Exam 3 Cheat Sheet - Financial Markets and Institutions | FIN 310, Quizzes of Financial Market

Download Exam 3 Cheat Sheet - Financial Markets and Institutions | FIN 310 and more Quizzes Financial Market in PDF only on Docsity! 1. Calculate all aspects of an annuity for TVM 2. Size and scope of all financial institutions and how they relate to US markets a. Read chapter 11, bitch. 3. Relationships between bank assets and liabilities in terms of maturity and liquidity a. Assets: i. Cash, usually less than 10% ii. Other assets such as premises, equipment, other real estate owned, ~10% iii. Loans, the majority, usually ~50% of a bank’s assets 1. Four classes: business or commercial and industrial, commercial and residential real estate loans, individuals loans such as auto and credit card, and all other loans such as international governmental loans iv. Investment securities, ~25%, such as interest bearing deposits purchased from other FIs, fed funds sold to other banks, RPs, treasury securities, municipal securities, MBSs, and other debt and equity securities 1. These are held to generate income and for trading and liquidity management purposes. Usually investment securities held by banks are highly liquid, have low default risk, and can usually be traded in secondary markets. v. Remember; loans generate lots of income, but are illiquid. Investment securities provide liquidity to the firm. Banks need liquidity to guard against runs on the bank. b. Liabilities: i. Deposits 1. Transaction accounts/NOW accounts: checking accounts that may or may not bear interest 2. Retail/household savings account, this is the biggest section of deposit liabilities 3. Time deposits: CDs and such. ~10% a. Can be resold to outside investors in the secondary market ii. Borrowed or other liability funds 1. ~20% fed funds, RPs, notes and bonds c. Liability structure of banks’ balance sheets is shorter term maturity than their asset portfolio. More liquid instruments like deposits and borrowings are used to fund less liquid assets such as loans. This means interest rate risk/maturity mismatch risk and liquidity risk are key exposure concerns for banks. Fo realz. 4. Difference between banks contingent promise and collateral in regards to lending a. What do they do 5. Calculate annual CFs on annuity contract a. See problem 15-1, this is simple TVM. 6. Understand why banks buy certain securities to increase their profits a. See number 3…in depth explaination given there. 7. Calculate an insurance companies Net Profitability a. Calculate combined ratio b. Subtract investment ratio from combined ratio c. Subtract result (operating ratio) from 100% d. This equals overall profitability 8. Calculate Net Asset Value of a Mutual Fund a. Multiply shares owned by market price and divide by shares outstanding 9. Calculate investment banks profitability a. Problem 16-2 b. Primary Market: A market that issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors. c. Secondary Market: A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves 10. Understand relationship between Money Market Fund, Mutual/Equity Fund, Fixed income or bond funds and the flow of funds. a. Where will money go based on economic environment b. Mutual Fund i. Cash flows into MFs are highly correlated with the return on stock markets ii. Growth has also resulted from the rise in retirement funds under management by MFs iii. MFs managed ~ 25% of retirement fund assets in 2010 iv. MFs are the second most important group of FIs as measured by asset size; second only to commercial banks v. Banks’ share of all MF assets was 8% in 2010 vi. Insurance companies managed 7% of MF industry assets in 2010 c. Short Term i. invest in securities with original maturities of less than one year 1. Money Market Mutual Fund – Short Term a. provide an alternative investment to interest-bearing deposits at commercial banks b. bank deposits are relatively less risky, because they are FDIC insured, and generally offer lower returns than MMMFs d. Long Term i. invest in portfolios of securities with original maturities of more than one year 1. Equity Funds – Long Term a. consist of common and preferred stock 2. Bond Funds – Long Term a. consist of fixed-income capital market debt securities 3. Hybrid Funds – Long Term a. consist of both stock and bond securities iv. MFs are the second most important group of FIs as measured by asset size; second only to commercial banks v. Banks’ share of all MF assets was 8% in 2010 vi. Insurance companies managed 7% of MF industry assets in 2010 vii. The MF industry has two sectors viii. short-term funds invest in securities with original maturities of less than one year ix. money market mutual funds x. tax-exempt money market mutual funds xi. long-term funds invest in portfolios of securities with original maturities of more than one year xii. equity funds consist of common and preferred stock xiii. bond funds consist of fixed-income capital market debt securities xiv. hybrid funds consist of both stock and bond securities xv. MF managers must specify their fund’s investment objectives in a prospectus (a formal summary of a proposed investment), which is made available to potential investors xvi. holds lists of the securities invested in by the funds xvii. Mutual funds are required to publish the specific objectives of the fund in the prospectus xviii. No investor should invest in a fund without carefully reading the prospectus xix. The prospectus will contain historical return information, usually for 1-year, 3- year and 5-year periods and perhaps longer xx. The prospectus must also show historical fees and the effect of those fees on a given investment over time xxi. Little information on risk is usually provided xxii. Investor returns from MF ownership reflect three components xxiii. income and dividends on portfolio assets xxiv. capital gains on assets bought and sold at higher prices xxv. capital appreciation on assets held in the fund xxvi. MF assets are marked to market daily xxvii. prices are adjusted daily to reflect changes in the current market prices of the portfolio’s assets xxviii. Then net asset value (NAV) of a MF share is equal to the market value of the assets in the MF portfolio less liabilities divided by the number of shares outstanding xxix. MFs charge investors fees for the services they provide xxx. sales loads xxxi. 12b-1 fees are fees related to the distribution costs of MF shares xxxii. cannot exceed 1% of average annual net assets for load funds xxxiii. cannot exceed 0.25% of average annual net assets for no-load funds xxxiv. MFs may offer different share classes with different combinations of loads xxxv. A load fund is an MF with an up-front sales or commission charge that the investor must pay xxxvi. A no-load fund is an MF that does not charge up-front sales or commission charges on the sale of mutual fund shares to investors xxxvii. MFs are heavily regulated because they manage and invest small investor savings