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
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 20 - CREDIT RISK
FIs special role: Ability to: 1) Evaluate information and 2) Control and monitor borrowers. Allows
FI's to transform financial claims of household/savers efficiently into claims (debt and equity) issued to
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 4 - THE FED, MONETARY POLICY AND INTEREST RATES
Federal Reserve Act in 1913 created our central bank, the Federal Reserve Bank, to stabilize the
monetary and financial system, in response to numerous banking crises and panics in the late 1800s and
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 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