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End User License Agreement
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End User License Agreement
by Sarah Swammy, Gary Strumeyer
The Capital Markets
Cover
Copyright
Dedication
Preface
Acknowledgments
About the Author & Executive Editor
Gary Strumeyer
Sarah Swammy
About the Contributors
Part One: Introduction and Tools
Chapter 1: The Early 21st‐Century Evolution of Global Capital Markets
Introduction
Capital Market Mission and Key Capital Market Questions
Post–Great Recession, Global Capital Markets Chart a More Conservative Course
Accurate Financial Era Definition Helps Chart Business and Portfolio Strategy
The Great Transition Age Unfolds
No Transitions Are Frictionless
The New Conservative Financial Consensus Speeds the Transition to the Next‐Generation Global Financial System
Sturdier Global Financial System Promotes World Economic Growth
Chapter 2: The Role of Global Capital Markets
Introduction
The Basic Products Offered in Capital Markets
Capital Markets as a Substitute for Bank Lending
Key Participants in Capital Markets
Types of Markets
Capital Markets Development
Chapter 3: How the Global Financial Crisis Transformed the Industry
The Situation Prior to the Global Financial Crisis
Overview of Regulation Introduced 2008–2015
Impacts on Business Models
How It Impacts the Functioning of Capital Markets
Chapter 4: Cash Bonds and Futures
Tools of the Trade
Discount Factors
Price‐Yield Formula
U.S. Treasury Debt Obligations
PV01, PVBP
Convexity
Yield Curve
Sample Trades
Forward Prices: Cash and Carry
Forward Rates
Extracting the Discount Factor Curve
Carry, Roll‐Down
U.S. Treasury Futures
Chapter 5: Risk in Capital Markets
Introduction
Overview of Risk Management in Capital Markets
Metrics Used to Measure and Monitor Risk
Brief Overview of Regulatory Landscape
Metrics for Major Risk Types
The Intersection between Risk and Strategy
Future Outlook
Chapter 6: Enablers for Robust Risk Management in Capital Markets
Introduction
Overview of Capital Markets Risk Management Processes
Technology Capabilities and IT Architecture to Support Capital Markets Risk
Data Capabilities to Support Capital Markets Risk
Looking Forward
Chapter 7: Making Markets Work
Introduction
Securities Market Infrastructure
Derivatives Market Infrastructure
Concluding Remarks
Part Two: Capital Markets Products
Chapter 8: Money Markets
Federal Funds Markets
Repurchase Agreements
U.S. Treasury Bills (T‐Bills)
Government‐Sponsored Enterprises/Federal Agency Securities
Commercial Paper
Certificates of Deposit
Eurodollar Deposits
Municipal Notes
Variable Rate Demand Notes
Money Market Funds
How the Financial Crisis of 2007 and 2008 Changed the Money Markets
Conclusion
Chapter 9: Repurchase Agreements
Introduction
Mechanics of a Repo Trade
Margining Trades
Market Participants
Risks Associated with Repo Transactions
Delivery Conventions
General Collateral and Specials
Determinants of Repo Rates
Availability of Collateral
The Federal Reserve and Repo
Repo and Bond Carry
Conclusion
Chapter 10: U.S. Treasury and Government Agency Securities
Features of U.S. Treasury Securities
Types of Treasury Securities
Treasury Auctions
Conclusion
Chapter 11: Government‐Sponsored Enterprises and Federal Agencies
Introduction
Agency Bonds
Overview of Government‐Sponsored Enterprises; Housing GSEs
History of Fannie Mae and Freddie Mac
Federal Home Loan Banks (FHLB)
Overview of Government‐Sponsored Enterprises; Non‐Housing GSEs
Overview of Federal Agencies
Types of Agency Debt
Cost‐Benefit Analysis of Callable Notes
The 2008 Financial Crisis
Conclusion
Chapter 12: Inflation‐Linked Bonds
Indexation
Real Yields and Inflation Breakevens
Seasonality of Consumer Prices
Diversification Properties
Tax Treatment
Risks
Issuance Schedule
I Bonds
Other Countries
Reasons for Issuing Inflation‐Linked Bonds
Bond Mathematics
Summary
Chapter 13: Mortgage‐Backed Securities
Mortgages: The Building Blocks of MBSs
What Are Mortgage‐Backed Securities?
The Issuing Agencies
Why Are MBSs Attractive?
Terminology
Types of Underlying Loans
Agency Pass‐through Trading
Prepayment Risk and Analysis
OAS Analysis and MBS
The Future of Fannie Mae and Freddie Mac Securitization
Chapter 14: Corporate Bonds
What Is a Corporate Bond?
Types of Bond Structures
How Are Corporate Bonds Priced?
Stakeholders in the Corporate Bond Market
Price Transparency
High‐Yield (“Junk”) Bonds
Emerging Bond Markets
What Is an Emerging Market?
