that reflect the
probability of default to determine the creditworthiness of
particular debt securities. As a consequence, debt ratings play a
major role in the pricing of debt securities and in the regulatory
process
Rating agencies assess the credit risk of specific debt securities
and the borrowing entities. In the bond market, a rating agency
provides an independent evaluation of the creditworthiness of
debt securities issued by governments and corporations. Large
bond issuers receive ratings from one or two of the big three
rating agencies. In the United States, the agencies are held
responsible for losses resulting from inaccurate and false
ratings
9. Be prepared to discuss the following from the report, The
New Dynamics of Financial Market Globalization: What is
financial globalization? What trends are significant in financial
globalization in the 2001-2016 period?
Financial globalization is the consolidation or integration of
financial markets across the world. The main goal to financial
globalization is to connect different nations/institutions to
global capital markets promoting growth and stability in the
global economy.
Significant Trends
1. Significant trends observed from the years 2007-2016 are:
a decline of global cross-border capital flows including a
limitation of lending across nations; a decrease of foreign
claims by European banks; slight changes on the value of
foreign investment relative to the global GDP; and the
percentage of equities and bonds owned by foreign investors.
10. What are the functions of the Federal Reserve? How is the

16. Federal Reserve organized; how does it operate and especially
how do they control monetary policy? What is meant by the
“dual mandate?” and “QE”? How do we follow the Fed in the
money and capital markets?
Three traditional functions
1. Conducting Monetary Policy which is to control the supply
of money in the banking system to achieve the dual mandate .
3. Providing Payment services to financial institutions : The
FED holds cash reserves and processes check and electronic
payments for depository institutions.
Functions of the FED:
· Control monetary policy
· Coordination of Monetary Policy with Foreign Central
Banks
· Foreign exchange market intervention and coordination
with foreign central banks
· Bank regulation and supervision
· Lender of Last resort
· System for check clearance
**** Monetary policy is the fed’s behavior in pursuit of price
stability, moderate long interest rates, and maximum
employment.
The FOMC sets monetary policy by choosing an interest rate.
That cost is important since it is the cost- to a bank- of holding
reserves.
How is the Fed Organized?
Board of Governors: consist of 7 members, appointed by the
president and confirmed by the senate
Federal Open Market Committee (FOMC) à Fed’s monetary
policy making body /made up of the board of governors and the
presidents of the reserve banks.
FOMC sets monetary policy by establishing a target for the
federal funds rate
Quantitative Easing: Quantitative easing is an unconventional

17. monetary policy in which a central bank purchases government
securities or other securities from the market in order to lower
interest rates and increase the money supply
Dual Mandate– the balancing act where the fed tries to promote
full employment and economic prosperity while trying to keep
low inflation rates.
How do we follow the fed in the money and capital markets?
We follow the fed by following the federal funds rate target and
the actual rate
11. Why is the New York Federal Reserve considered the most
powerful of the district banks?
The New York Fed has its ear to the ground in the finance
capital of America. Its seats are the closest to Wall Street,
meaning the New York Fed is responsible for sniffing out
information that could move markets ahead of other banks./ he
New York Fed is the largest in terms of assets of the twelve
regional banks. Operating in the financial capital of the U.S.,
the New York Fed is responsible for conducting open market
operations, the buying and selling of outstanding U.S. Treasury
securities. / The Federal Reserve Bank of New York is
responsible for executing the central bank's monetary policy by
reviewing price inflation and economic growth, and by
regulating the banks within its territory.
12.The important role of banks as financial intermediaries.
What is financial intermediation? What are the benefits of this
process? What is spread banking? Why is spread banking
inherently risky for a depository institution? What are the two
main types of liabilities of a bank? Why are banks so heavily

