FINANCIAL MARKETS

Chevalier

Spring 2015

SPEND IT OR SAVE IT You need both in society Saving and capital formation

FINANCIAL ASSETS AND THE FINANCIAL SYSTEM Financial system-transferring money

from savers to borrowers

Circular flow of fundsPage 315

FINANCIAL SYSTEM OVERVIEW

NON-BANK FINANCIAL INTERMEDIARIES Finance companies-makes loans

Life insurance companies-through premiums

Pension funds/mutual funds- sell stock in

itself/money for future

Real estate investment trusts- home construction loans

INVESTMENT STRATEGIES AND FINANCIAL ASSETS Risk/return relationship Investment objectives

Importance of stock brokers in today’s market

Simplicity Consistency (p. 319)

IRA vs. Roth IRAMutual Funds401 K Pension PlanMoney Market (where money is loaned for

one year) Individual trading

MIRACLE OF COMPOUND INTEREST

BONDS Government or firms need to borrow

money for the long term

Coupon rate- stated rate of interestmaturity date- date at which the bond

reaches maturity and can be redeemed for full amount of interest plus principle.

par value (purchase price)Current Yield- % of return paid on

investment

Bond ratings (p. 322)

KINDS OF BONDS CD’s Corporate bonds-taxable income Muni bonds-tax exempt Govt. savings bonds

T-notes-2-10 T-bonds-10-30 T-bills- 13,26,52

EQUITIES,FUTURES,OPTIONS EMH-efficient market hypothesis-

equities of stocks are always priced about right.

Portfolio diversification (stockbroker)

Securities exchanges-NYSEAMEXRegionalGlobalOTC (nasdaq)

MEASUREMENT OF STOCK PERFORMANCE DJIA

Standards and Poor 500 (SPDR’s)

Bull v. Bear market

Options marketCall vs put option (buy vs. sell)

'Trader A' (Put Buyer) purchases a put contract to sell 100 shares of XYZ Corp. to 'Trader B' (Put Writer) for $50/share. The current price is $55/share, and 'Trader A' pays a premium of $5/share. If the price of XYZ stock falls to $40/share right before expiration, then 'Trader A' can exercise the put by buying 100 shares for $4,000 from the stock market, then selling them to 'Trader B' for $5,000.

Buy a call: The buyer expects that the price may go up. The buyer pays a premium that he will never get back. He has the right to exercise the option at the strike price.

Write a call: The writer receives the premium. If the buyer decides to exercise the option, then the writer has to sell the stock at the strike price. If the buyer does not exercise the option, then the writer profits the premium.