Chapter 15: Preferred Stock
Perpetual Preferred Stock
Dividend‐Received Deduction (DRD)
Fixed to Float
Noncumulative Preferred Stock
Cumulative Preferred Stock
Convertible Preferred Stock
Features of Preferred Stock
Anticipating the Risks
Preferred Stock Issuance and Trading
Conclusion
Chapter 16: Distressed Debt Securities
Overview of Distressed Debt Securities
What Constitutes “Distress”
Trading Market for Distressed Debt
Trading Strategy on the Distressed Debt
Puerto Rico: A Distressed Situation
The Sovereign Debt Crisis
Greece
Final Thoughts on Distressed Debt Securities
Chapter 17: Securitization
Securitizations in General
Securitization Basics: Structures, Collateral Types, and Risks
TRACE Reporting
Chapter 18: Asset‐Backed Securities
Automobile Securitization
Credit Card Securitization
Chapter 19: Non‐Agency Residential Mortgage‐Backed Securities (RMBSs)
RMBS Overview
The Creation of RMBSs
Mortgage Quality Types
Participants in the Creation of an RMBS
Credit Ratings
Risk Factors Affecting RMBSs
Operation of the RMBS Market
RMBS Contracts
Representations and Warranties
Opacity and Complexity of Securities
Chapter 20: Commercial Mortgage‐Backed Securities (CMBSs)
Overview of Commercial Mortgage‐Backed Securities
CMBS Market Participants
Underlying Collateral
CMBS 2.0
CMBS Structures
Industry Practices for the Marketing and Sales of CMBSs
Chapter 21: Collateralized Debt Obligations (CDOs)
Introduction to CDOs
Priority of Payments
CDO Market Participants
Collateral Pricing
CDO Trading
Motivation for Issuing CDOs
Chapter 22: Structured Investment Vehicles (SIVs)
Introduction to SIVs
SIV Structure
Structural Protections
Chapter 23: Collateralized Loan Obligations (CLOs)
What Is a Collateralized Loan Obligation (CLO)?
Structures and Strudels: An Introduction to Structured Finance
extit{Bon Appetit:} Reengineering for Risk Appetite
Chasing Waterfalls
The Capital Structure: The Intersection of Structured and Corporate Finance
Being Friendly: Debt versus Equity
CLO Coverage Tests: Take your PIK
The Life and Times of a CLO
The Loan Market
CLO Report Cards: Performance Metrics
The CLO Manager
Qualitative Analysis of a CLO
Quantitative Analysis of a CLO
A Whole New World: CLOs in the Post‐Crisis Regulatory Environment
Conclusion
Chapter 24: Municipal Bonds
Introduction
Municipal Bond Credit Analysis
The Erosion of the General Obligation Pledge
A Word about Puerto Rico
Types of Municipal Bond Structures
The Primary Market
The Secondary Market
Investing in Municipal Bonds
Municipal Bond Risk Factors
Case Study
Chapter 25: Equities
What Is an Equity?
Types of Equities
Why Do Companies Issue Equities?
Equity Market Participants
Equity Markets
Mechanics of Order‐Driven Markets
History of Equity Trading
Modern Market Structure—Order Types
Modern Market Structure—Complexity
Modern Market Structure—Market Data
High‐Frequency Trading
Chapter 26: Cash Equities in the Secondary Market
Introduction
The Institutional Client
The Portfolio Manager
The Research Analyst
The Buy‐Side Trader
The Broker‐Dealer (Sell‐Side)
Equity Research
The Research Analyst
Research Sales
Execution
Additional Products and Services
Conclusion
Chapter 27: Exchange‐Traded Funds (ETFs)
Constructing an ETF: Market Participants and Their Functions
ETF Regulations
Determining Net Asset Value of ETFs
Portfolio Disclosure
Understanding Different ETF Strategies
Portfolio Construction Methodology
Conclusion
Chapter 28: Equity Capital Markets
Securities Offering Reform of 2005
The Rise of Electronic Trading
The Great Recession
Growth of the ATM Market
ATM Financing versus Follow‐on Offering
Due Diligence Regimen
Transaction Participants and Typical ATM Documentation
The Selling Agent
Corporate Board and Management Oversight
Marketplace Acceptance
Sizing an ATM Program
Regulation M
Procedures and Mechanics of the ATM program
ATM Selling Strategies
Variations of the ATM Model
Summary
Chapter 29: Interest Rate Swaps
Plain‐Vanilla Fixed‐for‐Floating Swaps
Classical Single‐Curve World
The New World: Decoupled Discount and Forward Curves
OIS Market
Libor Market Instruments
Dual Curve Construction
Swap Trading—Rates or Spreads
Swap Spreads
Risk, PV01, Gamma Ladder
Credit Considerations: XVA
Chapter 30: Interest Rate Options
1‐Step Binomial Model
From 1 Time‐step to 2 to …
Normal Distribution
Modeling Asset Changes
Greeks
Call Is All You Need
Interest Rate Options
Market Players
Caplets/Floorlets: Options on Forward Rates
European‐Style Swaptions
Skews, Smiles
CMS Products
Bond Options
Chapter 31: Commodities
Introduction
Commodity Fundamentals
Types of Commodities
Commodities Exchanges
Commodity Contracts
Key Characteristics
Investment Vehicles
Future Trends
Boom to Bust and Back Again?
New Commodities
Chapter 32: Currency
The Emergence of a Foreign Exchange Market
The Mechanism
Who Uses the Foreign Exchange Market?
What Are the Main Currencies?
Exchange Rate Regimes
The Size of the Foreign Exchange Market
The Future of the Foreign Exchange Market
Chapter 33: Conclusion
Section 1: Safer Banks, but Is the Financial System Safer?
Section 2: Are There Any Unintended Implications of Recent Regulation?
Section 3: A Need for Reinvention
Index
End User License Agreement
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