18. regulated? (I emailed her about these two subquestions so i will
write them out when i hear back from
Gioia)UPDATED!!!!!!!!!!!!!!!!!!!!!!
It involves a financial intermediary that stands between the
lender-savers and the borrower-spenders and helps transfer
funds from one to the other. A financial intermediary does this
by borrowing funds from the lender-savers and then using these
funds to make loans to borrower-spenders. The process of
indirect finance whereby financial intermediaries link lender-
savers and borrower-spenders/ This process allows fund to be
transferred from those who have capital to those who lack
capital
Benefits: hedge risk-spread out decrease risk, reduces the costs
of lending and borrowing, greater liquidity, ease of borrowing
Spread Banking? In simple terms, the net interest spread is like
a profit margin. The greater the spread, the more profitable the
financial institution is likely to be; the lower the spread, the
less profitable the institution is likely to be.
Balance Sheet of a Bank: Asset = credit ex. Credit cards, line of
credit, etc.
Liabilities = Savings Accounts - dont know about the other
one
The two main types of liabilities for banks are deposits and
borrowed funds(When banks go to the money and capital
markets to borrow).
Banks are heavily regulated b/c the regulators want to make
sure that banks are healthy and can perform their very important
function of financial intermediation; facilitating the transfer of
money in the economy.
13. What is securitization? Why is securitization an important
theme in the money and capital markets?
is the process of bundling small and otherwise illiquid financial

19. assets (such as residential mortgages, auto loans, and credit card
receivables), which have typically been the bread and butter of
banking institutions, into marketable capital market securities.
Securitization is the fundamental building block of the shadow
banking system.
14. How does the Fed administer discount window borrowings?
How has this process changed? Why did the Fed make these
changes?
How Does the fed administer window borrowings?
How has this process changed?
The fed administers rates to depository institutions by setting
the discount rate above the federal funds rate
Old system Discount window: 3 conditions Have to be me
1. they would have to need money or else liquidity crisis
2. no traditional forms of financing is available to them
3. They can’t relend the funds
New system /Discount window
Discount rate was below the federal funds rate
NEW SYSTEM:
1. All banks have access to the discount window Primary credit-
-> healthy institutions
Secondary credit--> higher rate for unhealthy institutions
Discount rate is above the federal funds rate
Why did the fed make these changes?
The intention was to rely on an above the market discount rate
instead of 12 federal reserve banks to ration borrowing at the
discount window.
· Federal funds future contract is an interest rate futures
contract that is based on the average federal funds rate over a
particular calendar month.
· Think of a future contract as specifying that a certain good

20. or asset is to be delivered at some future date at a pre-set price
the futures price.
The fed funds future market is not very good at predicting, The
rate does not tell us where the market thinks rates will be in the
future. Fed fud future rates, on average, overpredict future fed
fund rates.
Market partcipants can utilize this market by directly hedging
against the fed funds rate to match the borrowing rate with the
fed funds futures contract - Mark Accardo
16.What are derivatives?Define the five different types of
derivatives. What is a credit default swap? What benefits do
derivatives, like the credit default swap, provide the market?
Derivatives are financial instruments that derive their value
from some underlined asset
Forwards: A forward contract is a customized contract between
two parties to buy or sell an asset at a specified price on a
future date. A forward contract can be used for hedging or
speculation, although its non-standardized nature makes it
particularly apt for hedging. (over the counter product)
Futures: A futures contract is a legal agreement to buy or sell a
particular commodity or asset at a predetermined price at a
specified time in the future. (standardized also trade in
exchange)
Reserve requirmenets
PCEI: P
Options: option to buy or sell an underlying asset at a set
price/time. It ahs two values (Intrinsic value and time value)
(market price vs strike price)
Call right to buy
Put right to sell at strike price

