FINANCIAL MARKETS AND INSTITUTIONS

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FINANCIAL MARKETS AND INSTITUTIONS
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FINANCIAL MARKETS INSTITUTIONS
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FINANCIAL MARKETS AND INSTITUTIONS
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  1. WHEN WAS THE FINANCIAL SERVICES MODERNIZATION ACT MADE?
    1999
  2. WHAT PROMPTED THE FINANCIAL SERVICES MODERNIZATION ACT
    THE MERGER OF CITIGROUP AND TRAVELERS INS. GROUP IN 1998

    • PRIOR TO THE ACT COMMERCIAL BANKS CAN ENGAGE IN ONLY LIMITED ACTIVITIES
    • -NO SECURITIES AND INSURANCE COVERAGE
  3. BECAUSE OF THE FINANCIAL SERVICE MODERNIZATION ACT, WHAT WERE SOME OF THE IMPACTS OF THE RECENT MARKET TURMOIL ON THE CONSOLIDATING TREND?
    BANKS LIMIT THE BUSINESS THEY DO

    • NON BANK INSTITUTIONS CONVERT TO BANK HOLDING COMPANIES
    • -I.E. GOLDMAN SACHS AND MORGAN STANLEY
  4. WHAT ARE THE DIFFERENT TYPES OF DEPOSIT ACCOUNTS, AND WHAT ARE THEIR CHARACTERISTICS?
    • TRANSACTION DEPOSITS
    • -DEMAND DEPOSIT ACCOUNT (CHECKING)
    • -(TRADITIONALLY NO INTEREST)

    • NEGOTIABLE ORDER OF WITHDRAWAL (NOW) ACCOUNT (1981)
    • -WITH INTERESTS BUT REQUIRES A LARGER MINIMUM BALANCE
  5. WHAT ARE LONG TERM SOURCES OF FUNDS FOR COMMERCIAL BANKS?
    BONDS ISSUED BY BANKS

    • BANK CAPITAL
    • -PRIMARY CAPITAL
    • -(TIER I) COMMON AND PREFERRED STOCKS, RETAINED EARNINGS

    • SECONDARY CAPITAL (TIER II)
    • -SUBORDINATED NOTES AND BONDS
  6. WHAT DO BANKS NEED TO SATISFY IN ORDER TO COMPETE LONG TERM?
    CERTAIN CAPITAL REQUIREMENTS IN ORDER TO ABSORB LOSSES

    IN THE PAST BANK CAPITAL WAS A PERCENTAGE OF TOTAL ASSETS

    SINCE 1992 BANK CAPITAL WAS A PERCENTAGE OF RISK WEIGHTED ASSETS
  7. WHAT WAS BANK CAPITAL BASED ON IN THE PAST?
    A PERCENTAGE OF TOTAL ASSETS
  8. SINCE 1992 WHAT HAS BANK CAPITAL BEEN BASED ON
    PERCENTAGE OF RISK WEIGHTED ACTIVITIES (LOOK AT SLIDE 16 ON CH.17)
  9. WHAT ARE THE FOUR TYPES OF BUSINESS LOANS?
    WORKING CAPITAL LOANS(CURRENT ASSETS-CURRENT LIABILITIES=WORKING CAPITAL)

    TERM LOANS- USED TO PURCHASE FIXED ASSETS, AND THEY HAVE PROTECTIVE COVENANTS

    INFORMAL LINE OF CREDIT(SUSCEPTIBLE TO HAVING CREDIT LINE CUT)

