Fine 442 Capital Markets

Front 1

Basic Reasons for Financial institutions (8)

Back 1

1. Stocks are not the most important source of external financing for businesses
2. Issuing marketable debt and equity securities is not the primary way in which businesses finance their operations
3. Indirect finance (financial intermediaries) is much more important than direct finance
4. Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses
5. The financial system is among the most heavily regulated sectors of the economy
6. Only large, well-established corporations have easy access to securities markets to finance their activities
7. Collateral is a prevalent feature of debt contracts for both households and businesses
8. Debt contracts typically are extremely complicated legal documents that place substantial restrictions on the behavior of the borrower

Front 2

Financial crises in the developed world (3 stages, 4-1-1 causes)

Back 2

1. Initiation
-Caused by: financial liberalization/innovation, asset bubble, interest rate spikes, increase in uncertainty
-Adverse selection and moral hazard problems worsen
2. Banking crisis
- Economic activity declines
- Banking crisis
- AS + MH
- Economic activity v
3. Debt deflation
- Unanticipated Decline in price level
-AS + MH > Economic activity v

Front 3

Financial crises in emerging markets (3 stages, 4-1-1)

Back 3

1. Initiation of financial crisis
-Mismanagement of liberalization/globalization, severe fiscal imbalances
2. Currency Crisis
-Speculative attack, interest rate dilemma
3. Full-fledged financial crisis
-difficulty for MNCs domestic/abroad

Front 4

Determinants of supply and demand (5/3)

Back 4

Demand: Wealth +, expected interest rate -, expected inflation -, relative risk -, relative liquidity +
Supply: Wealth +, expected inflation +, government deficit +

Front 5

Characteristics of money markets(3)

Back 5

1. Large denominations
2. Low default risk
3. Mature <1 year from original issue

Front 6

Discounting treasury securities

Back 6

i = (F-P)/P*360/n

Front 7

Current yield

Back 7

i = C/P

where C = coupon interest rate
P = price of bond

Front 8

Banking equations (5)

Back 8

ROA = net profit after taxes/assets
ROE = net profit after taxes/equity capital
EM = assets/equity
ROE = ROA x EM
NIM = (interest income - interest expenses)/assets

Front 9

Benefits of mutual funds (5)

Back 9

1. Liquidity intermediation
2. Denomination intermediation
3. Diversification
4. Cost advantages
5. Managerial expertise

Front 10

Modified Duration Gap

Back 10

MDG = MDa - MDL x ((L/A)

Front 11

Styles of Hedge Funds (4)

Back 11

Equity long-short, event driven, directional, relative value

Front 12

Functions of Financial System de Laurent (7)

Back 12

1. Channel funds to those without investment opportunities
2. Reduce asymmetric information
3. Transfer risk to individuals willing to bear it
4. Efficient trading system (prevent trading costs)
5. Pool resources to lil fellas to undertake large investment
6. Provide liquidity
7. Provide information to corps, investors, politicians

Front 13

Basel Tiers

Back 13

Tier I is core capital
(equity, retained earnings)
Tier II is supplementary capital
(subordinated debt, credit risk adusted)

Front 14

reasons for capital (4)

Back 14

1. absorb unanticipated losses
2. Inspire confidence
3. Protect debt holders
4. reduce systemic risk or regulations