Bonds

What is an Inverted Yield Curve?

An inverted yield curve refers to a phenomena in the bond markets where bond securities with shorter maturities actually have higher yields than bonds with longer term maturities with similar credit qualities.

Interest Rate Swap - Overview

An interest rate swap is a contractual agreement to exchange periodic interest payments. In most cases one of the rates is fixed and the other is a variable rate whose performance is matched against the prime rate. Interest rate swaps are normally longer in their terms, generally for a period of one year or more.

What is Inflation?

The measure of price increases within a set of goods and services over a period of time is known as inflation.

What is the GDP?

The gross domestic product, or GDP, is the total value of a nations goods and services produced within a preset period of time.  Usually, GDP is measured on a calendar year basis.  More precisely, GDP can be calculated by adding up the following components:  consumption, investment, government spending, and net exports, or the spread

What is the Federal Reserve Bank?

The Federal Reserve acts as the central bank of the United States.  The "Fed" was instantiated by congress and was put in place to stabilize and formalize the banking system within the country.  The primary role of the federal reserve bank is to implement monetary policy to keep a balance between steady economic growth and high levels of inflation. 

How is the Federal Reserve Organized?

The federbal reserve is organized in tiers; there is a board of governors which oversees the entire federal reserve system.  Then, there are 12 district federal reserve banks, and each district has a group of 9 directors. 

Overview of the Federal Fund Rate

What are Federal Funds?

All commercial and thrift banks are required to keep a certain percentage of deposits, as cash, at their district Federal Reserve Bank.  This reserve is known as federal funds and is a safety measure put in place to keep stability in the banking system in the case of a financial crisis where there is a run at the banks.  Federal funds are non-interest bearing and usually average 10% of the banks deposits over the past 14 days.  Banks, usually smaller thrifts, who are not able to meet the reserve requirements look to other institutions which have excess reserves for a loan at a negotiated interest rate. 

What is an Economic Recession?

In economics, the term recession is generally used to describe a situation in which a country's GDP, or gross domestic product, sustains a negative growth factor for at least 2 consecutive quarters.  I say generally because recession can be defined differently by different economists.  Just as there is an agency to define the measure of inflation; the official agency in charge of declaring that the economy is in a state of recession is the National Bureau of Economic Research (NBER).  NBER's definition of recession is a bit more vague than the standard one that was described above; they define recession as a "significant decline in economic activity lasting more than a few months".  For this reason, the official designation of recession may not come until after we are in a recession for six months or even longer.

What is LIBOR?

The London Interbank Offered Rate, or LIBOR, is the European version of the federal funds rate in the United States and represents the interest rate at which London banks charge each other on funds borrowed.  This is not to be confused with the BBA LIBOR rate, which is a filtered average of inter-bank loans maturing within 1 year.  BBA LIBOR is published once per day by the British Bankers Association at around 11 AM London standard time.  The BBA is advised by a group of senior banking experts from at least 8 contributor banks and uses their lending activity to derive the BBA LIBOR rate. 

How is it used?

LIBOR represents a benchmark for short term borrowing worldwide and is used to settle interest rate contracts in many of the world's futures and options exchange

Maturity Date

A bond maturity date refers to the date at which the principal amount of the bond is payable to the bond holder. On the maturity date of the bond, the agreement between the bond holder and the issuer of the bond ceases. For example, a bond that is due to expire on November 21, 2008 will mandate that the issuer of the bond return the principal back to the bond holder as well as all remaining interest payments on that date.

If the indenture allows, there may be a call provision which will allow the bond issuer to buy the bond back from the bond holder before maturity. This is something to look for explicitly. If this option is allowable, the bond yield will adjust higher to compensate the bond holder for that risk.

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Monetary Indicators - Definition

Monetary indicators provide insight into the health of the market based on economic data. This data helps gauge how businesses will be affected by the economic environment, thus providing investors and edge when selecting the company they chose to invest. A good example of a monetary indicator is interest rates. When the interest rates are lowered, the market generally responds positively to this information, which leads to bounces in businesses that rely heavily on lending rates, such as the banks and homebuilders. Traders that focus on monetary indicators when making investment decisions are more suited for long-term investment strategies.