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Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Discuss the general features,
yields, prices, ratings, popular types, and international issues of
corporate bonds. Review the legal aspects of bond financing and bond cost.
The document discusses why financial institutions exist and how they promote economic efficiency. It covers topics like transaction costs, adverse selection, moral hazard, and how these concepts influence financial structure. Financial institutions help address issues like the "lemons problem" that can arise from asymmetric information between parties. They do this through tools like producing private information, regulation, financial intermediation, debt contracts, collateral requirements, and monitoring borrowers.
The document discusses the US mortgage market. It covers what mortgages are, common types of residential mortgages, institutions that provide and service loans, and the growth of the secondary mortgage market. Key developments include the creation of mortgage-backed securities and collateralized mortgage obligations, which helped securitize mortgages and spread risk across many homeowners.
The document provides an overview of money markets and the securities traded within them. It defines money markets as markets for short-term, highly liquid debt instruments maturing in one year or less. Major participants include governments, banks, corporations, investment companies, and individuals. Common instruments discussed include Treasury bills, federal funds, commercial paper, certificates of deposit, bankers' acceptances, and eurodollars. The money markets allow short-term borrowing and lending to manage cash flow mismatches.
Chapter 08_Conduct of Monetary Policy: Tools, Goals, Strategy, and TacticsRusman Mukhlis
This document provides an overview of monetary policy tools and goals. It discusses how central banks like the Federal Reserve and European Central Bank implement monetary policy through tools like open market operations, discount rates, and reserve requirements. It also examines the goals of price stability and inflation targeting, and debates whether price stability or dual mandates are preferable. Tactics for choosing policy instruments on a daily basis and evaluating the pros and cons of monetary targeting and inflation targeting are also summarized.
The document provides an overview of topics that will be covered in a textbook on financial markets and institutions. It introduces the three primary financial markets of bonds, stocks, and foreign exchange. It discusses why these markets and the institutions that operate them are important to study. The chapter outlines how the textbook will use analytical frameworks, case studies, and web exercises to examine these topics from both theoretical and practical perspectives.
Ch.2 Overview of the Financial System - mishkin.pptSajidIqbalLibrary
The document provides an overview of the financial system and financial markets. It discusses that the financial system consists of financial markets, institutions, and regulatory bodies. Financial markets channel funds from those with surplus to those with deficits. They promote economic efficiency and improve consumer well-being. The structure of financial markets can be classified by financial instrument type, maturity date, and whether the security is being originally issued or previously traded.
Bonds are debt instruments where an investor loans money to an entity for a set period of time at a fixed or variable interest rate. There are various types of bonds including corporate bonds issued by companies, municipal bonds issued by state and local governments, and U.S. Treasury bonds issued by the federal government. Bonds can have different features such as being callable or convertible. They can also be secured by specific assets or unsecured. Bond issuers look to bonds as a way to raise funds for a period of time while investors seek bonds as a conservative way to earn income. However, bonds carry various risks including interest rate risk, credit risk, and liquidity risk.
This document provides an overview and preview of Chapter 2 from the textbook "Financial Markets and Institutions". It discusses the role of the financial system in channeling funds from savers to borrowers through both direct finance in financial markets and indirect finance using financial intermediaries. It previews topics that will be covered in the chapter, including the functions of financial markets and intermediaries, the structure and internationalization of financial markets, and the types of financial intermediaries.
The document discusses why financial institutions exist and how they promote economic efficiency. It covers topics like transaction costs, adverse selection, moral hazard, and how these concepts influence financial structure. Financial institutions help address issues like the "lemons problem" that can arise from asymmetric information between parties. They do this through tools like producing private information, regulation, financial intermediation, debt contracts, collateral requirements, and monitoring borrowers.
The document discusses the US mortgage market. It covers what mortgages are, common types of residential mortgages, institutions that provide and service loans, and the growth of the secondary mortgage market. Key developments include the creation of mortgage-backed securities and collateralized mortgage obligations, which helped securitize mortgages and spread risk across many homeowners.
The document provides an overview of money markets and the securities traded within them. It defines money markets as markets for short-term, highly liquid debt instruments maturing in one year or less. Major participants include governments, banks, corporations, investment companies, and individuals. Common instruments discussed include Treasury bills, federal funds, commercial paper, certificates of deposit, bankers' acceptances, and eurodollars. The money markets allow short-term borrowing and lending to manage cash flow mismatches.
Chapter 08_Conduct of Monetary Policy: Tools, Goals, Strategy, and TacticsRusman Mukhlis
This document provides an overview of monetary policy tools and goals. It discusses how central banks like the Federal Reserve and European Central Bank implement monetary policy through tools like open market operations, discount rates, and reserve requirements. It also examines the goals of price stability and inflation targeting, and debates whether price stability or dual mandates are preferable. Tactics for choosing policy instruments on a daily basis and evaluating the pros and cons of monetary targeting and inflation targeting are also summarized.
The document provides an overview of topics that will be covered in a textbook on financial markets and institutions. It introduces the three primary financial markets of bonds, stocks, and foreign exchange. It discusses why these markets and the institutions that operate them are important to study. The chapter outlines how the textbook will use analytical frameworks, case studies, and web exercises to examine these topics from both theoretical and practical perspectives.
