Application of Concepts/Time Value of Money, APA Format 400 to 600 words. All required files attached.
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Chapter6-PowerPoint-Notes.pptFinance 3rd Edition Cornett, Adair, and Nofsinger
6
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Understanding
Financial Markets
and Institutions
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Financial Markets
Manage flow of funds
Two major market dimensions
Primary versus secondary markets
Money versus capital markets
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Primary Markets
Used by corporations and governments
Used to issue new financial instruments
Stocks
Bonds
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Primary Market Transfer of Funds
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Secondary Markets
Benefit investors and issuers
Securities traded after issue
Provide liquidity and diversification benefits for investors
Security valuation information for issuers
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Secondary Market Transfer of Funds
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Money Markets vs. Capital Markets
Money markets trade debt securities or instruments with maturities of one year or less
Capital markets trade stocks and long-term debt with maturities greater than one year
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Money Market vs. Capital Market Maturities
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Other Markets
Foreign Exchange Markets
Trade currency for immediate delivery (spot) or for some future delivery
Subject to foreign exchange risk due to currency fluctuations
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Other Markets
Derivatives
Highly leveraged financial securities linked to underlying security
Potentially high-risk
Used for hedging and speculating
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Financial Institutions
Banks
Thrifts
Insurance companies
Mutual funds
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Financial Institutions
Perform economic functions
Monitor costs
Provide liquidity
Price risk
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Funds Flow with Financial Institutions
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Interest Rates
Affected by economic conditions
Nominal rate quoted most often
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Nominal Interest
Factors that affect rate
Inflation
Real interest rate
Default and liquidity risk
Provisions of security issuer
Time to maturity
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Inflation
Percentage increase in cost of goods or services over given period of time
Actual or Expected inflation rate
Interest rates increase in response to inflation
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Inflation
Annual inflation calculation using Consumer Price Index (CPI)
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Nominal Rates vs. Inflation
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Default or Credit Risk
Risk that issuer fails to pay promised interest and principal
Investors demand higher interest with higher default risk
U.S. Treasury securities are generally considered to be free of default risk
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Default Risk Premium Calculation
DRPj = ijt - iTt
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Corporate Bond Default Risk Premiums
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Three Yield-Curve Theories
Unbiased Expectations
Liquidity Premium
Market Segmentation
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Unbiased Expectation Yield Curves
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Forecasting Interest Rates
As interest rates rise, investment portfolios values fall
Forecasts important to corporate and individual financial wealth
