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Category: Business and Industry
Date Submitted: 04/09/2013 11:24 AM
Chapter 2: Financial system
>Direct&indirect finance
>function of indirect finance
1.)transaction cost(developing expertise, economies of scale, provide customer with liquidity services)
2.)risk sharing(asset transformation-sell assets with lesser risk to one party in order to buy assets with greater risk from another party>diversification for lender/saver)
3.)asymmetric information (Ch7)
Adverse selection
Moral Hazard
>Structure of financial market
>Debt & equity
>Primary & secondary(broker&dealer)
>Regulatory Agencies
(SEC-stock/bonds,CFTC-Derivative)
>Six types of regulations
1. Restrictions on Entry
2.Disclosure (Report)
3.Restrictions on Assets and Activities
4.Deposit Insurance (FDIC-back up)
5.Limits on Competition
6.Restrictions on Interest Rates
Chapter 3: Fundamental of FM
“price and yield are negatively related!!!!”
Chapter 4: Interest rate change
>Shift of demand curve-bond (AD)
1.Wealth + AD+ (right)
2.E(R)~ (Sum of Prob X R) + AD+
3.Risk ( SD, Variance) + AD- (Left)
4.Liquidity + AD+
5.E(interest rate) + AD-
6.E(inflation) + AD-
7.Risk relative to other asset + AD-
8.Liquidity relative to other As +AD+
>Shift of supply curve-bond (AS)
1.Profitability of investment + AS +
2.E(inflation) + AS+(low borrow cost)
3.Govt deficit + AS+ (T-bond)
>Fisher effect
E(inflation)+
1. E(R)- AD-
2. AS+
P- , i +
>Business expansion
1.Wealth+ AD+
2.investment + AS+
AS>AD , P- i+
>low Japanese interest rate(case)
-inflation AD+ AD-
P+ i-
>Decision rule
Investor: forcast i-, buy long bonds
forcast i+, buy short bonds
Firm: forcast i-, borrow short
Forecast i+, borrow long
Chapter 5: Risk and term structure
>factors affect risk structure of i
1.default risk
Risk premium[i(C)-i(T)]
=how much additional interest can be earned if taking risk bond...