New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Financial Markets & Institutio

by: Destinee Auer

Financial Markets & Institutio ECON 3830

Marketplace > Georgia College & State University > Economcs > ECON 3830 > Financial Markets Institutio
Destinee Auer
GPA 3.67

Leng Ling

Almost Ready


These notes were just uploaded, and will be ready to view shortly.

Purchase these notes here, or revisit this page.

Either way, we'll remind you when they're ready :)

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Leng Ling
Class Notes
25 ?




Popular in Course

Popular in Economcs

This 7 page Class Notes was uploaded by Destinee Auer on Monday October 12, 2015. The Class Notes belongs to ECON 3830 at Georgia College & State University taught by Leng Ling in Fall. Since its upload, it has received 37 views. For similar materials see /class/221946/econ-3830-georgia-college-state-university in Economcs at Georgia College & State University.


Reviews for Financial Markets & Institutio


Report this Material


What is Karma?


Karma is the currency of StudySoup.

You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 10/12/15
FINC Review Chapter 1 0 Types of securities 0 Debt Securities Represent borrowed funds incurred by the issuer 0 Equity Securities Certificates that represent ownership in the issuer 0 Two types of financial markets 0 Money Markets Short term maturities High degree of liquidity Lower risk lower return common forms are TBills commercial paper and CDs 0 Capital Markets Long term securities commonly used to finance the purchase of capital most common forms are bonds markets and stocks I Primary MarkeIS Facilitate the issuance of new securities I Secondary Markets Facilitate the trading of existing securities 0 Liquidity the degree to which securities can be turned to cash sold without loss of value 0 Future Value of Money FV o FVPVgtlt1r or PV 1 rquot o Determinants of Expected Valuations 0 Economic conditions 0 Industry Conditions 0 FirmSpecific Information 0 New Information 9 Changed equilibrium price 0 Value of securities is in their expected future cash flows 0 Regulation of financial market 0 Securities Act of 1933 requires firms to disclose all relevant financial information o SarbanesOxley Act passed in response to Enron and WorldCom s respective collapses More heavily regulates the information disclosed for public Chapter 2 o Loanable Funds Theory 0 Inverse relationship between loanable funds demanded and the interest rate Government demand for the funds is independent of the interest rate whilst business demand will always correlate with low interest rates 0 Economic Forces on Interest Rates 0 Slowdown in growth I demand schedule shifts to left demand decreases I Interest Rates J 0 Increase in growth I Puts pressure on interest rates to rise due to increase in the demand schedule I Interest Rates 4 o Crowding Out Effect Excessive government borrowing will crowd out business and household demand 0 Forecasting Interest Rates 0 Household Demand I 39 39 by f 39 g future I 39 of HH Business Demand Determined by future plans for corporate expansion and future state of the economy 0 0 Government Demand Also can be affected by the future state of the economy as taxes may be affected Chapter 3 o Firm Characteristics that Determine Yields 0 Default Risk Firms are rated by credit agencies that review the financial status of the firm 0 Liquidity Less liquid the higher the yield Vice versa Short term maturities are more liquid thus less risky 0 Tax Status Investors are more concerned with after tax income than before tax income Taxable securities must offer a higher beforetax yield than taxexempt securities I Tax Yields rm IMO T I where rm After tax yield I Tb Before tax yield I T Investor s marginal tax rate 0 Term to Maturity I Maturity dates will differ between debt securities The term structure of interest rates defines the relationship between term to maturity and the annualized yield I Yield curve The graphical representation of the term structure 0 Term Structure of Interest Rates 0 Relationship between the term remaining until maturity and the annualized yield of debt securities 0 Three Prevailing Theories I Pure Expectations Theory the term structure of interest rates is determined solely by expectations of future rates Liquidity Premium Theory the inference that investors prefer more liquid securities and therefore short term maturities Segmented Markets Theory investors and borrowers invest in securities that suit their forecasted cash needs The three combined help us predict more precisely what the yield curve will look like for various securities Chapter 4 0 Federal Open Market Committee FOMC o Fed uses open market operations to regulate the money supply and regulate monetary policy I Purchasing securities increases the money supply I Selling securities decreases the money supply 0 No formulas Chapter 5 o Correcting a Weak Economy 0 How Fed Can Stimulate Weak Economy I Use a loosemoney policy and buy government securities I Lower the discount lending rate I Lower the reserve requirement for depository institutions 0 Correcting High In ation 0 Techniques for Correcting Inflation I Sell government securities I Raise the discount rate I Raise the reserve requirement for depository institutions 0 Tradeoffs in Monetary Policy 0 There exists an inverse relationship between inflation and unemployment I When inflation is high tight money policy is considered but the tight money policy leads to high inflation because in order to slow inflation you must slow economic growth which results in unemployment 0 Monitoring and Forecasting the Fed39s Policy 0 Indicatot s of Economic Growth I Q Serves as the most direct indicator of economic growth in the US Can result in an increased demand for labor ie lower unemployment I Unemployment Rate A primary indicator for the Fed o Indicators of Inflation I Producer and Consumer Price Index Wage Rates Oil Prices 0 No formulas Chapter 6 0 Money Market Securities Debt securities with a maturity of