Ch.2 Overview of the Financial System - mishkin.pptSajidIqbalLibrary
The document provides an overview of the financial system and financial markets. It discusses that the financial system consists of financial markets, institutions, and regulatory bodies. Financial markets channel funds from those with surplus to those with deficits. They promote economic efficiency and improve consumer well-being. The structure of financial markets can be classified by financial instrument type, maturity date, and whether the security is being originally issued or previously traded.
Bonds are debt instruments where an investor loans money to an entity for a set period of time at a fixed or variable interest rate. There are various types of bonds including corporate bonds issued by companies, municipal bonds issued by state and local governments, and U.S. Treasury bonds issued by the federal government. Bonds can have different features such as being callable or convertible. They can also be secured by specific assets or unsecured. Bond issuers look to bonds as a way to raise funds for a period of time while investors seek bonds as a conservative way to earn income. However, bonds carry various risks including interest rate risk, credit risk, and liquidity risk.
This document provides an overview and preview of Chapter 2 from the textbook "Financial Markets and Institutions". It discusses the role of the financial system in channeling funds from savers to borrowers through both direct finance in financial markets and indirect finance using financial intermediaries. It previews topics that will be covered in the chapter, including the functions of financial markets and intermediaries, the structure and internationalization of financial markets, and the types of financial intermediaries.
This chapter discusses why studying money, banking, and financial markets is important: to understand how financial markets work; how banks and other financial institutions operate; and the role of monetary policy. It provides an overview of key concepts like financial markets, the bond market, stock market, financial institutions, and past financial crises.
1) The document discusses insurance companies and pension funds, including the fundamentals of insurance, types of insurance like life and health, and types of pensions like defined-benefit and defined-contribution plans.
2) It also covers topics like adverse selection, moral hazard, and regulation of insurance companies and pension plans. Key trends are discussed, such as declining numbers of life insurers and issues facing pension funding.
3) The growth of credit default swaps is examined, including the role they played in the AIG bailout during the financial crisis. Challenges facing programs like Social Security are also summarized.
The document discusses various types of fixed income securities including bonds, their key features such as coupon rate, maturity date, and yield. It also covers bond market sectors such as the domestic bond market, foreign bond market, and international bond market. Various government bond issuers from countries around the world are also outlined.
This document discusses financial markets and institutions. It begins by outlining the capital allocation process and defining direct and indirect financing. It then discusses various segments of financial markets, including money markets and capital markets. The document outlines what financial markets are, why they are important to study, and their key functions. It also defines different types of financial markets and instruments traded within them, such as money market securities, capital market securities, bonds, mortgages, and derivatives. Finally, it discusses financial institutions, defining them and their role in facilitating indirect finance between savers and borrowers.
Banking and management of financial institutionsOnline
The document discusses various aspects of commercial bank financial management, including analyzing a bank's balance sheet with assets like loans and reserves on the left and liabilities like deposits on the right, how banks engage in asset transformation by borrowing short-term via deposits and lending long-term, and the goals of liquidity, asset, liability, and capital management to maximize profits while minimizing risks.
1. The document discusses various currency derivatives including forward contracts, futures contracts, and options contracts. Forward contracts allow corporations to lock in exchange rates for future currency needs, while futures and options are used by corporations for hedging and by speculators.
2. Currency futures contracts are standardized and exchange-traded, whereas forward contracts are customized over-the-counter contracts. Options provide the right but not obligation to buy or sell a currency.
3. The use of currency derivatives allows corporations to hedge currency risk and reduce fluctuations in value, while speculation in these markets allows some traders to profit but does not consistently generate large profits due to market efficiency.
This chapter provides an overview of financial markets and institutions. It discusses the structure and components of financial markets, including debt and equity markets, as well as primary and secondary markets. The chapter also examines the role of financial intermediaries in providing transaction and risk-sharing services. It outlines various types of financial intermediaries and regulations that aim to increase information and ensure stability.
This document contains lecture slides about interest rates and security valuation. It defines various interest rate measures like coupon rate, required rate of return, expected rate of return, and realized rate of return. It also discusses how to calculate the present value of bonds and stocks using these different rates. Additional topics covered include duration, which measures a bond's price sensitivity to interest rates, and convexity, which diminishes errors in duration estimates. Worked examples are provided to illustrate bond valuation and predicting price changes using duration.
Financial Markets, Financial Institutions, Interest Rates. asset demand and determination of asset prices, role of information in financial markets, causes and consequences of financial crises.
Mgnt 4670 Ch 11 Intl Monetary System (Fall 2007)knksmart
The international monetary system describes the structure through which exchange rates are determined, trade and capital flows occur, and balance of payments adjustments are made. It includes fixed and floating exchange rate systems, as well as the roles of central banks and reasons for each type of system. Over time, the system has evolved from early forms of money and bartering to the gold standard, Bretton Woods system of fixed rates tied to the US dollar, and currently a mixed system with major currencies floating and others using fixed or managed rates.