21. Interest Rate Swaps: Counterparties exchange interest rates / An
interest rate swap is an agreement between two parties to
exchange one stream of interest payments for another, over a set
period of time. Swaps are derivative contracts and trade over-
the-counter.
Credit Default swaps: A credit default swap (CDS) is insurance
against default on a financial instrument, usually some kind of
securitized bond. Typically, the holder of debt will buy a CDS
from an investment or insurance company, such as AIG, to shift
the risk of default to a third party. When the probability of
default is low, the cost of the CDS is similarly low. By lowering
the risk of these insured bonds with default insurance, the
market price of the bonds would increase./ a financial contract
whereby a buyer of corporate or sovereign debt in the form of
bonds attempts to eliminate possible loss arising from default
by the issuer of the bonds. This is achieved by the issuer of the
bonds insuring the buyer’s potential losses as part of the
agreement.
Benefits of Derivatives: Price discovery, risk management
(hedge risk), improve market efficiency/ help reduce market
transaction costs
17. Discuss the “too big to fail” philosophy. How did “moral
hazard” contribute to the financial crisis?
The moral hazard created by a government safety net and the
desire to prevent financial institution failures have presented
financial regulators with a particular quandary, the too-big-to-
fail problem
Which regulators are reluctant to close down large financial
institutions and impose losses on the institutions’ depositors
and creditors because doing so might precipitate a financial
crisis.
Similarly, the too-big-to-fail policy increases the moral hazard

22. incentives for nonbank financial institutions that are extended a
government safety net. Knowing that the financial institution
will be bailed out, creditors have little incentive to monitor the
institution and pull their money out when the institution is
taking on excessive risk. As a result, large or interconnected
financial institutions are more likely to engage in highly risky
activities, making a financial crisis more likely.
18.What is “stretch for yield”? Be prepared to cite examples of
this phenomenon in today’s money and capital markets and refer
to its effects on the rates and relationships we are following.
Stretch for yield happens in low interest rate environment--
bonds, other safer assets
Investors wants to invest in riskier assets in hope of
higher/enhancing returns
Demand increases in riskier assets caused prices to increase and
rates to decrease
In the market monitoring project, bonds like US and other
countries have seen decreases in their prices and the stock
markets are continuing to rally.
Specific rates that have gone up include DJ Corporate,
HY100, Fixed-Rate MBS, etc. - all rates have generally gone up
with exceptions of 2-3 negative weeks, causing bond prices to
drop.
19.What is a “flight to quality”? Be prepared to cite examples
of this phenomenon in today’s money and capital markets and
refer to its effect on the rates and relationships we are
following.

23. Flight to quality is the action of investors moving their capital
away from riskier investments to safer ones
For example, during a bear market, investors will often move
their money out of equities and into government securities and
investment grade corporate securities. Another example is
investors moving investments from high-risk countries with
political unrest like Thailand or many thriving yet still not fully
established markets like Uganda and Zambia to more stable
markets of other countries, like Germany, Australia, and the
United States. One indication of a flight to quality is a dramatic
fall of the yield on government securities, which is a result of
the increased demand for them
Many investors will monitor for a decrease bond yields as a
metric for more challenging economic conditions, including
increasing rates of unemployment, stagnating economic growth
or even a recession. As interest rates increase, bond prices also
tend to fall
Slower-than-expected economic growth, corporate scandals,
wars, high oil prices, and other factors can convince investors
that markets are about to slow or fall.
20.What is the yield curve? Why is it so important to the study
of the money and capital markets? What type of yield curve
maximizes a bank’s net interest margin?
Yield Curve: A graph that depicts the relationship between bond
yields and maturities (is an important tool in fixed-income
investing) Investors use the yield curve as a reference point for
forecasting interest rates, pricing bonds and creating strategies
for boosting total returns. Type of yield curve to maximize net
interest margin? Positive yield curve or upward Steeper (The
steeper the curve, the bigger the profit because banks lend long
term but borrow short term)

