Chevalier Spring 2015. You need both in society Saving and capital formation.
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Transcript of Chevalier Spring 2015. You need both in society Saving and capital formation.
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.