keywords money market / capital markets Concepts: asked price/ bid price / bid–asked spread Money market: certificate of deposit / commercial paper / banker’s acceptance / Eurodollars / repurchase agreements / federal funds / London Interbank Offered Rate (LIBOR) capital markets: Treasury notes / Treasury bonds / municipal bonds / equities / preferred stock /derivative assets / call option / put option / futures contract yield to maturity / equivalent taxable yield preferred stock characteristics : residual claim / limited liability capital gains / price–earnings ratio price-weighted average market-value-weighted index index funds contingent claims exercise (strike) price 1 . Money market securities are very short-term debt obligations. They are usually highly marketable and have relatively low credit risk. Their low maturities and low credit risk ensure minimal capital gains or losses. These securities trade in large denominations, but they may be purchased indirectly through money market funds. 2. Much of U.S. government borrowing is in the form of Treasury bonds and notes. These are coupon-paying bonds usually issued at or near par value. Treasury notes and bonds are similar in design to coupon-paying corporate bonds. 3. Municipal bonds are distinguished largely by their tax-exempt status. Interest payments (but not capital gains) on these securities are exempt from federal income taxes. The equivalent taxable yield offered by a municipal bond equals rm/(1- t ), where r mis the municipal yield and t is the investor’s tax bracket. 4. Mortgage pass-through securities are pools of mortgages sold in one package. Owners of passthroughs receive the principal and interest payments made by the borrowers. The originator that issued the mortgage merely services it, simply “passing through” the payments to the purchasers of the mortgage. A federal agency may guarantee the payment of interest and principal on mortgages pooled into these pass-through securities. 5. Common stock is an ownership share in a corporation. Each share entitles its owner to one vote on matters of corporate governance and to a prorated share of the dividends paid to shareholders. Stock, or equity, owners are the residual claimants on the income earned by the firm. 6. Preferred stock usually pays fixed dividends for the life of the firm; it is a perpetuity. A firm’s failure to pay the dividend due on preferred stock, however, does not precipitate corporate bankruptcy. Instead, unpaid dividends simply cumulate. Newer varieties of preferred stock include convertible and adjustable-rate issues. 7. Many stock market indexes measure the performance of the overall market. The Dow Jones Averages, the oldest and best-known indicators, are price-weighted indexes. Today, many broadbased, market-value-weighted indexes are computed daily. These include the Standard & Poor’s 500 stock index, the NYSE index, the NASDAQ index, the Wilshire 5000 index, and indexes of many non-U.S. stock markets. 8. A call option is a right to purchase an asset at a stipulated exercise price on or before an expiration date. A put option is the right to sell an asset at some exercise price. Calls increase in value while puts decrease in value as the price of the underlying asset increases. 9. A futures contract is an obligation to buy or sell an asset at a stipulated futures price on a maturity date. The long position, which commits to purchasing, gains if the asset value increases while the short position, which commits to purchasing, loses.