    REVOLVING CREDIT LOAN- WHETHER YOU BORROW OR NOT, YOU WILL BE CHARGED, (MUCH MORE SAFER) REVOLVING WOULD BE BEST SUITED FOR EMERGENCIES BECAUSE THEY ARE LIQUID.
  10. IVESTMENT IN SECURITIES IS COMPOSED MAINLY OF WHAT?
    • PRIMARILY DEBT SECURITIES
    • -TREASURY SECURITIES
    • -AGENCY SECURITIES
    • -CORPORATE AND MUNICIPAL SECURITIES (INVESTMENT GRADE ONLY)
    • -MORTGAGE BACKED SECURITIES.
  11. WHAT ARE OFF BALANCE SHEET ACTIVITIES?
    • ACTIVITIES THAT DO NOT AFFECT THE BALANCE SHEET RIGHT AWAY, BUT LIKELY IN THE FUTURE.
    • -THEY CREATE CONTINGENT OBLIGATIONS
    • -THESE ACTIVITIES NEED TO BE DISCLOSED NOWADAYS.
  12. WHAT IS A LOAN COMMITMENT?
    • OBLIGATION OF A BANK TO PROVIDE A SPECIFIED LOAN AMOUNT TO A PARTICULAR BUSINESS UPON REQUEST.
    • -NOTE ISSUANCE (NIF) FOR COMMERCIAL PAPERS
  13. WHAT ARE STANDBY LETTERS OF CREDIT?
    BACKS A CUSTOMERS OBLIGATION TO A THIRD PARTY

    BANKS EARN FEE INCOME
  14. WHAT ARE CURRENCY FORWARD CONTRACTS?
    • Agreement between a customer and a bank to
    • exchange one currency for another on a particular future date at a specified
    • exchange rate

    • Allows customers to hedge their
    • exchange-rate risk

    The bank can also serve as an intermediary
  15. WHAT ARE INTEREST RATE SWAP CONTRACTS?
    • Two parties agree to periodically exchange interest payments on a
    • specified notional amount of principal (Fixed rate for floating rate and the reverse)

    • The bank can serve as an intermediary or a guarantor for a fee, or the
    • counterparty in a swap contract
  16. WHAT ARE CREDIT DEFAULT SWAP CONTRACTS?
    • Privately negotiated contracts that protect buyers against the risk of
    • default on debt securities
    • -(Sellers receive periodical fees income, but they will have to cover the losses on the debt
    • securities for the buyers in cases of default –E.g., AIG)

    IN OTHER WORDS, WHEN YOU BUY SOMETHING THAT IS RISKY, BUY INSURANCE TO PROTECT YOURSELF.
  17. WHAT DOES THE DUAL BANKING SYSTEM CONSIST OF?
    • Federal-
    • National bank
    • –Chartered by the Comptroller of the Currency
    • –Members of the Federal Reserve System

    • State
    • State bank
    • -Chartered by state agencies
    • –May be members of the Federal Reserve System
  18. COMMERCIAL BANKS CAN EITHER BE INDEPENDENTLY OWNED OR OWNED BY A _________________
    • BANK HOLDING COMPANY (BHC)
    • -MOST BANKS ARE OWNED BY BHC'S
    • -BHC'S HAVE MORE POTENTIAL FOR PRODUCT DIVERSIFICATION THAN
    • INDEPENDENTLY OWNED BANKS
  19. WHAT ARE THE FORMER AND AND CURRENT INSURANCE RATES FOR THE FDIC?
    • USED TO BE $100,000 PER DEPOSITOR
    • CURRENTLY UP TO $250,000 PER DEPOSITOR THROUGH DECEMBER 31, 2013
  20. WHAT ARE SOME OF THE OUTCOMES FROM THE REGULATION OF INVESTMENT IN SECURITIES?
    • Banks are not allowed to use borrowed or deposited funds to purchase
    • common stocks

    Banks can invest only in investment-grade bonds
  21. WHAT IS THE GLASS-STEAGALL ACT OF 1933?
    • Prevent any firm that accepts deposits from underwriting stocks and
    • bonds of corporations

    • Separated banking and securities activities
    • –To prevent potential conflicts of interest
  22. what are the implications from the financial services moderniazation act of 1999?
    Essentially repealed the Glass-Steagall Act

    • Easier for commercial banks to engage in securities and insurance
    • activities
    • –Increase the degree to which banks can
    • offer securities services
    • –Allow securities firms and insurance
    • companies to acquire banks
  23. what is the implication of off balance sheet transactions?
    • Risk-based capital requirements are higher for banks that conduct more
    • off-balance sheet activities
  24. what can you tell me about the regulation of the accounting process?
    • SARBANES OXLEY ACT OF 2002
    • Make corporate managers, board members, and auditors of public firms
    • more accountable for the accuracy of the financial statement that their
    • respective firms provided.
  25. WHY DO BANKS NEED SUFFICIENT CAPITAL?
    TO ABSORB POTENTIAL OPERATING LOSSES
  26. WHY WOULD BANKS PREFER LOW CAPITAL
    TO BOOST ROE
  27. WHAT IS THE NAME OF THE SYSTEM USED TO MONITOR BANKS?
    THE CAMELS SYSTEM.
  28. WHAT DOES C IN CAMELS STAND FOR, AND WHAT DOES IT MEAN?
    • Capital adequacy
    • -Regulators determine the capital ratio (capital divided by assets) of
    • a bank
  29. WHAT DOES A IN CAMELS STAND FOR AND WHAT DOES IT MEAN?
    Asset quality