Chapter 14_The International Financial SystemRusman Mukhlis
The document discusses various topics related to the international financial system including:
- Types of foreign exchange rate interventions and their impact on monetary bases
- Components and purpose of a country's balance of payments
- Fixed and floating exchange rate regimes and how central banks intervene to maintain fixed rates
- Challenges of large current account deficits and the euro's challenge to the US dollar's global reserve status.
This document provides an overview of money market securities, including Treasury bills, commercial paper, negotiable certificates of deposit, and repurchase agreements. It discusses the key characteristics of each type of security such as typical maturities, minimum denominations, how they are issued and traded, and how yields are estimated. The chapter also examines how these short-term instruments provide liquidity to both issuers and investors.
This chapter discusses investing in stocks and the stock market. It covers topics such as how stocks are traded on exchanges and over-the-counter markets, methods for valuing stocks like the dividend discount and Gordon growth models, how the market sets stock prices, sources of error in valuations, important stock market indexes, investing in foreign stocks, and regulation of the stock market by the SEC.
Capital markets are financial markets for long-term debt or equity-backed securities where money is provided for over a year. They channel wealth from savers to long-term investors like companies and governments. Capital markets have a primary market where new securities are sold and a secondary market where existing securities are traded. They mobilize savings, enable capital formation and economic growth, provide investment opportunities, and are regulated to protect investors. Money markets are for assets involved in borrowing and lending of up to one year. They include instruments like certificates of deposit, commercial paper, and repurchase agreements. Both capital and money markets are important for financing trade and industry while managing liquidity and risk.
Chapter 22_Insurance Companies and Pension FundsRusman Mukhlis
This document summarizes key topics related to insurance companies and pension funds. It discusses the fundamentals of insurance, types of insurance like life and health insurance, and how insurance companies are organized and regulated. It also covers the different types of pension plans like defined benefit and defined contribution, and how pension plans are regulated in the US by acts like ERISA.
This document is a chapter from a textbook on financial markets that discusses money markets. It begins with an overview of the topics to be covered, including the definition of money markets, their purpose, participants, and instruments. Money market securities have short maturities of one year or less and high liquidity. Major participants include corporations, governments, banks, and investors. Key instruments discussed include Treasury bills, federal funds, repurchase agreements, certificates of deposit, commercial paper, and eurodollars. The chapter then examines these instruments in more detail through examples and illustrations.
Money evolved from barter systems through the use of commodities as a medium of exchange and store of value. The development of coinage and paper money based on gold and silver standards addressed issues with bartering and established money as a unit of account. The establishment of fractional reserve banking through goldsmiths further developed money by allowing the creation of paper claims that functioned as money. The Federal Reserve System was created in 1913 to oversee banking and monetary policy by regulating the money supply and financial system.
This document discusses the time value of money and various time value of money concepts. It covers calculating the future and present value of single amounts, annuities, perpetuities, and mixed streams of cash flows. It also discusses how compounding interest more frequently than annually increases the effective annual interest rate. The learning goals are to understand these time value of money concepts and calculations.
The document discusses different types of bonds such as government bonds, municipal bonds, mortgage-backed securities, asset-backed securities, corporate bonds, and zero-coupon bonds. It provides details on the key features of bonds including their nominal value, issue price, maturity date, coupon rate and payment dates. It also outlines some of the main risks associated with investing in bonds such as interest rate risk, reinvestment risk, inflation risk, market risk, default risk, and call risk.
This document provides an overview and learning goals for a lecture on interest rates and bonds. It discusses key concepts like the term structure of interest rates, bond yields, prices, and types. It also covers bond valuation basics, factors that influence interest rates, and theories of the term structure. Examples are provided to illustrate expectations theory and the impact of inflation on interest rates. The document reviews corporate bond features, costs, and ratings. Tables present bond characteristics, issuer risks, and rating scales.
The document discusses risk and return in investments. It defines risk as the possibility of loss or variability in returns. It notes that risk and return are positively correlated, so higher risk investments like stocks generally offer higher returns than lower risk ones like bonds. It identifies two main components of risk: systematic risk that affects the overall market and unsystematic risk that is specific to a particular company. Common types of systematic risk include market risk, interest rate risk and inflation risk, while business and financial risk are examples of unsystematic risk. The document also provides examples of how to calculate expected returns, standard deviation of returns as a risk measure, and real rates of return adjusted for inflation.
This chapter discusses why studying money, banking, and financial markets is important: to understand how financial markets work; how banks and other financial institutions operate; and the role of monetary policy. It provides an overview of key concepts like financial markets, the bond market, stock market, financial institutions, and past financial crises.
1) The document discusses insurance companies and pension funds, including the fundamentals of insurance, types of insurance like life and health, and types of pensions like defined-benefit and defined-contribution plans.
2) It also covers topics like adverse selection, moral hazard, and regulation of insurance companies and pension plans. Key trends are discussed, such as declining numbers of life insurers and issues facing pension funding.
3) The growth of credit default swaps is examined, including the role they played in the AIG bailout during the financial crisis. Challenges facing programs like Social Security are also summarized.
The document discusses various types of fixed income securities including bonds, their key features such as coupon rate, maturity date, and yield. It also covers bond market sectors such as the domestic bond market, foreign bond market, and international bond market. Various government bond issuers from countries around the world are also outlined.
