Finance 3317 - Finance 3317 I Financial System a Composed...

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Finance 3317 8-30-11 I. Financial System a. Composed of 3 elements a.i. Financial Instrument (this is covered in the financial market) a.ii. Financial Market a.ii.A. Primary or Secondary Market ( page 3) a.ii.A.a. Primary Market – the original bonds and stocks sold a.ii.A.b. Secondary Market – markets that trade securities once they are issued a.ii.B. Money or Capital Market (page 3) a.ii.C. Foreign Exchange Markets (page 3) a.iii. Financial Institutions b. Handout 1 : Why are new issues of bonds so much greater than new issues of stock? b.i.A. Bonds have limited life (maturities); stock are perpetuities b.i.A.a. Bonds mature and are usually replaced by a higher priced bond b.i.A.b. Bonds are usually callable (interest rates based) b.i.B. Bonds have lower cost of capital b.i.C. Bonds have lower issuing costs (Most are issued to Financial institutions) b.i.D. Stockholder Resistance b.i.D.a. Dilution of control b.i.D.b. Dilution of Earnings b.i.E. New issue of stocks will usually send negative signals and may lower stock price b.i.F. Leverage: b.i.F.a. ROA = Net Income After Taxes/ Assets b.i.F.b. ROE = NIAT/Net worth or ROE = ROA x LM b.i.F.b.i. Leverage Multiplier = Assets/Net worth Firm A = L + NW LM A 100% 50 % 50% 100/50 = 2 B 100% 90 % 10% 100/10 = 10 Firm ROA x LM =RO E Representativ e of what? A 1% 2% 2% Non-financial Firms B 1% 10 % 10% Financial Institutions c. Money Markets vs Capital Markets (page 7) c.i. #3 page 23 c.ii. Money markets are very amorphous c.iii. Capital Market c.iii.A. NYSE c.iv. Foreign Exchange Markets Exchange Rate (Currency Unit per U.S. Dollar) Country 2006 8/26/11 $US Brazil 2.1738 1.6055 Depr China 7.9723 6.3860 Depr
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Japan 116.31 76.62 Depr Thailand 37.876 29.96 Depr Venezuela 2.14 4.2893 Apprec II. Chapter 2: (Pages 24-36 SKIP) a. Internal Rate of Return - Interest rate that equates the PV of an investment’s cash inflow with the outflows of that investment b. Interest (cost of borrowing) (return on investment) (IRR) b.i. Handout: b.i.A. Reserve Market Rates b.i.A.a. Monetary Policy must lower short term interest rates b.i.A.b. Intended Federal Fund Rates – trying to lower the fund rates b.i.A.c. Primary direction is downward through all of 2008 and pretty horizontal since then b.i.B. Treasure Yield Curve b.i.B.a. A line drawn to show the relationship between yield and maturity of a [homogenous class of securities] b.i.B.a.i. Same class or similar class for example: Federal Government issues treasury bill on up to 30 year bonds b.i.B.b. Maturity premium goes by maturity risk b.i.C. Short-Term Interest Rates since 1993 to 2011 b.i.C.a. 90-day commercial paper and 3 month treasury yield (money market instruments) b.i.C.b. Have been going down. b.i.D.
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Finance 3317 - Finance 3317 I Financial System a Composed...

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