1 / 29

Financial Markets

Financial Markets. Businesses can borrow savings to: produce new goods and services build new plants and equipment create more jobs. Financial Markets. Financial Asset: Legal claim on the property and income of the borrower.

val
Download Presentation

Financial Markets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Financial Markets Businesses can borrow savings to: produce new goods and services build new plants and equipment create more jobs

  2. Financial Markets Financial Asset: Legal claim on the property and income of the borrower. e.g. certificate of deposit – a piece of paper that says, “ABC Bank has my $1000 and promises to repay me on this date.” I (lender) have provided ABC Bank with funds that they can loan. My CD is a claim on the property/income of the bank for that $1000.

  3. Financial Markets Lenders (businesses/individuals): can provide funds directly to the borrower (govt./business) Stocks, bonds – financial assets in the hands of the lenders.

  4. Financial Markets Financial intermediaries (“lying between”) Institutions that collect and channel funds from savers to borrowers. Borrowers use the funds to: Invest in capital equipment Build plant Hire and train workforce

  5. Financial Markets Benefits of capital formation: Lenders: Don’t have to find borrowers Liquidity Less risk Credit underwriting Pooled portfolio “Guaranteed” rate of return (FDIC)

  6. Financial Markets Benefits of capital formation: Borrowers: Don’t have to find lenders Economies of scale Reduced time and expense Ready capital

  7. Financial Markets Non-bank financial intermediaries Pooled loan capital Life Insurance companies (e.g. MetLife) Collect premiums Long-term finance Pension Funds (e.g. MD State Retirement and Pension System)– set aside assets which must be invested.

  8. Financial Markets Non-financial intermediaries (contd.) Finance company (e.g. Ford Motor Credit) Nontraditional loans Installment contracts

  9. Financial Markets Investment Considerations: Consistency: “Can’t beat the market.” 11% historical average Magic of compounding (1¢ or $5 million)

  10. Financial Markets Investment Considerations: Simplicity: KISS Credit Default Swaps

  11. Financial Markets Investment Considerations: Risk: “The degree to which the outcome is uncertain, but a probable outcome can be estimated.

  12. Financial Markets Investment Considerations: Objective: Rainy Day Fund House Down payment College Tuition Retirement

  13. Financial Markets Junk bonds Speculative stock Debt Instruments Common stock Preferred stock Investment-grade bonds Prime commercial paper U.S. Treasury bills

  14. Financial Assets Bonds: Long-term financing instruments that pay principle and interest. Coupon rate Maturity Par (face) value

  15. Financial Assets Bond prices change when: Market interest rates change: Ex: You hold a 10-yr. bond paying 7.5%, but market rates have declined to 5.5%; Investors will pay a premium to own the higher yielding bond. Company’s ability to repay changes

  16. Financial Assets Bonds are rated by: Standard and Poor’s (S&P) Moody’s Determine the basic financial health of the issuer. Ratings range from AAA (highest quality) to D (junk). Investment grade bonds are rated BBB and above.

  17. Financial Assets Bond yield (rate of return) – seller wants to profit from market price: Coupon rate ÷ market price Ex: $60 ÷ 950 = 6.32% $60 ÷ 850 = 7.01% $60 ÷ 1100 = 5.45%

  18. Financial Assets Bond Types: CDs – issued by banking entities $500- 1000 Varying maturities, “penalty for early withdrawal” FDIC insured Taxable income

  19. Financial Assets Corporate bonds: $1000 – 10,000 Long-term investment Easily liquidated in the market Taxable income

  20. Financial Assets Municipal bonds (“munis”): Low-risk “borrower” Government repays easily since it can tax Tax-exempt interest Easier and cheaper for the issuer to borrow

  21. Financial Assets U.S. Savings Bonds: $50 - $10,000 50% discount from face value Accrued interest collected upon redemption Easy to obtain “No” risk

  22. Financial Assets Treasuries: T-bills: 1, 3, 6 month maturities Discounted like savings bond T-notes – 2-10 year maturities T-bonds – 10-30 year maturities

  23. Financial Assets IRAs – long-term, tax sheltered Various investment amounts Reduced taxable income Interest earned tax deferred

  24. Equities and Options Value of a share of stock depends on: Outstanding number of shares Company profitability Market expectations

  25. Equities and Options The market is infinitely efficient: Efficient Market Hypothesis (EMH) – there are no bargain-priced stocks. Portfolio diversification – “win some, lose some”: 401 (k), 403 (b) –tax-deferred income Lowers taxable personal income taxes Usually employer-matched Mutual funds Share of stock in a portfolio of stocks Managed by experts

  26. Equities and Options Trading – 3 markets: NYSE – largest and most profitable corps. AMEX – smaller corps. offering more speculative stocks NASDAQ (OTC) – all stocks not traded on the other two organized exchanges.

  27. Equities and Options Measurement: DJIA (“the Dow”) – 30 major corps. S&P 500 – 500 representative stocks NASDAQ – tracks all the stocks traded on this exchange (about 3300).

  28. Equities and Options Futures: different from “spot” trades An agreement to buy or sell at a future date for a specific price Ex: On 1/1/10, buy a 7/1/10 gold contract for $600/oz. I expect gold to rise to $800/oz. On 7/1/10, I buy $600 worth of gold from contract buyer and sell for $800. Advantage: I keep $600 for six months.

  29. Equities and Options Options – suppose you are not sure about the movement of commodity prices: Call option – the right to buy at a future price Put option – the right to sell at a future price Ex: I expect gold to rise to $800/oz. If it doesn’t, I tear up the contract. Used by industries that want to lock in commodity price (e.g. oil, lumber).

More Related