24. 21. What are the key trends in the money and capital markets
over our base period (9/17-9/18)? Has the market followed these
trends this semester? What trends are evident this semester?
Key trends in the mcm’s over our base period:
· Short term and longterm rates increased
· Bond prices went down
· Yield curve flattened
· Stock markets increased
· Volatility increased
Key Trends this semester:
· FED increased administered rates.
· Stock markets have been volatile
· Bond prices and rates have been volatile
· Credit differentials have widened
22. What are credit differentials? Why are they important to the
study of the money and capital markets? What has happened to
credit differentials over the last year? This semester?
A credit spread is the difference in yield between a U.S.
Treasury bond and another debt security with the same maturity
but of lesser quality. Credit spreads between U.S.
IF ANYONE CAN ADD ANYTHING HERE (WOULD BE
APPRECIATED)
23. What is the term structure of interest rates? How do we
study this? What has happened over the last year? This
semester?
The term structure of interest rates is the relationship between
interest rates and time to maturity . We study this by looking at
the yield curve. Over the past year and semester, the yield curve
has flattened.
24. What are international interest rate differentials? How do
we study this? What has happened over the last year? This
semester?

25. International interest rate diferentials reflect the contrast in
interest rates between simmilar rates in different countries . (US
treasury compared to other countries in the project). Over the
past year they have narrowed, and over the past semester they
have widened.
25. What are the key fundamental factors affecting the money
and capital markets today? Make sure you can discuss these
with reference to the many Wall Street Journal articles
distributed this semester.
· Economic announcements
· Fiscal Policy
· Federal Reserve Policy
· Political Announcements
· Supply and Demand.
·
26. What is fiscal policy? How has fiscal policy influenced the
markets this semester?
Fiscal policy is the means by which a government adjusts its
spending levels and tax rates to monitor and influence a nation's
economy./ Fiscal policy refers to the use of government
spending and tax policies to influence macroeconomic
conditions, including aggregate demand, employment, inflation
and economic growth.
27. What are the important economic indicators that influence
market behavior? Be prepared to cite specific economic
indicators that have influenced the money and capital markets
this semester. And why?
5 Economic Indicators that influence market behavior
· Employment (non-farm payrolls, unemployment rates,
hourly earnings, average workweek) Jobless claim Weekly
· Inflation: PCEIàFed’s preferred inflation measure, CPI,
PPI, GDP Deflator

26. · Consumer Confidence: (consumer confidence index /
consumer sentiment index/ retail sales/ purchasing managers
Index/ industrial production)
· GDP
· Housing: building permits, housing starts, new home sales,
existing home sales. Case-schiller price index (measures of
home prices)
28. Describe the role of the Federal Reserve in the money and
capital markets this semester. How did we follow the Fed this
semester?
29. What are the two major investor types in the money and
capital markets? Who are the major institutional investors? Who
are the major issuers in the money and capital markets? Be
prepared to discuss what instruments these issuers use to fund
themselves in the money and capital markets.
Two types of investors
Retail (small investors)
Institutional: pension funds, hedge-funds, mutual funds.
Major issuers in the money and capital markets: U.S
government, financial institutions, and corporations,
municipalities
Instruments they use include corporate/government securities,
stocks, and bonds
30. Why is the US Treasury so important to the study of the
money and capital markets? When following the markets, what
should we follow in terms of the US Treasury’s activities? What
is meant by the term “crowding out?”
31. How does a universal bank like Bank of America Merrill
Lynch make money?
What are their major business segments? (Bjorneby
presentation)
Banks like Bank of America make money through the net

27. interest net margin which is the difference between interest
income-interest expense (Aka spread banking) The larger the
spread, the higher the interest margin would be
Major Business Sectors: commercial banking, investment bank
sales and trading business, manage money and individuals and
business out of wealth management sector
Financial Services and Banking at a High Level
There are Two major types of banks
1. Global investment banks
2. Retail and Commercial banks
If a firm does both of those things, you’d refer to them as a
Universal Bank
Bank of America – Breakdown
· Global Banking & Markets
· Consumer banking
· Global wealth & investment mgmt. and other
Revenue and income for the company is split relatively evenly
amongst those groups
(around 33.3% per division.)
Within the company you can be an Industry banker, brining all
of the products to your client
Or you can focus on a particular product.
Some examples include, M&A advice, investment grade and
non-investment grade.
32. What is risk as it relates to the money and capital markets?
How is risk measured in the money and capital markets? THIS
NEEDS MORE RESEARCH - It would help if anyone adds
more.