    • The FDIC evaluates the quality of a bank’s assets, including its loans and
    • securities

    Capacity Capital

    Collateral Character

    Condition
  30. WHAT DOES M IN CAMELS STAND FOR AND WHAT DOES IT MEAN?
    Management

    • The FDIC specifically rates the bank’s management according to administrative skills, ability to comply with existing regulations, and ability to cope with a changing environment
    • -Also assesses the bank’s internal control systems
  31. WHAT DOES E IN CAMELS STAND FOR AND WHAT DOES IT MEAN?
    Earnings

    • A commonly used profitability ratio to
    • evaluate banks is return on assets (ROA), defined as earnings after taxes
    • divided by assets
    • -Earnings can also be compared to industry earnings
  32. WHAT DOES L IN CAMLES STAND FOR AND WHAT DOES IT MEAN?
    Liquidity

    • Regulators prefer that banks do not consistently rely on outside
    • sources of funds such as the discount window
  33. WHAT DOES S IN CAMELS STAND FOR AND WHAT DOES IT MEAN?
    Sensitivity

    • The degree to which a bank might be exposed to adverse financial market conditions
    • -Much emphasis on a bank’s sensitivity to interest rate movements
  34. WHAT IS THE OVERALL GOAL OF BANK MANAGEMENT?
    • Goal: Maximize shareholder wealth
    • -Managerial decisions may conflict with this goal

    • -Agency problems
    • –The problem that an agent may not behave in the best interests of a principal

    • Agency costs
    • –The costs associated with the existence, prevention, and correction of agency problems
  35. WHAT IS INTEREST RATE RISK? HOW DO YOU MEASURE IT? AND WHAT ARE THE IMPLICATIONS?
    The profitability a bank is highly influenced by interest rate changes

    Net interest margin

    (Interest revenues – interest expenses)/Assets

    REMEMBER NET INTEREST MARGIN IS A PROFITABILITY MEASURE, SO YOU WANT IT TO BE HIGHER!!!! THE HIGHER THE BETTER!!!!!
  36. WHAT IS THE GAP ANALYSIS? AND WHAT IS THE IMPLICATION?
    RATE SENSITIVE ASSETS-RATE SENSITIVE LIABILITIES

    • RATE SENSITIVE DEFINITION- The applicable interest rate is adjusted frequently (as the market
    • interest rate changes)

    IMPLICATION- NEGATIVE FOR MOST BANKS REMEMBER BANKS LIKE LOW INTEREST RATES..... SO WHEN I RATE GOES DOWN, ASSETS GET PAID BUT THEY WILL EVENTUALLY LOWER AND DEPOSITS WILL LOWER. THIS IS A BENEFIT.
  37. WHAT IS DURATION ANALYSIS? AND WHAT IS THE IMPLICATION?
    • Duration
    • -A measure of how sensitive the value of assets (or liabilities) is to interest rate changes
    • -A higher duration means a higher sensitivity
  38. IMPLICATION- FOR MOST BANKS THIS NUMBER IS POSITIVE.
  39. WHAT IS REGRESSION ANALYSIS? AND WHAT IS THE IMPLICATION?
    Analysis of how a bank’s performance is affected by interest rate changes

    • IMPLICATION- USUALLY NEGATIVE
    • REMEMBER, IF I RATE IS HIGH, THEN BANK STOCKS GO DOWN HIGH INTERESTS RATES HURTS BANKS
  40. IN TERMS OF GAP, DURATION AND REGRESSION WHAT ARE THE NEGATIVE/POSITIVE IMPLICATIONS FOR EACH RESPECTIVELY?
    BANKS USUALLY HAVE

