Chapter 3 - INTEREST RATES AND SECURITY VALUATION
1. INTEREST RATE MEASURES
Coupon Interest Rate: The interest rate that determines a bond's annual or semi-annual coupon CF or
Required Rate of Return (rrr): The interest rate an investor should re
Chapter 23 - MANAGING RISK WITH DERIVATIVES
FIs can use derivatives to manage interest rate, credit and FX risk.
Spot Market: Cash transactions for immediate delivery (1-3 days) of commodities, securities (bonds,
Forward Market: Agree on P an
Chapter 22 - INTEREST RATE and INSOLVENCY RISK
Interest Rate Risk - In the process of FIs performing their asset-transformation function, FIs are
exposed to Interest Rate Risk, from Mismatched Maturity/Duration: Borrowing Short, Lending Long.
Chapter 21 MANAGING LIQUIDITY RISK
Liquidity risk is part of the normal operation of a FI, especially for DIs (Depository Institutions). Two
types: a) Risk from unexpected deposit withdrawals (liabilities), and b) Risk from when loan
commitments are exerc
Chapter 19 - RISKS OF FINANCIAL INSTITUTIONS
Risks Faced by Financial Institutions, See Table 19-1, p. 535.
1. Credit Risk - Loan Default Risk (See Example 19-1, p. 536, and Figures 19-1 and 19-2 on p. 536
2. Liquidity Risk - Unexpected Deposit
Chapter 11 - COMMERCIAL BANKS
Depository Institutions - commercial banks, savings banks (thrifts) and credit unions. See Table 11-1
on p. 321, 1950 vs. 2006. See Figures 11-1 and 11-2, page 321 and 322.
Commercial banks vs. savings banks/credit unions. Co
Chapter 10 - DERIVATIVE SECURITIES MARKETS
Derivative Security is an exchange-traded financial security whose payoff is tied to an underlying
asset, or previously issued security. The derivative "derives" its value from the value of some
Chapter 9 - STOCK MARKETS
Transfer of funds from suppliers of funds (investors) to users of funds (firms), as one source of funds
in addition to _ and _. Shareholders become owners and are entitled
See Figure 9-1 on p. 245, market value of s
Chapter 8 - FOREIGN EXCHANGE (FX) MARKETS
U.S. Banks and MNCs operate in a global economy, and need to buy, sell, and trade currencies.
Foreign trade, Exports + Imports = $3 trillion for U.S., most of it requiring the purchase or sale of FX.
Also, MNCs an
Chapter 6 - BOND MARKETS
Capital Markets: One or more year to maturity, e.g., bonds (CH 6), mortgages (CH 7) and stocks (CH
BONDS are long-term debt obligations of companies or governments to fund long-term investments in
long-term assets, e.g., capit
Chapter 2 - INTEREST RATES
Nominal Interest Rates: Interest rates observed in financial markets, e.g.,
REVIEW OF TIME VALUE OF MONEY
Compound interest, based on reinvestment assumption. Compounded because interest is paid in
current period on interest
Chapter 1 - Introduction and Overview of Financial Markets
Why study Financial Markets and Institutions?
1. Dynamic and evolving markets. DJIA rose from 2800 in 1990 to more than 11,000 by 2000 (25%
annual returns in the 90s), then the stock market declin