Financial Markets and Institutions 09 15 2013 Securitization grouping of things Commonly used for mortgage o Taking existing securities pulling them together and selling Investment bank help big companies find funding sources cash flow Foreign Exchange Financial intermediary Life insurance PNC Pension funds 09 03 13 Primary market Public market IPO Initial public offering Where something is birthed Secondary market Where existing securities are sold NASDAQ Really important Essential Ask yourself How can I sell it High Yeild Risk Federal Reserve FOMC Federal Open Market Committee Banks are first recipients of Feds Banks alter through o Interest rates Fed funds rate rate on banks lending to other banks Excess Reserve makes up the fed funds Discount rate money borrowed from federal reserve Federal reserve not forced to loan out money Liquidity converting assets to cash o MTG MBS CMO AIG 1 MBS CDS SP CRA FNMA FHCCM Mortgage Back security MBS collection of mortgages Community reinvestment act CRA designed to help follks who didn t have capacity to purchase home Strict criteria income credit assets etc Early 1990 Janet Rino o Vis a Vis every lender broker everyone in mortgage process was forced to include subprime borrowers o Subprime inclusion o SASI stated assets and stated income No verification for SASI o Owners of MBS is giving out Mortgages to homeowners who aren t verified CMO transformers of borrowing AIG credit default swaps Interests rate and rates of return Interest rates are low Chapter 2 09 05 13 Chapter 3 Assymetric negotiating One side knows more than the other in negotations Economies of scope Moral hazards you will face for a long time 09 10 13 Rating agency S P Why do you want AAA rating Lower interest rate Credibility Less hesitancy on investments Low coupon o Issuer of debt firm borrower Problem with short term awards to leaders Maniupulate Restricted covenants What you can and cant do Private equity 09 12 13 Repo Means Repurchase Reserves Bank needs to set aside money from incoming money sent to FR Before only puy money aside in cash now you can also due treasury bills Liquidity risks Liquid Ability to turn something into cash Banks set their own prime rate Chapter 1 Introducing Money and the Financial System 09 15 2013 Can the fed restore the flow of money Financial system is like an irrigation system 2007 Economic Crisis o resulting in decline in production of goods and services o 8 million jobs lost o Unemployment rate was 10 o Economic crisis contributed to GM and Chrysler bankruptcy o Extinction of Lehman Brothers and Bear Stearns investment o US Treasury Department and Federal Reserve Economist believe some government intervention was necessary to pull US out of deep recession houses Key Components of the Financial System 3 major components o Financial Assets Asset anything of value owned by a person or a firm 5 categories Money o Money anything that people are willing to accept in payment for goods and services or to pay off debts o Money supply total quantity of money in the economy Stocks Bonds o Stock financial securities that represent partial ownership of a firm also called equities o When you buy a share of stock from a firm you become that firms shareholder o Dividends a payment that a corporation makes to its shareholders Made quarterly o Bond a financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money o Interest rate the cost of borrowing funds or the payment for lending funds usually expressed as a percentage of the amount borrowed o Coupons Bonds payment of interest in fixed dollar amounts Ex IBM sells you bond of 1 000 Coupon for that bond is 65 per year for a maturity 30 years For 30 years IBM will pay you 65 plus at the 35th year the principal 1 000 will be paid o Short term bonds a bond maturing one year or less o Long term bonds a bond maturing 1 year or more o Bonds are securities Foreign Exchange o Foreign exchange units of foreign currency o Banks are number one buyers and sellers in the foreign exchange Securitized loans Convert for investors who want to buy foreign assets Convert for firms who wish to purchase foreign goods and services or invest in foreign countries o 30 years ago loans could not be sold in financial markets and only banks issued loans o Government and firms changed that and created markets for loans o Loans now became securities o Securitization the process of converting loans and other financial assets that are not tradable into securities Ex Bank can sell mortgage to government sponsored enterprise or firm Mortgage a loan a borrower uses to buy a home Enterprise and firm will then create a mortgage baked security Mortgage backed security when a mortgage is bundled together with similar mortgages granted by other banks Functions like a bond The bank that originated the original mortgages will still collect interest rates and send payments to agencys or firm that will distribute to the investors Who purchased the mortgage back securities Financial Assets An asset that represents a claim on someone else for a payment A claim for someone to give you money Checking account in BoA because they are required to give you the money in that account Two groups of financial assets Securities o Securities A financial asset that can be bought and sold in a financial market o Tradable o Ex Own a share of stock for Apple you own a security because you can sell your share in stock market o Financial markets places or channels for buying and selling stocks bonds and other securities Ex New York Stock Exchange Those that aren t o You cant sell bank accounts Financial liability a financial claim owed by a person or a firm Loan you get from the bank for a car is a financial asset from the viewpoint of the bank but a financial liability from the viewpoint of the borrower you o Financial Institutions Two channels Banks and other financial intermediaries Financial intermediary a financial firm such as a bank that borrows funds from savers and lends them to borrowers o Funds flow from lenders to borrowers indirectly o Commercial bank a financial firm that serves as a financial intermediary by taking in deposits and using them to make loans Most important financial intermediaries Key role in taking deposits from household and firms and investing most of those deposits by making loans or by buying securities such as bonds or securitized loans Firms rely on borrowing money for short
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