    • NEGATIVE GAP
    • POSITIVE DURATION GAP
    • NEGATIVE B2 IN THE REGRESSION ANALYSIS

    RISING INTERESTS RATES HURT BANK PERFORMANCE
  41. HOW DO BANKS REDUCE INTEREST RATE RISK?
    MATURITY MATCHING-(ASSET SIDE AND LIABILITY SIDE MOVE IN SAME DIRECTION)

    USING FLOATING RATE LOANS(BANKS LIKE TO USE THIS WHEN THEY EXPECT INTEREST RATES TO INCREASE)

    • USING INTEREST RATE FUTURES(BOTH FUTURES AND SWAPS ALLOW YOU TO LOCK IN 1 RATE)
    • USING INTEREST RATE SWAPS

    USING INTEREST RATE CAPS( IF YOU HAVE A LOAN, YOU CAN SET UP A CAP TO HOW HIGH THE INTEREST RATE CAN BE)
  42. WHAT IS CREDIT RISK?
    The risk that a debtor may not be able to repay the credit
  43. Should a bank try to minimize its credit risk exposure?

    
    NO!!!!!! BANKS NEED TO KNOW THE LEVEL AT WHICH THEY CAN BEAR RISK
  44. WHAT IS RISK RETURN TRADEOFF?
    TAKE A RISK TO THE AMOUNT YOU CAN TOLERATE
  45. WHAT IS THE TRADEOFF BETWEEN RISK AND RETURN?
    A BANK CANNOT SIMULTAANEOUSLY MAXIMIZE RETURN AND MINIMIZE CREDIT RISK
  46. WHAT DOES A BANK DO SINCE IT CANNOT SIMULATNEOUSLY MAXIMIZE RETURN AND MINIMIZE CREDIT RISK?
    THE BANK ATTEMPTS TO EARN A REASONABLE RETURN AND MAINTAIN CREDIT RISK AT A TOLERABLE LEVEL.(DEPENDS ON INDIVIDUAL BANKS SITUATION)
  47. WHAT IS MARKET RISK?
    • The risk that the value of securities may change due to changes in
    • financial market conditions
    • -As banks pursue new services related to the trading/holding of securities, their exposure to market risk increases
  48. HOW DO YOU MEASURE MARKET RISK?
    THE VALUE AT RISK APPROACH-(VaR)- THE MAXIMUM POSSIBLE LOSS GIVEN A PROBABILITY OR SCENARIO

    REMEMBER!!!! A BANKS MARKET RISK ALSO DEPENDS ON ITS INTEREST RATE RISK EXPOSURE. MOST BANKS ASSESS IONTEREST RATE RISK OVER A RELATIVELY LONG TIME, BUT MARKET RISK ON A SHORTER TERM HORIZON
  49. WHAT IS FINANCIAL LEVERAGE?
    THE EXTENT TO WHICH LIABILITIES ARE USED TO FINANCE ASSETS
  50. DO BANKS HAVE HIGHER OR LOWER FINANCIAL LEVERAGE?
    HIGHER
  51. -MAJORITY OF BANK ASSETS GENERATE PREDICTABLE CASH FLOWS
  52. -BANKS MUST MEET THEIR MINIMUM CAPITAL REQUIREMENTS
    -THE REQUIREMENT FOR A BANK DEPENDS ON ITS RISK
  53. WHAT DOES EXCESSIVE CAPITAL DO FOR THE PROFITABILITY OF SHAREHLDERS?
    IT REDUCES THEIR PROFITABILITY
  54. HOW DO YOU FIND ROE?
    ROE=ROA * EQUITY MULTIPLIER

    • EQUITY MULTIPLIER= ASSETS/EQUITY
    • ROA= NET INCOME/ASSETS
  55. WHAT IS THE TRADEOFF FOR A HIGHER LEVEL OF CAPITAL?
    • BETTER ABILITY TO ABSORB LOSSES
    • LOWER RETURN FOR SHAREHOLDERS
  56. HOW DO BANKS INCREASE CAPITAL?
    • ABSOLUTELY INCREASE CAPITAL:
    • KEEP RETAINED EARNINGS
    • ISSUE NEW STOCKS

    • RELATIVELY:
    • SELL LOANS
    • REDUCE ANY OTHER RISKY ACTIVITIES
  57. WHAT IS A THRIFT/SAVINGS INSTITUTION?
    Depository institutions specializing in mortgage lending

    • -Savings bank
    • –Insured by Bank Insurance Fund (BIF)

    • -Savings and loan associations (S&Ls)
    • –Insured by Savings Association Insurance Fund (SAIF)

    –BIF and SAIF are both administrated by FDIC
  58. WHAT ARE CHARACTERISTICS OF THRIFT OPERATIONS?
    S&Ls are the most common

    SIs are usually small in terms of their assets

    • Savings banks are concentrated in
    • northeastern U.S.

