Test 2 Cheat Sheet

Test 2 Cheat Sheet - Chapter5 Financial institutions...

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Chapter5 Financial institutions facilitate the transfer : of money from savers to borrowers direct ( . transfer bus Delivers securities to savers ), who give the firm money investment ( / banking house company sells stocks bonds to investment bank which then sells the ), same to savers financial ( intermediary obtains funds from savers in ; , exchange for securities bank insurance , , , company mutual fund credit unions pension , , funds life insurance companies mutual , ) funds hedge funds - , Market functions company service trading , . service info Service : Auction Market : exchange physical facility where buyers and sellers come together to trade securities : Dealer Market : OTC market group of dealers who make markets in different securities : Third Market NYSE stocks traded off the floor by firms that are not NYSE members : Fourth Market major institutions match orders internally : IPO when company issues shares to the ; public for the first time shows intrinsic value of the firm : Efficient Market Hypothesis securities are normally in equilibrium and are fairly . priced One cannot beat the market except . through good luck or better info : Weak Form can t profit by looking at past . trends A recent decline is no reason to ( ) think stocks will go up or down in the . - future Evidence supports weak form , . analysis but technical analysis is still used - : Semi strong all publicly available , information is reflected in stock prices so doesn t pay to pore over annual reports . looking for undervalued stocks Superior analysts can still profit by finding and . using new info : Strong , , all info even inside info is . embedded in stock prices Insiders can gain by trading on the basis of insider ., info but it is illegal * our markets are semistrong and weak money markets - funds are borrowed or ; loaned for short period capital markets - intermediate or long term debt and ; corporate stocks - primary corporations , raise capital new stock and ; debt - secondary existing securities are traded among investors , NYSE is a physical location exchange ( ) NASDAQ electronic dealer based market is smaller dealers occurs in auction markets for companies too small for the NYSE . , Inc liquidity more likely to invest Chapter6 * . , . inc risk inc int rate . : 4 factors affect int rates production , . opportunities time pref for , , consumption risk expected inflation . & ; Int Rates depend on S D for funds upward pressure on rates when the economy is , expanding inflationary pressures = = *+ + + + Quoted interest rate r r IP DRP LP MRP = r quoted or nominal rate *= r real . risk free rate w no inflation in the world = *+ ; - Rrf r IP Treasury bill risk free and very - & = liquid DRP LP 0 = IP - . inflation premium avg expected rate over life of security . , / To calc IP add inflation years = DRP ; default risk premium 0 for treasury ; , securities greater risk of default higher market rate = LP liquidity premium = MRP ; maturity risk premium long term bonds exposed to high risk - = , - T bill short term risk free rate T = Bond long term risk free rate = *+ T Bill r IP = * + + Tbond yield r t IPt MRPt Corporate Bond = * + + + + yield r t IPt MRPt DRPt LPt * . when Tbond and Corp bonds have ,
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