This document discusses financial markets and institutions. It begins by outlining the capital allocation process and defining direct and indirect financing. It then discusses various segments of financial markets, including money markets and capital markets. The document outlines what financial markets are, why they are important to study, and their key functions. It also defines different types of financial markets and instruments traded within them, such as money market securities, capital market securities, bonds, mortgages, and derivatives. Finally, it discusses financial institutions, defining them and their role in facilitating indirect finance between savers and borrowers.
Banking and management of financial institutionsOnline
The document discusses various aspects of commercial bank financial management, including analyzing a bank's balance sheet with assets like loans and reserves on the left and liabilities like deposits on the right, how banks engage in asset transformation by borrowing short-term via deposits and lending long-term, and the goals of liquidity, asset, liability, and capital management to maximize profits while minimizing risks.
1. The document discusses various currency derivatives including forward contracts, futures contracts, and options contracts. Forward contracts allow corporations to lock in exchange rates for future currency needs, while futures and options are used by corporations for hedging and by speculators.
2. Currency futures contracts are standardized and exchange-traded, whereas forward contracts are customized over-the-counter contracts. Options provide the right but not obligation to buy or sell a currency.
3. The use of currency derivatives allows corporations to hedge currency risk and reduce fluctuations in value, while speculation in these markets allows some traders to profit but does not consistently generate large profits due to market efficiency.
This chapter provides an overview of financial markets and institutions. It discusses the structure and components of financial markets, including debt and equity markets, as well as primary and secondary markets. The chapter also examines the role of financial intermediaries in providing transaction and risk-sharing services. It outlines various types of financial intermediaries and regulations that aim to increase information and ensure stability.
This document contains lecture slides about interest rates and security valuation. It defines various interest rate measures like coupon rate, required rate of return, expected rate of return, and realized rate of return. It also discusses how to calculate the present value of bonds and stocks using these different rates. Additional topics covered include duration, which measures a bond's price sensitivity to interest rates, and convexity, which diminishes errors in duration estimates. Worked examples are provided to illustrate bond valuation and predicting price changes using duration.
Financial Markets, Financial Institutions, Interest Rates. asset demand and determination of asset prices, role of information in financial markets, causes and consequences of financial crises.
Mgnt 4670 Ch 11 Intl Monetary System (Fall 2007)knksmart
The international monetary system describes the structure through which exchange rates are determined, trade and capital flows occur, and balance of payments adjustments are made. It includes fixed and floating exchange rate systems, as well as the roles of central banks and reasons for each type of system. Over time, the system has evolved from early forms of money and bartering to the gold standard, Bretton Woods system of fixed rates tied to the US dollar, and currently a mixed system with major currencies floating and others using fixed or managed rates.
Chapter 14_The International Financial SystemRusman Mukhlis
The document discusses various topics related to the international financial system including:
- Types of foreign exchange rate interventions and their impact on monetary bases
- Components and purpose of a country's balance of payments
- Fixed and floating exchange rate regimes and how central banks intervene to maintain fixed rates
- Challenges of large current account deficits and the euro's challenge to the US dollar's global reserve status.
This document provides an overview of money market securities, including Treasury bills, commercial paper, negotiable certificates of deposit, and repurchase agreements. It discusses the key characteristics of each type of security such as typical maturities, minimum denominations, how they are issued and traded, and how yields are estimated. The chapter also examines how these short-term instruments provide liquidity to both issuers and investors.
This chapter discusses investing in stocks and the stock market. It covers topics such as how stocks are traded on exchanges and over-the-counter markets, methods for valuing stocks like the dividend discount and Gordon growth models, how the market sets stock prices, sources of error in valuations, important stock market indexes, investing in foreign stocks, and regulation of the stock market by the SEC.
Capital markets are financial markets for long-term debt or equity-backed securities where money is provided for over a year. They channel wealth from savers to long-term investors like companies and governments. Capital markets have a primary market where new securities are sold and a secondary market where existing securities are traded. They mobilize savings, enable capital formation and economic growth, provide investment opportunities, and are regulated to protect investors. Money markets are for assets involved in borrowing and lending of up to one year. They include instruments like certificates of deposit, commercial paper, and repurchase agreements. Both capital and money markets are important for financing trade and industry while managing liquidity and risk.
Chapter 22_Insurance Companies and Pension FundsRusman Mukhlis
This document summarizes key topics related to insurance companies and pension funds. It discusses the fundamentals of insurance, types of insurance like life and health insurance, and how insurance companies are organized and regulated. It also covers the different types of pension plans like defined benefit and defined contribution, and how pension plans are regulated in the US by acts like ERISA.
This document is a chapter from a textbook on financial markets that discusses money markets. It begins with an overview of the topics to be covered, including the definition of money markets, their purpose, participants, and instruments. Money market securities have short maturities of one year or less and high liquidity. Major participants include corporations, governments, banks, and investors. Key instruments discussed include Treasury bills, federal funds, repurchase agreements, certificates of deposit, commercial paper, and eurodollars. The chapter then examines these instruments in more detail through examples and illustrations.