    S&Ls are spread across the country

    SIs are either stock owned or mutual

    Most are stock owned
  59. WHAT ARE USES OF FUNDS FOR THRIFT OPERATIONS?
    • CASH
    • MORTGAGES
    • -PRIMARY USE
    • MORTGAGE BACKED SECURITIES

    • OTHER SECURITIES
    • TREASURY SECURITIES
    • CORPORATE BONDS
  60. WHAT ARE THE RISKS FOR THRIFT OPERATIONS IN TERMS OF LIQUIDITY, CREDIT AND INTEREST RATE?
    • Liquidity risk
    • Relatively high

    • Credit risk
    • Relatively low

    • Interest rate risk
    • Relatively high
  61. WHAT IS A CREDIT UNION?
    • Nonprofit,
    • mutual organizations owned by depositors (members) with common bonds
    • Same university, community, church, ...

    Deposits are called shares, and the interest paid is called dividends

    CU income is not taxed

    Either federally or state chartered
  62. WHAT ARE ADVANTAGES OF CREDIT UNIONS?
    CUs are not taxed

    Affiliation-supported facilities
  63. WHAT ARE DISADVANTAGES OF CREDIT UNIONS?
    Employees may lack incentives

    Limited size and diversification

    Unable to get funds by issuing stocks
  64. IF CU'S NEED FUNDS TEMPORARILY WHERE CAN THEY GO?
    • If CUs need funds temporarily, they can borrow from other credit unions or from the
    • Central Liquidity Facility (CLF)

    CLF acts as a lender for CUs much like the Fed’s discount window for banks

    • CLF is part of a larger system called the Corporate Credit Union Network
    • -Credit union for credit unions
  65. WHO REGULATES AND SUPERVISES CREDIT UNIONS?
    NCUA (NATIONAL CREDIT UNION ASSOCIATION)
  66. WHAT ARE THE CAPITAL REQUIREMENTS OF CREDIT UNIONS?
    CAPITAL RATION OF 8% OF RISK WEIGHTED ASSETS
  67. WHO REGULATES CU DEPOSIT INSURANCE?
    • Deposits are insured by the National Credit Union Share Insurance Fund
    • (NCUSIF, since 1970)
    • ADMINISTERED BY NCUA


    • 90 percent of CUs are insured by NCUSIF (all Federal CU are insured)
    • Used to be up to $100,000 per depositor
    • Currently up to $250,000 per depositor through December 31, 2013
  68. WHAT IS THE EXPOSURE TO LIQUIDITY RISK FOR CU'S?
    • Localized depositors
    • -Can have unanticipated surges of withdrawals

    Relatively high
  69. WHAT IS THE EXPOSURE TO CREDIT RISK FOR CU'S?
    • Concentrate on personal loans to members, Many of whom may be employed by same
    • employer

    Relatively high
  70. WHAT IS THE EXPOSURE TO INTEREST RATE RISK FOR CU'S?
    • More insulated from interest rate risk than banks
    • -Assets (consumer loans) maturities are typically short term, matching the short-term liabilities
    • -The spread between interest revenues and interest expenses has been relatively stable

    Relatively low
  71. WHAT IS A CREDIT UNION SERVICE CENTER?
    • Shared facility (shared branching) by participating CUs (since 1992)
    • -Allow members to make deposits and withdrawals as if it were their own credit union branch

    • As of April 2010
    • -Most CUs participate
    • -4034 service center locations
  72. WHAT ARE FINANCE COMPANIES?
    THEY PROVIDE SHORT AND INTERMEDIATE TERM CREDIT TO CONSUMERS AND SMALL BUSINESSES.
  73. WHAT ARE CONSUMER FINANCE COMPANIES?
    • –Provide financing for customers of retail
    • stores or wholesalers

