financial markets and institutions – ba 543 thursday bexell 415 12:00 noon to 2:50 p.m. 6:00 p.m....
TRANSCRIPT
Financial Markets and Institutions – BA 543
Thursday Bexell 415
12:00 noon to 2:50 p.m.
6:00 p.m. to 8:50 p.m.
Chapter 2 – Financial Intermediation
Definition of Financial Intermediation Transforming financial assets into more widely
preferred type of asset/liability Example: Car Loan Example: Swap (Bond swap from fixed to floating
rate)
Performed by Financial Institutions Many of these intermediation functions are
completed with large institutions Completed in Financial Markets
Chapter 2 – Financial Intermediation
A closer look at Financial Institutions Types
Banks – Commercial, Investment, Savings and Loans, Credit Unions, etc.
Investment Companies Insurance Companies Others – Pension Funds, Foundations, etc.
Functions Transforming, Exchanging, and Designing
Financial Assets Advising and Managing Financial Assets
Chapter 2 – Financial Intermediation
Direct Investing with Intermediaries Commercial Bank
Direct Deposit – CD – Promised Payment at the end of the Investment Period
Dollars are loaned to a borrower (to buy a car) with a different payment schedule
Indirect Investing with Intermediaries Mutual Fund Company (Investment Company)
Buy mutual fund shares at NAV (no load) Company uses funds to buy stocks and bonds
Chapter 2 – Financial Intermediation
Four Functions of Intermediation Maturity
Borrow in the long, lend in the short Risk Reduction (Diversification)
Eliminate firm specific risk via a portfolio Cost Reduction of Information/Contracting
Share information acquired across large set of individuals
Payment Mechanisms Checks, Credit Cards, Debit Cards, etc.
Chapter 2 – Financial Intermediation
Asset/Liability Management for Financial Institutions Nature of Business – Buy and Sell Money Buy Low, Sell High – Spread
Nature of Liabilities Timing and Amount of Outflow of Cash Table 2-1 Page 19
Liquidity of Claims against Financial Institutions – can obligations be met with current assets of the institution?
Chapter 2 – Financial Intermediation
Growth of Financial Intermediaries through Financial Innovation Market Broadening Instruments – attracts new
investors Zero-Coupon Bonds – TGIRS, LYONS, etc
Risk Management Instruments Options
Arbitrage Instruments – Price Stability Index Assets for direct trade
Motivation? Risk Transfer or Arbitrage
Chapter 2 – Financial Intermediation
Asset Securitization Pledging Cash Flows from a set of borrowers
to the lenders of the funds… Example Mortgage Backed Securities
Ginnie Mae, Sallie Mae, Freddie Mac… Conforming Loans are the security for the Bonds
sold to investors and the payment of the mortgage payment flows to bondholders
Original Lender to Mortgage does not service loans – just pools loans and sells bonds
Costs and Benefits? Implications?
Chapter 2 – Financial Intermediation
End of Chapter Questions #7 – Mutual Funds – Advantages and
Disadvantages for Investor Advantages
Risk Reduction – Portfolio Cost Reduction for information and transactions Record Keeping
Disadvantages Loss of flexibility for individual investor Pay gains annually stock appreciation
Conclusion – Meets the needs of many investors thus the growth…
Chapter 2 – Financial Intermediation
End of Chapter Questions #8 – Volatility Increases Innovation
Greater Volatility means Greater Risk Greater Risk means Benefits of Risk Transfer
Increases Financial Innovation is finding an efficient way to
transfer risk so greater volatility increases the benefits of new ways to transfer risk.
#10 – Asset Securitization and Liquidity Liquidity of Market (instruments have a
secondary market) New Lenders that find “niche” meets their
requirements