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UM / Finance / FIN 302 / What are the types of financial systems?

What are the types of financial systems?

What are the types of financial systems?


School: University of Miami
Department: Finance
Course: Fundamentals of Finance
Professor: Frank peterson
Term: Summer 2015
Tags: fin302 UM Webb Quiz1 Stuart
Cost: 50
Name: Chapter 1, 2 , 3 ,4 Study Guide quiz 1
Description: study guide for quiz #1 Includes chapter 1, 2, 3, and 4
Uploaded: 01/28/2016
6 Pages 52 Views 3 Unlocks

FIN 302

What are the types of financial systems?

Chapter 1

Business organizations:  

Sole proper ship: Owned by a single person who is financially  responsible for the actions and obligations of the business

Partnership: a business owned by more than one person

Corporation: No owner financially responsibly for the actions and  obligations of the business. Owned by more than one person, legal  entity.

Moral Hazzard

∙ Hidden action problem  

∙ Efficient level of “effort”

∙ If individual does not bear full cost/receive full benefit of action,  may prefer other actions

Financial systems: 

∙ Financial markets

Why use financial instruments?

∙ Financial institutions

∙ Financial instruments

Real assets: factories, land, human capital  make money

Financial asset: claims on real asset such as stocks, bonds Derivatives: option, futures, ABS

Why use financial instruments?  

∙ Allocation of capital

∙ Consumption smoothing

∙ Allocation of risk

∙ Separation of management  ownership

Financial markets 

∙ Primary market: Firms’ new securities are issued and sold for the  first time

∙ Secondary markets: previously issued securities are resold  (traded)

What are the types of financial intermediaries?

Types of financial intermediaries:

∙ Commercial Banks  

∙ Investment Banks  

o Full service consultant on issuance of new securites  o Frequently take a position in new securities, at least  temporarily Don't forget about the age old question of What is the meaning of christianity?

∙ Mutual Funds

o Pooling mechanism to overcome market frictions o Highly regulated

∙ Hedge Funds  

o Similar to mutual funds, but restricted investor base o Less regulation

∙ Venture Capital/Private Equity

Chapter 2

Investment process:

∙ Asset allocation: put money un different things

∙ Security selection: once allocation has been made slect  securities in each asset class in which invest

o Security: interest rate, dividend

o Company: bankruptcy risk

o Market: forecast, regulation

Fixed income security/ debt instruments If you want to learn more check out What does humanistic refer to?

∙ No voting right “borrowing instruments

∙ Pay some amount every period

∙ Treasury bond , corporate bonds, municipal bonds, mortgage back securities


∙ Voting right

∙ Residual claim: a stock is a claim to funds after all debts have  been paid We also discuss several other topics like What is the meaning of deductible?

∙ Limited liability


∙ Coupon rate: How much you get every year, 8%

∙ Face/ par value/ principal: initial payment $1000

∙ Maturity: how long will the payments last, 10 years ∙ Period: annually, semiannually  

Treasury bond 

∙ Fixed rate

∙ Issued by the treasury

∙ Semi annual coupon payments

∙ Save investment

o Treasury note ( 1- year maturity)

o Treasury bill ( less than 1 year maturity)

o Treasury bond ( 10-30 Years maturity)

Municipal bond 

∙ Issued by states and local governments

∙ Exempt from federal income tax

∙ Exempt from state local tax

∙ Revenue bods

Corporate bonds 

∙ Default risk: can pay their debt bankruptcy

∙ Commercial paper  short term

∙ Corporate bond --? Longer term, seniority classes


∙ Ownership in a firm We also discuss several other topics like What is the meaning of street name in drugs?

∙ Future cash flaws (dividends)

∙ Maturity is indefinite

∙ Involves risk, variable liquidity

∙ Valuation: TVM adjustments + risk adjustment

∙ Common stock: voting rights (junior)

∙ Preferred stock: non voting right (senior)

Market capitalization  # shares  price (shares)

Bankruptcy ( order they pay)

∙ Government

∙ Employees (wages)

∙ Bond holders

∙ Preferred stock holders

∙ Common stock


∙ Security whose cash flows depends on value of other assets ∙ Options, futures, swaps., bonds with option feature ∙ Valuation: TVM+ risk+ option adjustment

Option and futures:

∙ Call (put) Option: right to buy (sell) the underlying asset at a  specified price (strike Price), on a specified date (maturity) time  period If you want to learn more check out What is the behavioral exposure theory?

∙ Long (short) Futures: obligation to buy (sell) the underlying asset  at a specified price (strike Price), on a specified date (maturity)  time period. Two kinds commodities or financial

Mutual funds Markets:

∙ Financial intermediaries that pool funds from investors and buy  assets

∙ Advantages:

o Record keeping and administration

o Diversification and divisibility

o Professional management and analysis

o Lower transaction cost

Asset- backed securities:  

∙ Securization is example of financial engineering

∙ Mortgages, auto loans, corporate bonds. Credit card receivables Chapter 3

How securities are traded: 

Price and quantities are set by the market

Primary markets: 

∙ Issued by the first time

∙ Raise capital

∙ How are new securities floated (sold): We also discuss several other topics like How did the earth form?

o Government securities: typically auctioned  

o Corporate securities, federal agencies debt, municipal bonds,  mortgage-backed securities: typically underwritten by  investments banks

o Equity: trough initial public offering (IPO)

SEO: seasoned equity offering  

Secondary markets:  

∙ Track among investors brokers. Independent of the company  ∙ Brokers help investors trade without taking positions themselves ∙ Broker Guarantees counter pay that

o An investor can pay for a security he is buying

o An investor can deliver a security he is selling

How do brokers trade? 

∙ Exchanges 

o Traditional floor trading

oElectronic limit order book

 ∙     Over the counter (OTC) Markets 

oTrade with dealers.  

oNot organized/ no requirements

o Match sellers and buyers

 ∙     Electronic communication investors 

o Direct among investors

o Regulation “national market systems”

Limit order book: 

∙ Lot size: # of securities

∙ Price

∙ Buy or sell

Market maker= dealer 

∙ Provide a service: immediacy, liquidity

∙ It has a price : bid ask spread

Broker trades: Type of orders

∙ Limit order: protects you from price exchange

∙ Market order: highest at moment

∙ Stop-loss order: combines limit order with a rule

Trading cost 

∙ Explicit cots: commission

∙ Implicit cost: bid-as spread

Special trades:  

 ∙     buying on margin:  

o securities are held as collateral by broker

o borrow part of the purchase price of security from the broker o brokers charge interest rate

 ∙     short sale 

oselling shres of a firm I don’t own by borrowing the security  and later replacing it

odo profit if price is lower

oloose if price goes up: no limit

Chapter 4  

Time Value of money


o T=0 Decision time (today)

o Ct: cash flow generated during period t

Future Value: 

Value at some future date

Interest rate ( discount rate)

How long

FV n = C* (1+r ) n

Compounding period

FVn = C( 1+ r/m) mn 


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