    Provide direct loans to individuals
  74. WHAT ARE BUSINESS FINANCE COMPANIES?
    –Offer loans to small businesses
  75. WHAT ARE CAPTIVE FINANCE SUBSIDIARIES?
    Wholly owned subsidiary with the primary purpose to finance sales of the parent company’s products and services

    Provide financing to distributors/consumers of the parent company’s products

    Purchase receivables of the parent company
  76. WHAT ARE ADVANTAGES OF CFS?
    Corporations can separate manufacturing and retailing from financing

    Easier and less expensive to analyze each segment of the parent firm

    • Captive establishes credit rating separate from the parent firm
    • –Can get funding on its own
  77. HOW DO CFS COMPARE WITH OTHER FINANCIAL INSTITUTIONS?
    No reserve requirement

    No restrictions on how to obtain funds

    Competitive advantage in retail sales
  78. WHAT IS COMMERCIAL PAPER?
    • A short-term money market source but finance companies can roll over
    • their issues to create a permanent source of funds (INTEREST RATE RISK)

    • Secured commercial paper allows smaller and medium-sized finance
    • companies access to the market
  79. WHAT IS AN EASY TO SECURE A PERSONAL LOAN AND WOULD YOU DO IT?
    USUALLY DONE BY A COSIGNER OR BY REAL PROPERTY, NO DONT CO SIGN.
  80. WHO PROVIDES THOSE 90 DAY SAME AS CASH LOANS THAT YOU SEE AT FURNITURE STORES?
    FINANCIAL INSTITUTIONS
  81. WHAT IS CASH CYCLE?
    THE TIME BETWEEN CASH DISBURSEMENT AND CASH COLLECTION. OFTEN BACKED BY ACCOUNTS OR INVENTORY.
  82. WHAT IS A BUSINESS LOAN?
    LOANS TI FINANCE THE CASH CYCLE OF COMPANIES
  83. WHAT IS A LEVERAGED BUYOUT LOAN?
  84. WHAT IS THE LIQUIDITY RISK FOR FINANCE COMPANIES?
    • Finance companies do not hold assets that can be easily sold
    • -May securitize loans

    • Balance sheet structure does not call for much liquidity because of
    • little deposit outflow

    Relatively low
  85. WHAT IS INTEREST RATE RISK FOR FINANCE COMPANIES?
    Maturities of assets and liabilities typically do not differ much

    • Assets are typically not as sensitive as liabilities to interest rates
    • -Can use adjustable rates and shorter maturities on their loans

    Relatively low
  86. WHAT IS THE CREDIT RISK FOR FINANCE COMPANIES?
    The major risk faced by finance companies

    Loan delinquency rates are typically higher than those of other lending institutions

    High-risk, high-return nature of loans makes performance sensitive to prevailing economic conditions

    Relatively high
  87. WHAT FINANCING SERVICES DOES GMAC PROVIDE?
    • Automotive loans
    • Banking (Ally Bank)
    • Investing
    • Insurance
    • Mortgages
  88. WHAT IS THE HISTORY OF PAYPAL?
    • FOUNDED IN 1998
    • BOUGHT BY EBAY IN 2002

    • MAJOR SERVICES:
    • ONLINE PAYMENT
    • BUYER CREDIT/BILL ME LATER(DONE BY FINANCE COMPANIES)
    • MONEY MARKET FUND
    • DEBIT CARDS
  89. WHAT IS A MUTUAL FUND AND WHAT ARE THE BENEFITS?
    A pool of investments managed by professional managers

    • Benefits
    • -Administration and record keeping
    • -Diversification and divisibility
    • -Professional management
    • -Reduced transaction costs

    -Very popular since 90s
  90. WHAT ARE OPEN ENDED FUNDS?
    Not listed

    Transactions with the fund

    • Number of shares outstanding changes when
    • new shares are sold or old shares are redeemed
  91. WHAT ARE CLOSE ENDED FUNDS?
    Listed on exchanges

    Transactions with other investors

    Fixed number of shares outstanding
  92. WHAT IS NET ASSET VALUE AND WHAT ARE THE IMPLICATIONS FOR OPEN AND CLOSED ENDED FUNDS?
    The value (not necessarily price) of each share in a fund