Money evolved from barter systems through the use of commodities as a medium of exchange and store of value. The development of coinage and paper money based on gold and silver standards addressed issues with bartering and established money as a unit of account. The establishment of fractional reserve banking through goldsmiths further developed money by allowing the creation of paper claims that functioned as money. The Federal Reserve System was created in 1913 to oversee banking and monetary policy by regulating the money supply and financial system.
This document discusses the time value of money and various time value of money concepts. It covers calculating the future and present value of single amounts, annuities, perpetuities, and mixed streams of cash flows. It also discusses how compounding interest more frequently than annually increases the effective annual interest rate. The learning goals are to understand these time value of money concepts and calculations.
The document discusses different types of bonds such as government bonds, municipal bonds, mortgage-backed securities, asset-backed securities, corporate bonds, and zero-coupon bonds. It provides details on the key features of bonds including their nominal value, issue price, maturity date, coupon rate and payment dates. It also outlines some of the main risks associated with investing in bonds such as interest rate risk, reinvestment risk, inflation risk, market risk, default risk, and call risk.
This document provides an overview and learning goals for a lecture on interest rates and bonds. It discusses key concepts like the term structure of interest rates, bond yields, prices, and types. It also covers bond valuation basics, factors that influence interest rates, and theories of the term structure. Examples are provided to illustrate expectations theory and the impact of inflation on interest rates. The document reviews corporate bond features, costs, and ratings. Tables present bond characteristics, issuer risks, and rating scales.
The document discusses risk and return in investments. It defines risk as the possibility of loss or variability in returns. It notes that risk and return are positively correlated, so higher risk investments like stocks generally offer higher returns than lower risk ones like bonds. It identifies two main components of risk: systematic risk that affects the overall market and unsystematic risk that is specific to a particular company. Common types of systematic risk include market risk, interest rate risk and inflation risk, while business and financial risk are examples of unsystematic risk. The document also provides examples of how to calculate expected returns, standard deviation of returns as a risk measure, and real rates of return adjusted for inflation.
Chapter 6 interest rate and bond valuationMichael Ong
This document provides an overview of chapter 6 from a finance textbook on interest rates and bond valuation. It covers various learning goals and topics related to interest rates fundamentals, the term structure of interest rates, risk premiums, features of corporate bonds, bond yields, prices, and ratings. Key concepts discussed include the nominal and real interest rates, theories of the term structure, risk factors that influence bond prices, features of bond issues such as callability and conversion, how bond yields and prices are determined, and the ratings provided by Moody's and S&P. Examples and figures are provided to illustrate various points.
This document discusses the various types of risks faced by banks, including credit risk, liquidity risk, market risk, operational risk, capital risk, and others. It provides definitions and considerations for evaluating each type of risk, such as key ratios to examine for credit risk, balance sheet items that influence liquidity risk, and how changes in interest rates and exchange rates can impact market risk. The CAMELS framework for regulatory bank ratings is also summarized. Overall, the document provides an overview of fundamental risks in bank financial intermediation and how they can be assessed.
This document discusses the various types of risks faced by banks, including credit risk, liquidity risk, market risk, operational risk, capital risk, and others. It provides definitions and considerations for evaluating each type of risk, such as key ratios to examine for credit risk, balance sheet items that influence liquidity risk, factors that affect market risk, and guidelines for sufficient capital levels. The document also covers risk management strategies, off-balance sheet activities, CAMELS ratings, and other performance characteristics important for banks.
The document discusses various topics related to investment including the meaning of investment, characteristics of investment like return, risk and safety, types of investments like securities, real property and tangible assets. It also discusses the difference between investment, speculation and gambling. Other topics covered include factors affecting investment, investment avenues in India like equity shares, bonds, money market instruments, mutual funds and life insurance. It also discusses the meaning of tax planning, objectives and essentials of tax planning.
Econ315 Money and Banking: Learning Unit #12: Risk Structure of Interest Ratessakanor
This document discusses why there are different interest rates in the economy. It explains that interest rates vary based on the risk, liquidity, and tax attributes of different financial instruments. Bonds have different interest rates depending on their default risk, with riskier corporate bonds paying higher rates than safer Treasury bonds. Liquidity also impacts rates, with less liquid bonds paying more than more liquid ones. Tax attributes matter as well, as tax-exempt municipal bonds pay lower rates than taxable bonds. The document provides examples of how risk premiums, liquidity premiums, and tax premiums contribute to the different interest rates observed in the market.
This chapter discusses several factors that influence interest rates: marketability, liquidity, default risk, call privileges, prepayment risk, convertibility, and taxation. It explains how each of these factors affects the promised and expected yields on different types of financial assets. The risk-free interest rate underlies all other interest rates, which are scaled upward depending on their degree of additional risk factors like default risk or prepayment risk.
CH 4 interest rates about economics lessongs1905kemalhan
The document discusses key concepts related to interest rates, bonds, and inflation. It defines present value and how it relates to interest rates. It also discusses how bond prices are affected by changes in interest rates. Specifically, it notes that the price of long-term bonds is more volatile than short-term bonds due to interest rate risk. Additionally, it defines nominal and real interest rates and how inflation affects each.
chapter three interest rates in the financial system.pptxEbsaAbdi
There are two main economic theories that explain how interest rates are determined:
1) Loanable funds theory - Interest rates are determined by the supply and demand of loanable funds in the credit market. Demand comes from entities seeking to borrow, while supply comes from those willing to lend funds.
