2021 Week 11 — Lectures 19 & 20, Reading 10

We're discussing the following for week 11:

Lecture 19: Interest Rate Swaps

NOTE: Part 4 of this lecture is missing from Perry Mehrling's site and the YouTube playlist. Here's a direct link.
Part 4: What is a Swap

Lecture Notes

Selling an IRS is like borrowing in the repo market to finance the holding of a longer-term asset (corporate bond). But it's also like being long a portfolio of FRAs. A swap dealer is like a dealer in corporate bonds.

Lecture 20: Credit Default Swaps

NOTE: Part 4 of this lecture is cut short on Perry Mehrling's site and the YouTube playlist. For the full segment, watch through the Coursera site. Here's a direct link.
Part 4: What is a Credit Default Swap (CDS)?

Lecture Notes

IRS is a swap that's equivalent to borrowing long and lending short. CDS is a swap that's a bit like borrowing "risky" and lending "safe." You pay more interest on your notional "borrowing" than you get on your notional "lending." Regardless of any changes in the value of the underlying bond, you just pay the interest-rate spread for a period of time.

Reading 10: Excerpts from a 1952 report to the FOMC (parts one, two, and three)

Study Questions
The Fed is figuring out how they want to run monetary policy after the Treasury-Fed accord of 1951. The report gives us a snapshot of the inner workings of the FOMC, and what the money market and monetary policy looked like at the beginning of the 1950s. It is largely concerned with how to ensure a deep and liquid market for government securities (Treasuries) and the preface explains why this is an important policy objective.

Money and Banking Summer 2021 Reddit Master Thread