28. Risk is the uncertainty of returnRisk is measured by Beta and
Standard Deviation
33. What are the two perspectives on return in the money and
capital markets? How are each of these calculated in the bond
and equity markets?
34. What is the risk/return tradeoff?
The risk-return tradeoff states that the potential return rises
with an increase in risk. Using this principle, individuals
associate low levels of uncertainty with low potential returns,
and high levels of uncertainty or risk with high potential
returns. According to the risk-return tradeoff, invested money
can render higher profits only if the investor will accept a
higher possibility of losses.
· When risk increases/ return increases
35. What is liquidity as it relates to the money and capital
markets?
Another factor that affects the demand for an asset is how
quickly it can be converted into cash at low cost—its liquidity.
An asset is liquid if the market in which it is traded has depth
and breadth, that is, if the market has many buyers and sellers.
The more liquid an asset is relative to alternative assets,
holding everything else unchanged, the more desirable it is, and
the greater will be the quantity demanded.
Market Liquidity incorporates key elements of volume, time and
transaction costs (bid/offer spread). These dimensions equate to
the amount of assets that can be sold at any time within mar
ket hours, with minimum losses and at a competitive price.
Market liquidity can be difficult to measure depending on the
asset type, whether the asset is fungible, and the time horizon to
liquidate the asset.
36. Review all of the graphs in the Wall Street Journal articles
distributed this semester.
_____________________________________________________
__________________________________________________

29. The Graphs are not in date ordered; based on my notes and what
was handed out in class. Did not miss any class but please add
to it just in case if I miss one
This graph shows that other countries’ stock markets are
lagging behind and US stock markets continue to rally. Other
countries have not recovered from crisis fast enough unlike the
US.
Emerging markets are weak and very speculative.
Concerns about the decline of equity and how the decline causes
investors to invest in with its effects
Emerging markets are falling behind with their currency
depreciates.
Fed funds rate moves like steps; the increase of the rate started
in 2016 and continues to this day.
I don’t remember this graph in class
Notes are in the picture
Yield curve is flattening
I don’t know

30. Yield curve is flattening
Japan stock index has been strong. It was affected by stagnation
for a while
Yield curve is flattening
Consumer Confidence is high
I don’t know why - will research
Backup info has arrived
MIDTERM QUESTIONS
Direct Finance: financing where borrowers borrow funds from
the financial market without using a third-party as an
intermediary ex) stock/bond market
Discount Window Borrowing: The discount window is an
instrument of monetary policy that allows eligible institutions
to borrow money from the central bank, to meet temporary
shortages of liquidity.
Old System: Banks could only borrow from the federal reserve
if they met 3 conditions
Need $ to prevent a liquidity crisis, Can’t borrow from anyone
else, No relending of funds
Triggered a mandatory evaluation audit of the institution. NOT
EVERYONE CAME TO FED
New System: All banks have access to discount window

