Lecture_3_2010

Lecture_3_2010 - E4729 Foundations of Finance Lecture 3...

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E4729 Foundations of Finance Lecture 3 Financial Markets July 14, 2010 Leo M. Tilman Faculty, Columbia University
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2 E4729 Foundations of Finance Equity Markets Corporation Board of Directors Management Employees Bondholders Provide capital and receive: interest, principal back at maturity, liquidation preference over shareholders; creditor status Equity holders Provide capital and receive: dividends, potential capital appreciation Preferred stocks: preference over common in receiving dividends and liquidations Secured Creditors Unsecured Creditors Preferred Stockholders Common Stockholders
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3 E4729 Foundations of Finance Equity Markets Guest speaker’s materials will be distributed in class
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4 E4729 Foundations of Finance Flows of Funds ©from Financial Darwinism Pension Plan Assets Liabilities Bank Assets Liabilities Equity Individual Assets Liabilities Insurer Assets Liabilities Equity Mortgage Deposits Insurance Policy Preferred Stock Pension Plan Stock Bond
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5 E4729 Foundations of Finance Pension Plan Assets Liabilities Bank Assets Liabilities Equity Individual Assets Liabilities Insurer Assets Liabilities Equity Corporation Assets Liabilities Equity Commercial Loans Foreign Debt And Stocks Private Equity and Real Assets Mortgages Securitized and Sold Insurance Policies Securitized and Sold Hedge Fund Receivables Investment Bank Assets Liabilities Receivables Securitized and Sold Student Loans Preferred Stock Deposits Mortgage Insurance Policy Pension Plan Stock Bond Bond Bond Stock
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6 E4729 Foundations of Finance Equities Major Financial Markets Fixed Income Commodities Currencies Mutual Funds Derivatives Alternatives
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7 E4729 Foundations of Finance Illustrative Classification Fixed Income Developed EM Governments Agencies MBS and ABS Corporates $ Denominated Local Currency Muni, CDO
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8 E4729 Foundations of Finance Fixed Income Markets Money Markets (maturity less than 1 year) Deposits and CDs Commercial Paper, Eurodollars, Repurchase agreements Treasury Bills US Treasury Notes, Bonds, and Zeros Agencies RMBS and CMBS Asset-Based Securities Corporate Bonds Municipals CMOs, CDOs Download Bear Stearns booklets in from CourseWorks
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9 E4729 Foundations of Finance Fixed Income Markets Deposits (checking, savings, money markets, time deposits, CDs – FDIC insured up to $100K) Commercial Paper Unsecured short-term promissory note with maturities less than 270 days (to avoid SEC registration) Majority are by financial companies, but there are CP by others Many issuers have bank loans, which makes perceived credit risk smaller Very small secondary market Case Study: CP market immediately after Enron and WorldCom Eurodollars Euro CDs: large short-term CDs denominated in dollars and issued by banks outside of the US Eurodollar Deposits: dollar-denominated time deposits in banks outside of the US Don’t have FDIC insurance
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Lecture_3_2010 - E4729 Foundations of Finance Lecture 3...

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