    MARKET VALUE OF ASSETS-LIABILITIES/NUMBER OF SHARES OUTSTANDING



    For open-end funds, NAV is the price that investors will buy (sell) shares from(to) the fund

    For closed-end funds, share prices are frequently lower than their NAVs The mysterious “closed-end fund discount”
  93. IN INVESTING, WHAT DOES LOAD MEAN?
    IN ORDER TO BUY, PAY ME FIRST
  94. WHAT IS FRONT END AND A BACK END LOAD?
    FRONT END = BUY

    BACK END = SELL

    (BOTH ARE ONE TIME CHARGES)
  95. IF YOU DONT GET CHARGED FRONT END OR BACK END LOADS WHAT WILL YOU GET CHARGED?
    ANNUAL 12B-1 CHARGE
  96. WHAT ARE THE STOCK MUTUAL FUNDS INVESTMENT STYLES?
    Capital appreciation (aggressive growth)-HIGH RISK

    • Growth
    • Growth and income (BOTH OF THESE ARE SAFE)

    Specialty- BASED ON INDUSTRY

    INDEX- DJIA, S&P ETC.

    INTERNATIONAL AND GLOBAL

    • MULTIFUND (FUNDS ON FUNDS) AVOID!!!!!
    • WHY IS THIS BAD? OVERPAYMENT
  97. WHAT ARE ASSET ALLOCATION FUNDS?
    Invest in stocks, bonds, and money market securities

    • The actual composition of a fund is adjusted over time to reflect the
    • portfolio manager’s expectation on the market situation
  98. WHAT IS AN EXCHANGE TRADED FUND?
    Track indexes, Listed on exchanges, Becomes very popular in recent years, Have the characteristics of both open-end funds and closed-end funds

    • Similar to indexed mutual funds
    • Share price reflects changes in an index
    • Pay dividends earned in additional shares
    • Low management fees

    • Similar to closed-end funds
    • Listed with continuous price during the trading hours
    • Transaction costs (broker fees) MARKET ORDER



    Have tax advantages over indexed mutual funds, Unlike closed-end funds, share prices of ETFs do not deviate from their net asset value too much
  99. WHAT IS A REAL ESTATE INVESTMENT TRUST (REIT)
    • A closed-end fund that invests in real estate or mortgages
    • Equity REIT
    • -Invest in properties
    • -Can be used to hedge against inflation

    • Mortgage REIT
    • -Invest in mortgages and construction loans
    • (AVOID WHEN INFLATION IS HIGH!!!!)
  100. WHAT IS A UNIT INVESTMENT TRUST?
    • An investment company that offers a fixed (unmanaged) portfolio of securities as
    • redeemable "units" to investors for a specific period of time
    • -Assembled by a sponsor, e.g., a bank.
    • -Sold through brokers to investors
  101. WHAT IS A VENTURE CAPITAL FUND?
    • Pool of money from wealthy individuals and institutional investors invested in young, growing, and typically privately-held firms
    • -Usually in the form of limited partnership
    • -Exits through IPOs or sales of the firms
    • -High risk and high return
  102. WHAT IS A PRIVATE EQUITY FUND?
    • Pool of money from wealthy individuals and institutional investors aiming at acquiring majority stakes in businesses
    • -Usually in the form of limited partnership
    • -Profit from improved business performance
  103. WHAT IS A HEDGE FUND?
    • Unregulated, not allowed to advertise
    • -Target wealthy individuals and institutions
    • Usually in the form of limited partnership
    • High risk and high return
    • -Use strategies to magnify returns on investment



    • Investment strategies
    • -Along with equity investments
    • -Long/short derivative securities
    • -Sell stocks short
    • -Use borrowed funds
  104. WHAT HAVE RESEARCHERS FOUND OUT ABOUT MUTUAL FUND PERFORMANCE OVER TIME?
    • Researchers have found that, on average, mutual funds did not outperform the market
    • -Raise questions on the ability of fund managers
    • -Mutual funds may still fit investors’ needs by providing diversification and other services
  105. WHAT ARE SOME INVESTMENT BANKING FIRMS?
    • Goldman Sachs, Morgan Stanley
    • -They are now bank holding companies
    • -Some well-known ones including Bear Stearns, Lehman Brothers, and Merrill Lynch, were either bankrupted or acquired
  106. WHAT ARE THE FUNCTIONS OF AN IBF? (INVESTMENT BANKING FIRM)
    Functions of IBFs

