Question

• Explain the following money market rates

1. Prime rate
2. Federal fund rate
3. Libor

• Explain Capital market interest rate

1-10-years treasury rate

2- jumbo mortgages

• Explain the mortgage backed securities

• Explain the following indices

1. Dow Jones Industrial Average
2. S&P 500
3. Nasdaq Composite
4. Name another two stock market indices

        

Answer 1

Prime rate: Prime rate is the rate at which commercial bank provide loan to their most creditworthy customers. The basis of prime rate is the fed fund rate, it means fluctuation in the fed fund rate effects the prime lending rate. Prime rate is also the basis of other rates like line of credit, interest on cred it cards charged, home loan, personal loan etc.

Federal fund rate: Federal fund rate is the interest rate at which depository institutions like commercial banks lend its reserve fund to other depository institutions. Lending the reserve balances to other depository institution is non-collateralized in nature. Reserve funds are kept with the Federal bank and the bank with the surplus funds lend it to other bank who need the fund.

Libor: Libor stands for London Inter-bank Offered rate, it is the rate at which international commercial banks lend to each other globally for short-term loans. Libor is variable in nature and is published on daily basis by Intercontinental Exchange.

10-year treasury rates: 10-year treasury rate is the rate offered on the treasury security issued by the US government with the maturity of 10 years. It is sometimes serves as a basis of "risk free rate" and is considered in valuation of the market or individual securities.

Jambo Mortgages: Jambo Mortgages are those mortgages which are required on the purchase home with very high prices like luxury homes. Jambo mortgages are usually of 30 years.

Mortgage Backed Securities: Mortgage Backed Securities are those securities that are issued on the basis of pool of funds from mortgages backed by the underlying asset. The pool of funds from mortgages are repackaged into securities that is issued to investors like investment institutions like mutual fund companies, commercial banks, pension funds, insurance companies etc.