sumassign7 - Intro Macro ASSIGNMENT 7 N Sheflin NOTES...

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Intro Macro N. Sheflin ASSIGNMENT 7 NOTES: Review of the financial system , introduction to some financial economics’ concepts and applications and review of some investment material. Choppy but important stuff. Note some of the HW questions are from the investment game rounds 1-2. __________________________ KEY POINTS 1. THE FINANCIAL SYSTEM Role of the financial system – channel resources from savers to investors Securities, Markets and Exchanges o Stocks, bonds mutual funds o NYSE, NASDAQ Regulation o SEC http://www.sec.gov/about/whatwedo.shtml o Fed http://www.federalreserve.gov/pf/pf.htm o FDIC http://www.fdic.gov/about/learn/symbol/index.html o OCC http://www.occ.treas.gov/aboutocc.htm o OTS http://www.ots.treas.gov/?p=AboutOTS o CFTC http://www.cftc.gov/aboutthecftc/index.htm 2. SIMPLE FINANCIAL ECONOMICS CONCEPTS Present value, discounting, compounding **MOST IMPORTANT** Risk and return **IMPORTANT** Risk, insurance, diversification **IMPORTANT** Efficient markets and random walks **IMPORTANT** ‘Stock Picking’ Behavioral finance Adverse Selection and Moral hazard (look them up) Note i=r=interest rate COMPOUNDING AND DICOUNTING/PRESENT VALUE Future Value (FV) = Present Value (PV) x (1+i) n ex $100 in bank for 2 years at 10% = 100x(1+.1) 2 = 121 Present Value (PV) =Future Value (FV) / (1+i) n ex $121 in 2 years at 10% is equivalent to $100 today o The PV is the amount you could put in the bank today to grow to the FV in n years; i.e., we discount (remove) from the FV the interest that would have been earned over the n years.
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