1. Financial Market Theory
Tuesday, October 26, 2017
Professor Edwin T Burton

2. Federal Reserve Policy
Until 2008
Tighten by selling treasuries (open market sales) – the idea is to raise interest rates
Loosen by buying treasuries (open market purchases) – the idea is to lower interest rates
Rates targeted:
Overnight Repo Rate
Federal Funds Rate
Ability to influence longer rates is doubtful – e.g. “operation twist” in the 1960s
After 2008
Quantitative easing ballooned the Fed balance sheet and ballooned Member Bank Reserves
Makes it very difficult to get “excess reserves” low enough to influence lending rates
Is basically a long term “easing” policy
Effect was to have near zero rates for almost a decade
October 26, 2017

3. The Corporate Bond Market
Before Michael Milken (late 1970s)
Limited to very few (less than 50), very high quality credits
Weaker credits had to borrow from banks
After Milken
The High Yield (Junk Bond) Market
Pioneered by Milken
Exclusively operated by Milken until 1987
Now a huge market
Greatly expanded the corporate bond market
October 26, 2017

4. Other Considerations The Capital Stack The Debt Stack
Vulture (distressed) investing
Pricing: the yield curve, the “credit spread”
October 26, 2017