WVU FIN 330 - Final Exam Study Guide (13 pages)

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Final Exam Study Guide

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Final Exam Study Guide


Study Guide
West Virginia University
Fin 330 - Financial Institutions
Financial Institutions Documents
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Finance 330 1st Edition Final Exam Study Guide chapters 1 4 Chapter 1 Financial Markets structures through which funds flow Primary Markets vs Secondary Markets Primary Markets are markets in which corporations raise funds through new issues Secondary Markets markets that trade financial instruments once they are issued Types of Financial MarketsMoney Markets markets that trade debt securities or instruments with maturities of less than a year Capital Markets markets that trade debt and equity instruments with maturities of more than one year Foreign Exchange Markets markets in which cash flows from the sale of products of assets denominated in a foreign currency are transacted Derivative Markets markets in which derivative securities trade Initial Public Offerings the first public issue of financial instruments by a firm Derivative Security a financial security whose payoffs are linked to other previously issued securities Money Markets vs Capital Markets Money Markets markets that trade debt securities or instruments with maturities of one year of less Over the Counter Markets markets that do not operate in a specific fixed locationrather transactions occur via telephones wire transfers and computer trading Capital Markets markets that trade debt and equity instruments with maturities of more than one year Money Market Instruments Treasury Bills short term obligations issued by the U S government Federal funds short term funds transferred between financial institutions usually for no more than one day Repurchase agreements agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a special date and price Negotiable certificate of deposit bank issued time deposit that specifies an interest create and maturity and is negotiable Banker s acceptance time draft payable to a seller of goods with payment guaranteed by a bank Corporate stock the fundamental ownership claim in a public corporation Mortgages loans to individuals of business to purchase a home land or other real property Corporations bonds long term bonds issued by corporations Treasury bonds long term bonds issued by corporations State and local government bonds long term collateralized by a pool of assets and issued but agencies of the U S government Bank and consumer loans loans to commercial banks and individuals Derivative Security Markets the markets in which derivative securities trade Derivative Security an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future Financial Regulation Financial instruments are subject to regulations imposed but regulatory agencies such as the SEC Financial Institutions Institutions that preform the essential function of channeling funds from those with surplus funds to those with shortages of funds Types of Financial Institutions Commercial banks Thrifts Insurance companies Securities firms and investment banks Finance companies Mutual funds Hedge funds Pension funds Direct Transfer A corporation sells its stock of debt directly to investors without going through a financial institution Indirect Transfer a transfer of funds between suppliers and users of funds through a financial intermediary Liquidity the ease with which an asset can be converted into cash as its fair market Value Price Risk the risk that an asset s price with be lower than its purchase price Delegated Monitor an economic agent appointed to act on behalf of smaller investors in collecting information and or investing on their behalf Asset Transformers financial claims issued by an FI that are more attractive Diversity the ability of an economic agent to reduce risk by holding a number Economies of scale the concept that cost reduction in trading and other transaction services results from increased efficiency when Fls preform these services Etrade buying and selling shares on the internet Chapter 2 Nominal Interest Rates The interest rates actually observed in financial markets Loanable Funds a theory of interest rate determination that views equilibrium interest rates in financial markets as a result of the supply and demand for loanable funds The quantity of loanable funds supplied increases as interest rates increase The aggregate supply of loanable funds is the sum of the quantity supplied by the separate fund supplying sectors households businesses governments foreign agents Factors That Cause the Supply and Demand Curves for Loanable Funds to Shift Supply of funds wealth of fund suppliers risk of financial security future spending needs monetary policy objectives and economic conditions Wealth as the total wealth of financial market participants increases the absolute dollar value available for investment purposes increases Risk as the risk of a financial security decreases it becomes more attractive to suppliers of funds Near term Spending Needs when financial markets participants have few nearterm spending needs the absolute dollar value of funds available to invest increases Economic conditions underlying economic conditions themselves and improve in a country relative to other countries the flow of funds to that country increases Inflation The continual increase in the price level of basket of goods and services Real Interest Rate the interest rate that would exist on a default free security if no inflation were expected RIR NIR Expected IP Factors Affecting Nominal Interest Rates Inflation Real Interest Rate Default Risk Liquidity Risk Special Provisions Term to Maturity Default risk the risk that a security issuer will default on that security by being an interest of principle payments Liquidity Risk the risk that a security can be sold at a predictable price with low transaction costs on shorts Term and Structure of Interest Rates A comparison of market yields on securities assuming all characteristics except maturity are the same Unbiased Expectations Theory at a given point in time the yield curve reflects the market s current expectations of future short term rates Liquidity Premium Theory is a extension of unbiased expectations theory and is based of the idea that investors will hold long term maturities only if they offered at a premium to compensate for future uncertainty in a securities value Time Value of Money Time value of money is a notion that a dollar today is worth more than a dollar received at some future date This is

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