31. primary–for healthy institutions. Secondary–higher rate for
unhealthy institutions. Discount rate is now HIGHER than the
Fed Funds Rate. PRICE RATIONING banks don’t borrow from
Fed. If discount rate was lower, banks would borrow from the
fed and re lend to other banks for a profit because they would
be charging (fed funds rate) at a higher rate
They made these changes b/c there was a lot of volatility in the
market. TO MAKE FED FUNDS MARKET LESS VOLATILE,
DISCOUNT RATE SERVE AS A CAP
Investment Grade: refers to the company’s quality of credit.
Anything above BBB is considered investment grade and
anything below BBB is considered non-investment grade.
Anything rated BB or lower is considered a junk grade and the
probability that a company with a junk grade repays its debt is
considered “speculative”
Financial Intermediation: A financial intermediary channels
money from lenders to borrowers. Benefits include allowing
individuals to spread risk. Greater Liquidity.
Securitization: Assemble a pool of illiquid assets, primarily
loans, and sell an interest in the pool as a liquid, tradable,
security asset.
Reserve Requirements: changing the amount of bank reserves
that banks need to keep at the FED
Moral Hazard: Moral hazard is risk in regulated environment
that managers will take riskier positions because of the
protection of the regulations (a safety net.) Individuals act
irresponsibly b/c of the safety net that the govt implies. The
market implies that they have a government guarantee. Helped
lead to many people acting irresponsibly and purchasing terribly
rated mortgage loans that they could not afford.
This refers to Financial Institutions who are so big and

32. ingrained in the economy that if they were to fail it would have
a huge ripple effect throughout the economy.
Quantitative Easing: introduction of new money into the supply
by the central bank. During the financial crisis, the Fed started
buying longer-term bonds to inject money into the market in an
attempt to stimulate the economy.
Commercial Paper: short term debt securities issued by
corporations. Sold at discount. Companies do it to pay short
term liabilities. Unsecured, no collateral. Highly credit sensitive
market. Only the highest quality issuers can issue commercial
paper. Little bit of the flight to quality in the commercial paper
market.
Credit Default Swap: A credit default swap is a swap to transfer
the credit of fixed income products between two or more
parties. Buyer makes payments to the swap’s seller up until the
maturity date of contract. Seller agrees in the event of default,
the seller will pay buyers premium & interest payments that
would have been paid. Protect lenders against credit risk.
Companies that sell swaps protect themselves with
diversification.
1) Buyer of the bond 2) Issue of the bond 3) The seller of the
CDS.
Repurchase Agreement: A form of short-term borrowing in
which - The dealer sells the government securities to investors
(usually overnight basis) and buys them back the following day.
Open Market Operations: OMO – buying and selling of
securities primary t bills to either ease or add reserves, they
buy, or tighten by selling. Tightening right now, draining

33. reserves to raise the fed funds rate. Manipulating the amount of
reserves in the banking system by buying and selling treasuries
PCEI: The personal consumption expenditure price index
(PCEPI) is one measure of U.S. inflation, tracking the change in
prices of goods and services purchased by consumers
throughout the economy.
Prime Rate:Rate that commercial banks lend to their largest
highest quality borrowers. Prime Rate is important because it is
a benchmark for bank lending.
Foreign Bonds:
1. US vs Japan (10-year bonds issued by developed countries
governments)
2. US vs German (10-year)à Bunds
3. US vs Spanish (10-year) à Bonos
FOMC: FOMC: 7 Board of Governors + President of NY Fed
+Presidents of 4 other Fed Banks who vote on rotating policy.
**FOMC sets monetary policy**
- hawks are inflation concerned
- doves are on recession.
- Minutes released a month after a meeting, meet 8 times a year.
There are 12 members who can vote on the FOMC. Board of
Governors which includes the chair and 5 district bank
presidents. There are 12 district banks.
Callable Bonds: A callable bond is a type of bond that allows
the issuer of the bond to retain the privilege of redeeming the
bond at some point before the bond reaches its date of maturity.
Dual Mandate: The dual mandate is the line that the FED walks
trying to balance between inflation and recession. Keep
inflation at ideal rate (2%) while minimizing unemployment