2) Liquidity preference theory - Interest rates are set by the demand and supply of money balances. Individuals may prefer to hold their wealth in liquid money form rather than invest due to uncertainty, affecting interest rates.
Additionally, the structure of interest rates varies based on factors like maturity, risk, and transaction costs associated with different financial instruments. Riskier loans command higher interest rates as compensation for default risk.
This document defines interest rates and describes methods for measuring interest rates such as present value, yield to maturity, and real vs nominal rates. It also discusses factors that can cause shifts in the demand and supply of bonds, and thus influence equilibrium interest rates. These factors include wealth, expected returns, risk, liquidity, expected profitability, expected inflation, and government activities. The yield to maturity calculation is shown for simple loans, fixed-payment loans, coupon bonds, and discount bonds.
1. Financial markets allow individuals and organizations to exchange financial assets and funds through intermediation. Money markets deal in short term debt up to 1 year, while capital markets trade longer term equity and debt.
2. Financial institutions serve as intermediaries in these markets since they are imperfect. Major institutions include commercial banks, savings institutions, credit unions, finance companies, mutual funds, securities firms, hedge funds, insurance companies and pension funds.
3. Interest rates are determined by the interaction of supply and demand in the loanable funds market. Factors like expected inflation, economic growth, and money supply influence rates by shifting supply and demand curves. The term structure of interest rates shows the relationship between yields of different term securities.
This document discusses interest rates and bond valuation. It covers the cost of debt and equity, factors that affect interest rates like inflation and risk, and different types of interest rates such as nominal rates, real rates, and yield curves. It also examines theories of term structure, including expectations theory, liquidity preference theory, and market segmentation theory. Finally, it reviews macroeconomic factors that influence interest rate levels, such as monetary policy, fiscal policy, and international factors.
EDITED chapter 6 interest rates and bond valuation.pptMei Miraflor
This document provides an overview of key concepts related to interest rates, bond valuation, and corporate bonds. It includes definitions of important terms like nominal interest rate, yield curve, bond features, and bond valuation. Learning goals are outlined for understanding interest rate fundamentals, bond legal aspects, bond pricing, and valuation models. Examples are provided to illustrate concepts like expectations theory of the yield curve and calculating bond yields.
This document provides an overview of chapter 6 from a finance textbook on interest rates and bond valuation. It includes 6 learning goals that cover interest rate fundamentals, bond features, valuation models, and yield calculations. Several sections define key concepts like the term structure of interest rates, theories of the yield curve, and factors that influence interest rate levels such as monetary policy. Corporate bonds are discussed including their legal aspects, ratings, and priority of claims. Types of bonds are defined such as fixed-rate, floating-rate, and convertible bonds.
Chapter Three Interest rates in the Financial System.pptEbsaAbdi1
There are two main economic theories that explain interest rate determination: the loanable funds theory and the liquidity preference theory. The loanable funds theory states that interest rates are determined by the supply and demand of loanable funds in the credit market. The liquidity preference theory argues that interest rates are determined by individuals' preferences to hold money balances rather than invest or spend. There are also various theories about the term structure of interest rates and how they vary based on maturity and risk.
A bond is a debt security where the issuer owes the holder a debt and is obliged to repay the principal and interest at maturity. Bonds have features like nominal value, coupon rate, maturity date, and call/put options. There are various types of bonds like fixed rate, floating rate, zero coupon bonds, and municipal bonds. Bond portfolio strategies include passive buy and hold strategies, active strategies like sector substitution, and semi-active strategies like immunization and duration matching to reduce interest rate risk. Bonds are evaluated based on the issuer's financial strength and past earnings, while valuation considers the present value of future cash flows and yield to maturity is the single discount rate that equals the current price.
A bond is a debt security where the issuer owes the holder a debt and is obliged to repay the principal and interest at maturity. Bonds have features like nominal value, coupon rate, maturity date, and call/put options. There are various types of bonds like fixed rate, floating rate, zero coupon bonds, and municipal bonds. Bond portfolio strategies include passive buy and hold strategies, active strategies like sector substitution, and semi-active strategies like immunization and duration matching to reduce interest rate risk. Bonds are evaluated based on the issuer's financial strength and past earnings, while valuation considers the present value of future cash flows and yield measures like current yield and yield to maturity.
Investment involves sacrificing current consumption for future benefits. The investment process involves 5 steps: 1) determining objectives and policy, 2) security analysis, 3) portfolio construction, 4) review, and 5) performance evaluation. Investment decisions are based on balancing risk and return. Risks include systematic/market risks from external factors and unsystematic/specific risks that can be reduced through diversification. Systematic risks include market, interest rate, and purchasing power risks from factors like wars, recessions, and inflation.
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
Michael, LMIC Economist, presented findings that reveal a weakened relationship between labour market tightness and job quality indicators following the pandemic. Labour market tightness coincided with growth in real wages for only a portion of workers: those in low-wage jobs requiring little education. Several factors—including labour market composition, worker and employer behaviour, and labour market practices—have contributed to the absence of worker benefits. These will be investigated further in future work.
