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Finance_Notes_Quiz_1[1] - FIN 6404 Foundations of Finance...

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FIN 6404 Foundations of Finance Summer 2011 June 29, 2011 Summary of last lecture Financial market:  Category 1:  Institutions: investment banks, commercial banks Category 2:  Markets: NASDAQ, NYSE Category 3:  Financial securities  Interest rate Category 1:  Institutions  (understand the key role/task of commercial banks and investment banks) Commercial banks  --- take deposit, make loans out to small business or individuals, but  also make risky bets  e.g. SunTrust, Citibank, Wells Fargo, etc  Investment banks  --- can’t go open an account, don’t take deposit, help corporations raise  money by issuing stocks and bonds   [Same] they both help business to raise money to fund their projects  [Different] how they done, different in efficiency Bond  --- similar to a certificate of the deposit, the structure is a note  The investment bank charges the corporation the fee once when the bond is issued.  But for commercial bank, they charge interest rate every year for the life of the loan to the  borrowers.  (Different in the efficiency)  
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FIN 6404 Foundations of Finance Summer 2011 [a brief history of the revolution of the institutions]  Traditionally, commercial banks couldn’t take any risky activity because they managed the people’s  money. But as commercial banks got larger, they managed to convince the congress legislation.  The congress agreed, then commercial banks started to undertake what investment banks doing.  For a while, they made a lot of money, but they didn’t really understand the sophisticate of the  market. Then, the financial crisis occurred, all of them were in trouble. The government bailed the  banks out and reregulated the banks. (one full circle)  Q: There is no more investment bank now, what happened? Because during the financial crises:  Commercial banks are regulated by the Fed , they have constrains, so they have privileges: they  can borrow money from the Fed at 0% interest rate; Investment banks: if they need money during  the crisis (liquidity crisis), they want to borrow money from the Fed, they need to convert their  license from investment banks to commercial bank.  FDIC  Federal Deposit Insurance Corporation Other financial institutions: [less important] Hedge funds Pension funds: they have lots of money, big enough to influence the market by their  investment decisions.   [Focus on the big picture on financial institutions] Risk is determined by: Leverage  --- cause the subprime crisis 
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FIN 6404 Foundations of Finance Summer 2011 The idea that you put a little of your money and borrow a lot of money can result in you getting a  larger return on your investment. The word we used to describe this strategy is called “leverage”.  
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