Stock Market Index

Not all stock market indexes are created equal. Different methods are used to calculate various indexes, and different indexes will yield different assessments of "market performance." Using one of the following data sources, retrieve the stock price for 5 different firms on the first and last trading days of the previous month.

www.nasdaq.com - Get a quote, then select Charts and specify 1 month. When the chart appears, click on a data point to display the underlying data.

www.bloomberg.com - Get a quote, then plot the chart; next, use the moving line to see the closing price today and one month ago.

http://finance.yahoo.com - Get a quote, then click on Historical Data and specify a date range.)

1. Compute the monthly return on a price-weighted index of the 5 stocks.
2. Compute the monthly return on a value-weighted index of the 5 stocks
3. Compare the two returns and explain their differences. Explain how you would interpret each measure.

Yield Spreads and Risk

The yield spreads among various fixed-income securities are indicators of their relative risks. Risk originates from a number of factors, ranging from macroeconomic conditions to unique firm circumstances. Use the bond web links provided below to review the yields on Treasury bonds, investment grade corporate bonds, non-investment grade corporate bonds and mortgage-backed securities.

www.bondsonline.com/Todays_Market/Composite_Bond_Yields.php (Click on the link below the charts to see the data.)

http://finance.yahoo.com/bonds/composite_bond_rates

1. Calculate the yield spread between a 10-year AAA grade corporate bond and a 10-year A grade corporate bond.
2. Calculate the yield spread between a 10-year AAA grade corporate bond and a 10-year Treasury bond.
3. Calculate the yield spread between a 10-year AAA grade corporate bond and a 20-year AAA grade corporate bond.
4. Calculate the yield spread between a 10-year Treasury bond and a 20-year Treasury bond.
5. How would you explain the difference in yields in each case?
6. Repeat the calculations based on the yields that existed one month ago and compare them with today's yield spreads. What factors might explain the differences?

Additional Webmasters for website only:

Interest Rates

Go to www.bloomberg.com/markets/index.html. In the markets section under Rates & Bonds, find the rates in the Key Rates and Municipal Bonds sections.

Describe the trend over the last six months in:

1. Municipal bond yields
2. AAA-rated industrial bonds
3. 30-year mortgage rates

Subprime Mortgage Lending

As you learned in Chapter 2, security markets have been transformed by the development of derivatives and securitization. One type of lending that has received considerable attention is subprime lending. The article entitled "Subprime Mortgage Lending and the Capital Markets", authored by Elizabeth Laderman, describes developments in this market. The article can be found at the Federal Reserve Bank of San Francisco 's website at the following address:
www.frbsf.org/publications/economics/letter/2001/el2001-38.pdf

After reading this article, answer the following questions:

1. What is subprime lending?
2. Describe the growth characteristics of this market.
3. What role has securitization played in the development of subprime lending?