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Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
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Fabular Frames and the Four Ratio ProblemMajid Iqbal
Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
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1. Chapter 6: Gitman/Brigham
Interest Rates
Qasim Raza Khan
Lecturer in Department of Management Sciences
CUI-Lahore
YouTube Link for lecture:
https://shorte.be/LP?$=174133
2. Topics Covered
Part-1: Cost of Money (Introduction)
Part 2: Factors affecting cost of money
– Fundamental factors
– Macroeconomic factors
• Interest rate levels
Part 3: Determinants of market interest rates
Part 4: Risk associated with overseas security
investment
4. 1. Cost of Money
Cost of money is the rental price of borrowing
money
Suppose you go to a bank to borrow $10,000 for paying off college
fees, you won’t be able to get this money for free.
The $10,000 come with a price tag attached, i.e. some rate of
interest, consider for example a 10% rate of interest.
This 10% interest rate is the cost of obtaining $10,000. This cost is
also known as the ‘cost of money’.
5. LENDERS BORROWERS
EXCESS FUNDS
PRICING SYSTEM (i)
Supply of funds
Demand of funds
$
i
i
In a free economy, excess funds of lenders are allocated to borrowers through a
pricing system based on the supply of and demand for funds. This pricing system is
represented by interest rates, ‘i’ or the cost of money.
6. So, Now we know!
• Supply and demand of
funds determines the
interest rates (i).
• Supply curve move
downwards
• Demand curves move
upwards
7. • Generally interest rates are believed to be the
cost of money.
• However, in case of equity capital,
– Cost of money is called ‘Cost of equity’ and it
consists of dividends and capital gains expected by
the share holders
– Cost of equity = Dividends + Capital Gains
12. 2. Factors affecting cost of money, ‘i’
The four most fundamental factors affecting the cost of money are:
1. Production opportunities
– Rate of return that producers expect to earn on invested capital.
2. Time preferences for consumption
– The preferences of consumers for current consumption as opposed to
saving for future consumption.
Preference for current consumption Supply of funds Interest rate
3. Riskiness of loan
– The chance that an investment will provide a low or negative return.
4. Inflation
– The amount by which prices increase over time.
Expected Inflation Demand of funds Interest rate
For highly risky loans
investors expect
high rate of return,
i.e. high ‘i’
i. Fundamental factors affecting cost of money, ‘i’
13. ii. Macroeconomic factors affecting
cost of money, ‘i’
1. Monetary policy tools
– Federal Reserve Policies
– Open Market Operations
2. Business boom
3. Business recession
4. Government budget deficit and surplus
14. Macroeconomic factors affecting cost
of money, ‘i’
1. Federal Reserve Policies
– An increase in required reserve ratio by central
bank means reduction in volume of deposits
which raises interest rates.
RRR Supply of funds Interest rate
– A decrease in required reserve ratio means
availability of excess deposits which decreases
interest rates.
RRR Supply of funds Interest rate
15. 2. Open Market Operations
– Central bank buys back securities from open
market thus injecting money into the system
(increasing supply of money) which decreases
interest rates.
– Central bank sells securities into open market
thus absorbs money from the system (decreasing
supply of money) which increases interest rates.
16. 3. Business booms
Increased demand of funds Inflationary pressures i
4. Business recession
Decreased demand of funds Inflationary pressures i
5. Government budget deficit
Government needs funds which means demand for funds i
6. Government budget surplus
Government does not need funds which means demand for funds i
17. 3. INTEREST RATE LEVELS
• Capital is allocated to borrowers according to interest rates, i.
– Most capital across the world is allocated through the price system (that is,
interest rate).
• As can be seen in the figure below the excess funds of lenders are
allocated to the borrowers through a price system that is the
interest rate.
20. Determinants of Interest Rates
• The interest rate quoted on any debt security is
composed of a real risk-free rate, r* , plus
several premiums that reflect inflation, the
security’s risk, its liquidity (or marketability),
and the years to its maturity. This relationship
can be expressed as follows:
Quoted interest rate = r = r* + IP + DRP + LP + MRP
21. How is interest rate determined
on debt securities?
• Required Rate of Return
– Nominal rate of return an investor requires to
make an investment worthwhile.
– Made up of 3 components:
• Real risk free rate
• Inflation premium
• Risk premium
22. 1. Real risk-free rate of return, r*
• Definition
– r* is the minimum rate of return an investor
requires. This rate does not take into account
expected inflation.
• Changes in r*
• r* is equal to T-bill rate minus the inflation
premium.
23. 2. Inflation Premium
• Inflation
– Definition: Loss in purchasing power of money
because of increase in prices.
– As inflation increases every dollar we own buys a
smaller percentage of goods and services.
• Why is inflation premium given?
• Impact of inflation on treasury and corporate
securities
24. Risk Free Rate
• rRF = r* + IP. It is the quoted rate on a risk-free
security such as a Treasury bill and it includes
a premium for expected inflation.
25. Difference between Real Risk free interest
rate and Risk free interest rate
• Risk free interest rate = Real Risk free interest rate + Inflation premium
• Real Risk free interest rate = Risk free interest rate – Inflation premium
• What does the term ‘real’ means?