    • Originating
    • Registration statement
    • Prospectus
    • Underwriting
    • Distribution
    • Advising
  107. WHAT IS A SYNDICATE?
    A GROUP OF UNDERWRITERS
  108. WHAT IS FIRM COMMITMENT?
    UNDERWRITER BEARS RISK
  109. WHAT IS BEST EFFORTS?
    ISSUER BEARS RISK
  110. TRUE OR FALSE IBF'S CAN ISSUE STOCKS AS WELL AS BONDS
    TRUE
  111. TRUE OR FALSE THE FEES FOR BOND ISSUANCE ARE LOWER THAN THOSE FOR STOCK ISSUANCE?
    TRUE

    • WHY?
    • EASIER TO DISTRIBUTE
    • LESS PRICE UNCERTAINTY
  112. WHAT IS PRIVATE DIRECT INSURANCE
    • An issuer can also choose to place its bonds by itself
    • -Usually smaller issues targeting a few institutional investors
    • –Insurance companies, commercial banks, etc.
    • -Flexible (negotiable) terms on the issues
    • -To avoid the underwriting fees
  113. WHAT IS A LEVERAGED BUYOUT? (BORROW ALOT TO BUY A COMPANY)
    • The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition
    • -The assets of the company being acquired are usually used as collateral for the loans, in addition to the assets of the acquiring company
  114. WHAT ARE ARBITRAGE ACTIVITIES? (BUY CHEAPER ONES, SELL MORE EXPENSIVE ONES)
    Activities of purchasing undervalued assets and reselling them at higher prices

    • -Asset stripping
    • –A firm is acquired and then its individual divisions are sold off by the arbitrager
  115. WHAT IS A MERGER?
    A merger usually involves two firms of similar sizes, resulting in a new larger firm
  116. WHAT IS AN ACQUISITION?
    An acquisition usually has one large acquiring firm and one small target firm. After the acquisition only the large acquiring firm is left
  117. WHAT ARE THE ARBITRAGE ACTIVITY CONSTRAINTS?
    • Uncertainty in asset prices
    • Sources of financing
    • Transaction costs
  118. WHAT IS A FULL SERVICE BROKER?
    • Traditional
    • Executes transactions and provides information and advice
    • -E.g., Merrill Lynch of Bank of America
    • HIGHER TRANSACTIONS COSTS THAN DISCOUNT BROKER!
  119. WHAT IS A DISCOUNT BROKER?
    • Executes transactions only
    • Compete in price (broker commission)
    • Becomes more popular
  120. WHO PERFORMS THE DAY TO DAY REGULATION ON THE SECURITY INDUSTYRY?
    FINRA (FINANCIAL INDUSTRY REGULATORY AUTHORITY)
  121. WHAT DOES THE SECURITIES INVESTOR PROTECTION CORPORATION DO?
    • Provides insurance on cash and securities deposited at brokerage firms
    • -$500,000 total, including $100,000 against cash
    • -SEC-registered brokers are insured
  122. WHAT ARE THE MARKET RISK, INTEREST RATE RISK, CREDIT RATE RISK, AND EXCHANGE RATE RISK FOR SECURITIES OPERATIONS?
    • MARKET RISK BASED ON MARKET CONDITIONS
    • INTEREST RATE RISK BASED ON INTEREST RATE CHANGES
    • CREDIT RISK BASED ON CUSTOMER CREDIT
    • EXCHANGE RATE RISK- THIS BECOMES MORE IMPORTANT AS COMPANIES MOVE TOWARDS GLOBALIZATION.
  123. WHAT IS AN AGENCY PROBLEM?
    THE PROBLEM THAT AN AGENT MAY NOT BEHAVE IN THE BEST INTERESTS OF A PRINCIPAL.
  124. WHAT ARE AGENCY COSTS?
    THE COSTS ASSOCIATED WITH THE ESISTENCE, PREVENTION, AND CORRECTION OF AGENCY PROBLEMS

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