34. Essay Questions
1) Discuss key trends in the money and capital markets. Cite a
minimum of 6 trends:
· Gold has been increasing - Flight to Quality
· Oil has been decreasing
· Yield Curve has continued to flatten/stay positive: when the
yield curve flattens,One reason the yield curve may flatten is
market participants may be expecting inflation to decrease or
the Federal Reserve to raise the federal funds rate in the near
term. ... Consequently, the slope of the yield curve would
flatten as short-term rates increase more than long-term rates.
· Shanghai Composite is typically the worst foreign equity
index
· US administered rates have changed minimally since we’ve
been tracking them, however compared to 2017 they have
increased
· US interest rates have slowly continued to rise (Federal Funds
rate)
a. Have these trends continued this semester? What trends
continued, what trends have emerged?
All of them have continued this semester during our study of
money and capital markets
EMERGED Trends:
· Year on year hourly rate has increased over the year
· Expectations of housing have stabled/steadied to prevent
overshooting

35. 2) Functions of the Federal Reserve?
Functions of the Federal reserve:
1. Control monetary policy: (Monetary policy – controlling the
supply of money in the banking system to achieve the dual
mandate)
2. Coordinate monetary policy with foreign banks
3. Foreign exchange intervention
4. Bank regulation and supervision - DODD Frank
5. Lender of last resort
6. System for check clearance
7. Fiscal Agent- for US treasury holds all the auctions, social
security payments, government payroll.
a. How do we follow the Federal Reserve in the money and
capital markets?
Follow the FED in the money and capital markets by looking at:
1. Release of the FOMC minutes. Must be released 30 days after
last meeting.
2. Humphrey Hawkins testimony. Chairperson of FED is
required to go into front of congress and release their balance
sheet.
3. FOMC statement released every 8 weeks
b. Discuss the tools the Fed uses to control monetary policy.
How do they control monetary policy?
1. OMO: Buying and selling of securities primary t bills to

36. either ease or add reserves. Manipulating the amount of reserves
in the banking system by buying and selling treasuries
- Easing=Adding reserves buying/T Bills/Lower Fed Funds
Rate
- Tightening=Draining Reserves/selling T Bills/Raise Fed
Funds Rate
- FED Funds Rate - target and market
2. Discount Rate Policy
3. Reserve requirements- changing the amount of bank reserves
that banks need to keep at the FED
3) What are the 5 most important economic categories of
announcements today? For each, cite 2 important indicators.
· GDP: Flash (first GDP report of the year) and the Final (last
of the year - most important)
· Employment: employment situation, Jobless claims weekly
· Housing: case-shiller price index, new home sales, existing
home sales
· Inflation: PCEI (personal consumption expenditure index) and
CPI (consumer price index)
· Consumer/Business confidence: Purchasing managers index
(PMI), Consumer Sentiment Index (CSI)
4) What are the themes of money and capital markets? Refer to
events, announcements that reflect these themes.
1. When & how aggressively will Fed raise int. rates.
· Fed will not increase rates at the next FOMC meeting
(wednesday) but are expected to raise rates in December FOMC
meeting in an attempt to cool the economy
2. How will monetary policy shifts in other countries affect
the money and capital markets?
a. Monetary policy – controlling the supply of money in the
banking system to achieve the dual mandate
3. Will global equity markets continue to lag the US?

37. · Recently US equity has been volatile and seemingly closing
the gap between itself and the rest of the world. However,
whatever the US does, since its an economic leader, it has a
trickle down effect and other countries are also affected.
4. How will trade disputes affect financial markets?
· Foreign Investors lose confidence in the United States
protectionist trade policies and pull money out of our equities
market. Tariffs and Quota increases also make it harder for
importers and exporters to do business.
5. As the inflation rate has hit the FED’s target, will
concerns about inflation affect financial markets?
6. How will historically high consumer business confidence
affect the markets?
· Economy will overheat if consumer confidence continues to be
high. This will force fed to tighten (increase rates) in an attempt
to discourage spending and level out the economy (control
inflation)
Previous Exam (Use this as a direction for studying; Be aware
the questions in the previous exam is different than we learn)