one year or less 0 Treasury Bills I Issued on a weekly basis with 4week 13week and 26 week maturities on a monthly basis with a 1year maturity Minimum par value 1000 I If investors require a 7 annualized return on a oneyear Tbill with a 10000 par value what is the price they are willing to pay 0 P10000107934579 o PRICEPresent Value of Future Cash Flows I If investors require a 6 annualized return on a 6 month Tbill what is the price that they are willing to pay 0 P10000103970874 0 Estimating the Yield 39 SP PP 365 r 7 X 7 PP n I sp selling price pp purchase price N number of days of the investment 0 An investor purchases a Tbill with 182day maturity and 10000 par value for 9600 What is the yield if this Tbill is held to maturity 10000 9600 365 r X 7 836 9600 182 An investor purchased a Tbill with 182day maturity and 10000 par value for 9600 After 120 days the Tbill was sold at 9820 What is the yield for the 120day holding period 9820 9600 365 r gtlt 7 697 9600 120 I Use the same formula for estimating the yield on commercial paper too 0 Estimating the Yield on NCD s 0 An investor purchased an NCD a year ago for 970000 He redeems it today upon maturity and receives 1000000 He also receives interest of 40000 what is his annualized yield on this investment r SP PP int erest 1000000 970000 40000 PP 970000 722 Chapter 7 0 Bond Markets 0 Bond Yields Two Components I A set of coupon interest payments 0 The difference between the par value and versus the price when bond was sold Chapter 8 0 Bond Valuations and Risk 0 Zero Coupon Bonds I ZeroCoupon Rate meaning there is no coupon paid during the bonds lifetime bond holder receives one payment at maturity As long as the interest rate on a zero coupon bond is positive its price must be lower than the face value of the bond 0 Fixed Coupon Bonds I FixedCoupon Bond Firm pays a coupon every period until maturity Then at maturity firm pays face value 0 Discounts and Premiums I Premium When the bond s pricegt face value I m Bond s PriceFace Value I Discount Bond s PriceltFace Value 0 Factors thatAffect Bond Valuations I Factors that Affect RiskFree Rate 0 Economic Expectations 0 Inflationary Expectations 0 Money Supply Growth 0 Federal Deficit I Factors that Affect Credit Default Rate 0 Changes in Bond Ratings over time 0 Changes in credit risk premium over time 0 Duration I Duration measurement of the life of a bond on a present value basis The longer the duration the greater its sensitivity to interest rate changes 0 Modified Duration normal duration 1 YTM 0 Using modified duration to estimate price change for the bond 0 As duration 4 interest rate sensitivity 4 AP D X Ay Chapter9 0 0 Mortgage a securities debt used to finance real estate purchases 0 Residential Mortgages I FixedRate Locks in the borrower s interest rate over the life of the mortgage Makes the lender exposed to interest rate risk because it commonly uses funds obtained from shortterm deposits to make longterm mortgage loans I Ad39ustableRate Allows the mortgage interest rate to adjust to market conditions Adjustablerate is typically lower than the fixedrate as the lender has a lower interest rate risk 0 Amortization Schedules I Breaks down the monthly payments into principal and interest 0 Interest payment decreases over time 0 Principal repayment increases over time 0 During the early years and payments most payments reflect interest As the principal is paid off over time the interest proportion decreases o MortgageSecuritization I the pooling and repackaging of loans into securities I removes loans from the balance sheet of the bank that originally created them I future cash flows to the investors of these securities are the mortgage payment mortgage companies rarely collect the interest on the mortgages they merely sell them to investors then the mortgage companies collect servicing fees 0 Mortgage Pass Through Securities I The interest and principal payments on the mortgages are sent to the financial institution which then transfers the payments to the owners of the mortgage backed securities after deducting fees for servicing The mortgageissuer earns fees from servicing while avoiding exposure to interest rate risk and credit risk Chapter 10 0 Equity Securities 0 Common Stock I Allowed to vote in shareholder meetings 0 Preferred Stock I Not allowed to vote I Less risk 0 Stock Exchanges 0 Organized Exchanges I The Trading Floor I Listing Requirements 0 Over the CounterMarkets I NASDAQ I OTC Bulletin Board stocks under 1 I Pink Sheets 0 Extended Trading Sessions I Stock Quotations Provided by Exchanges I 52Week Price Range I Symbol I Dividend I Dividend Yield I PriceEarnings Ratio I Volume I Previous Day s Price Quotations 0 Stock Index I Dow Jones Industrial Average DJIA I Standard amp Poor s SampP 500 I NASDAQ I Other Stock Indexes Chapter 11 0 Common Stock Future Cash Flows o Dividends 0 Sell Price 0 Valuing Common Stock 0 Three Assumptions About Dividends I Constant dividend stream 0 Same dividend amount is paid through lifetime 0 Cash flow stream represents perpetuity P D D Z r o recom stock dividend Pecom stock price D req RoR I Dividends grow at constant rate constant dividend growth model 0 Assume that dividends grow at a constant rate g per period forever 2 g 72 g o D0dividend just paid ggrowth rate D1 D01 g I Nonconstant dividend growth 0 Use a timeline to solve 0 Capital Asset Pricing Model I Used to calculate the risk premium of a security I RRoR for an equity security riskfree rate br rf I Btells you how sensitive a stock is to movements in a large diversified portfolio 0 The higher Beta is the riskier the security is 1 is average 0 Dividend Stream


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

Why people love StudySoup

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Amaris Trozzo George Washington University

"I made $350 in just two days after posting my first study guide."

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."

Parker Thompson 500 Startups

"It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.