FIN320 Midterm Study Guide （need to complete within 5 hours）

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Money, payments, and the financial system

· 5 categories of financial assets

· Direct vs. indirect finance

o Role of financial markets and institutions

o Flow of funds and returns

· Types of financial intermediaries

· Primary federal regulators: SEC, Fed, FDIC, OCC

o Full names and purpose

· Basic structure and purpose of the Federal Reserve

· 3 key financial services

· Origins of and response to the financial crisis

o Lehman bankruptcy

o Pros and cons of government “safety net”

· Four functions of money

· History of money

o Commodity vs. fiat currency

o Problems of hyperinflation and deflation

o Gold standard and 1971

o Bitcoin and cryptocurrency

· Payments system and ACH

· Money supply and M1, M2

· Money supply, inflation, and quantity theory of money

· CPI and measuring inflation (calculations)

Stock market 

· What is equity? Shares, ownership, dividends

· Primary vs. secondary market

· Exchanges: NYSE and NASDAQ

· U.S. equity indexes: DJIA, S&P500, NASDAQ

o Compare and contrast

o Current level of the Dow

· Provide examples of international equity indexes 

· Bull market, bear market

· Equity pricing 

o One-year equity pricing model (calculations)

o Gordon growth model

o Cost of equity and required rate of return on equity

o Role of risk-free rate

· Rational expectations, efficient markets hypothesis, and the implications

o Prices and fundamental values

· Behavioral finance

Introduction to banking

· Examples of fintech

· Financial system and economic performance

· Information costs and the role of financial intermediaries

· Asymmetric information

o Explain adverse selection

o Explain moral hazard

· How do banks solve adverse selection and moral hazard?

o Relationship banking

o Screening and monitoring

· Draw the basic bank balance sheet

· Key asset and liability of a bank

o Loan making

o Deposit taking (defining characteristic)

· What does a credit analyst do?

· What is a relationship manager?

· T-account for a deposit (calculations)

· ROA, loans, and securities

· Bank profitability and net interest margin

· ROE and leverage (calculations)

· How does a regulatory capital ratio reduce the risk of bank failure?

Interest rates

· Are treasury bonds a risky investment? Why?

· Why charge interest?

· The dual meaning of “discount bond”

· The payments in an amortizing loan

· Bond pricing (calculations)

o Coupon rate

o Yield to maturity and current yield 

o Relationship between bond price and yield

o Par/premium/discount

o Interest rate risk (IRR)

o IRR and bond maturity

· Nominal vs. real interest rates (calculations)

o Actual vs. expected inflation 

· Historical context of period of “low interest rates”

· Recent trends in U.S. interest rates and inflation

· Supply and demand in bond market (draw and use)

o Factors that shift demand

o Factors that shift supply

· Why do interest rates fall in a recession?

· What happens when expected inflation rises?

Risk and term structure

· How is the universe of interest rates related to the risk-free rate?

· The two interest rate premiums

o The “risk premium”

o The “term premium”

· Default risk, default risk premium, and interest rates

· How do you quantify credit risk?

· Credit ratings agencies

o Moody’s, S&P, Fitch

o NRSRO

o Buy side vs. Sell side

· Purpose of credit ratings

· Investment grade and non-investment grade debt

· The different names for non-investment grade debt

· Default risk and shifts in bond demand

o Effect on price and yield

· Risk premium and recessions

· How do you measure the risk premium?

· What other factors determine same-maturity yields?

· Potential conflicts of interest at ratings agencies

· What is the “term premium”? (term structure of interest rates)

· Treasury yield curve

o Examples

o Explanation of slope

o Historical trends

· Sovereign bond market

o Role of central banks and investors

· Expectations theory of the term structure (calculations)

o If given current short and long rate, what is expectation of future short rate?

· Yield curve and the business cycle

· Discussion of the current yield curve

· Should we be worried?