• What does the term ‘risk-free’ means?
26. 3. Risk Premiums
1. DRP = default risk premium:
This premium reflects the possibility that the
issuer will not pay the promised interest or
principal at the stated time.
1. Treasury securities have no chance of default hence
DRP isn’t paid on them.
2. For corporate bonds higher the bonds rating, lower
its default risk and lower will be the interest rates.
27. 3. Risk Premiums
2. LP: Liquidity Premium:
– Liquid asset: An asset that can be converted to
cash quickly at a fair market value.
– Liquidity premium is added to ROI on securities
that aren’t liquid.
– Liquidity premium for treasury and
corporate securities
28. 3. Risk Premiums
3. MRP = Maturity Risk Premium:
Longer-term bonds, even Treasury bonds, are exposed to a
significant risk of price declines due to increases in interest
rates; and a maturity risk premium is charged by lenders to
reflect the interest rate risk.
MRP is paid to cover interest rate risk.
– Interest rate risk: The risk of capital losses to which investors are
exposed because of changing interest rates.
30. Risks associated with investment in
overseas securities
• Two main types of risks that an investor, looking to
invest in foreign securities, faces are: country risk
and exchange rate risk.
1. Country risk:
– Risk that arises from investing or doing business in
a particular country
– This risk depends on a country’s economic, social
and political environment.
– Countries with safer political, social and economic
environment have less country risk and therefore
are safe choices for overseas investment.
31. 2. Exchange rate risk:
– Risk of losing money in local currency because of fluctuation
in the value of foreign currency (in which investment was
being made).
– Recall example narrated in class (Pakistani earning US dollars
and praying for weak Pakistani rupee relative to US dollar).
– Suppose a US investor purchases Japanese bond. The US
investor gets interest rate in Japanese currency (Yen) which
must then be converted into US dollars whenever he wants
to make a purchase (as the investor resides in the US).
Whenever Yen strengthens in comparison to dollar it means
Yen can be converted into a larger number of US dollars and
the investor will be better off. On the other hand if Yen
weakens relative to dollar, it would mean Yen’s conversion
into dollar will give off fewer dollars and the investor will
have to suffer.
32. Simple Problems
• If expected inflation during the next year is 2%
and currently the nominal interest rate on T-bills
is 5%, what is the real risk free rate of interest?
• If inflation is expected to average 4% during the
next year and the real risk free rate of interest is
3%, what should be the nominal rate of interest?
• Answers: 3% and 7%
33. Simple Problem
• Assume that the real risk free rate, r* = 2% and
the average expected inflation rate is 3% for each
future year. The DRP and LP for Bond X are each
1% and the applicable MRP is 2%.
– What is Bond X’s interest rate?
– Is Bond X a treasury bond or a corporate bond?
– Does Bond X more likely to have a 3 month or 20 year
maturity?
Answers: 9%, corporate, 20 year
34. When inflation is expected to increase
• Long term bonds have higher yields for 2
reasons:
– Inflation is expected to be higher in
future
• If market expects inflation to increase in
future, the inflation premium will be
higher the longer the term to maturity.
– Positive MRP
• MRP always increases with increasing
maturity of bond.
– Refer to table page 177
35. • When inflation is expected to
decrease
• If market expects inflation to
decline in future, long-term
bonds will have smaller inflation
premium (thus lower rates) than
short-term bonds.
• Such yield curves predict
economic downturn because
weaker economic conditions
generally lead to declining
inflation which leads to lower
long-term interest rates.
36. Factors affecting shape of Corporate bonds
• Corporate bonds include a default risk premium (DRP) and a
liquidity premium (LP). Therefore, the yield on a corporate
bond that matures in t years can be expressed as follows:
• Corporate bond yield = r* + IPt + DRPt + LPt + MRPt
• The corporate bonds carry additional default and liquidity
risks, this is the reason they pay premium for covering these
risks which is why the ‘i’ (interest rate) paid on corporate
bond, also called the yield, is always higher than that paid on
treasury bonds.
37. Because of their additional default and liquidity risk, corporate bonds yield more than treasury
bonds with the same maturity and BBB-rated bonds yield more than AA-rated bonds.
38. • Corporate bond yield can be calculated using the formula:
• r = r* + IPt + DRPt + LPt + MRPt
• LP and DRP of a corporate bond are affected by its maturity
• For example:
– Coca Cola's chances of defaulting on 10 years bond are less
as compared to defaulting on a 100 year bond, so higher
DRP is paid on the bond with ______ years to maturity?
• Long term bonds are also less liquid than short term bonds so
as maturity of bonds increases LP also increases.
39. Interest rate determination
• Formula for calculation of interest rate on
short term treasury securities:
– Quoted interest rate = Real risk free rate + inflation premium
– r = r* + IPt
• Formula for calculation of interest rate on long
term treasury securities:
– Quoted interest rate = Real risk free rate + inflation premium +
maturity risk premium
– r = r* + IPt + MRPt
40. Interest rate determination
• Formula for calculation of interest rate on
corporate securities:
– r = r* + IPt + DRPt + LPt + MRPt
– Quoted interest rate = Real risk free rate + inflation premium + default
risk premium + liquidity premium + maturity risk premium