book notes - Finance Test 1 Chapter 1 o Financial markets...

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Finance Test 1 Chapter 1 o Financial markets Transfer excess funds to people who have a shortage of funds o Monetary policy Management of interest rates and the quantity of money o Financial intermediaries Pool funds and then make loans Chapter 2 o Maturity ST – less than a year LT – 10 years or longer o Equities – stocks shareholders are residual claimants o markets primary – new issues investment bank o underwrites new issues secondary – reselling o brokers – agents of investors who match buyers with sellers o dealers – link buyers and sellers by buying and selling at stated prices o exchanges – buyers and sellers meet NYSE o over the counter – dealers have inventories and set prices bond markets o money market – ST debt o capital market – Longer term debt o foreign bonds – sold in a foreign country and denominated in foreign currency Eurobond – US dollar bond sold in London Passed the US bond market Eurocurrencies – foreign currencies deposited in banks outside the home country Eurodollars – US dollars deposited in foreign banks o Intermediaries Risk sharing Intermediaries use funds they acquire by selling them to purchase other assets that may have more risk o Asset transformation Asymmetric information One party often does not know enough about the other party to make a good decisions
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o Adverse selection – borrowers who are most likely to produce an undesirable outcome are the ones who most actively seek loans Before transaction o Moral hazard – borrower might engage in activities that are undesirable, and loan is less likely to get paid back After transaction Depository institutions Banks, credit unions Thrift institutions contractual savings institutions insurance and pension funds investment intermediaries financial companies, mutual funds, money markets o financial panic - widespread collapse of financial intermediaries Chapter 3 o Simple loan Borrower pays back principal and interest at the end of the loan for simple loans, the simple interest rate equals the yield to maturity o Fixed payment loan Fully amortized Same payment every period o Coupon bond Receives coupon, then principal back at the end Price and YTM are negatively related As YTM rises, price of bond falls YTM is greater than coupon rate when bond price is below face value Higher interest rate implies that the future coupon payments and final payment are worth less when discounted back to present o Discount bond Bought at a discount, receives o Yield to maturity – interest rate that equates the PV of CFs with its value today o Current yield – yearly coupon payment divided by the price of the security o When real interest rate is low, there are greater incentives to borrow and fewer incentives to lend o Rate of return – payments to the owner plus the change in its value o Return on a bond does not necessarily equal the interest rate on that bond
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book notes - Finance Test 1 Chapter 1 o Financial markets...

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