《金融学》（第二版） 课件 （英文） Chapter1-3 Financial Economics、Financial Markets and Institutions、Managing Financial Health

Chapter1:

FinancialEconomicsObjectiveToDefineFinanceTheValueofFinanceIntroductiontothePlayers1Chapter1Contents1.1DefiningFinance1.2WhyStudyFinance1.3FinancialDecisionsofHouseholds1.4FinancialDecisionsofFirms1.5FormsofBusinessOrganization1.6SeparationofOwnershipandManagement1.7TheGoalofManagement1.8MarketDiscipline:Takeovers1.9TheRoleoftheFinancialSpecialistinaCorporation2IntroductionI’msavingforretirement.ShouldIuseabankCD,mutualfund,directstockmarketinvestment?Iwantthatnewcar.ShouldIusesavedcash,lease,borrow?I’mthinkingaboutstartinganewbusinesswillitrewardmeadequately?Thecompanyislookingtoexpandintotelecommunications.howshouldyouadvisetheCFO?ALatinAmericancountryhasaskedformajorprojectfinancingshouldmyorganizationprovidethefunds?31.1DefiningFinanceFinanceisthestudyofhowpeopleallocatescarceresourcesovertimecostsandbenefitsaredistributedovertimebuttheactualtimingandsizeoffuturecashflowsareoftenknownonlyprobabilisticallyUnderstandingfinancehelpsyouevaluatetheseuncertaincashflows4DefiningFinanceWhenimplementingdecisions,peoplemakeuseoftheFinancialSystem

definedasthesetofmarketsandotherinstitutionsusedforfinancialcontractingandexchangeofassetsandrisks5DefiningFinanceFinancialtheoryconsistsof:thesetofconceptsthathelptoorganizeone’sthinkingabouthowtoallocateresourcesovertimethesetofquantitativemodelsusedtohelpevaluatealternatives,makedecisions,andimplementthemTheseconceptsandmodelsapplyatalllevelsandscalesofdecisionmaking6DefiningFinanceAbasictenetoffinanceisthattheexistenceofeconomicorganizations(e.g.firmsandgovernments)facilitatethesatisfactionofpeople’sconsumptionpreferences71.2WhyStudyFinance?TomanageyourpersonalresourcesTodealwiththeworldofbusinessTopursueinterestingandrewardingcareeropportunitiesTomakeinformedpublicchoicesasacitizenTheintellectualchallenge81.3FinancialDecisionsofHouseholdsConsumptionandsavingdecisionsInvestmentDecisionsFinancingDecisionsRisk-managementdecisions9ImportantTermsAssetsPersonalinvesting&AssetallocationLiability,DebtNetWorth=Assets-LiabilitiesExogenousandendogenouselements101.4FinancialDecisionsofFirmsBusinessFirmsentitieswhoseprimaryfunctionistoproducegoodsandservicestheyvarywidelyinsizefrompart-timebusinessesrunfromaspareroom,togiantcorporations(e.g.MitsubishiorGeneralMotors)withhundredsofthousandsofemployees,andanevenlargerownership11FinancialDecisionsofFirmsStrategicplansspecifythebusinessthefirmisinstrategicplansmaychangeradicallyovertimethefirm’sbusinessmaybedefinedintermsofagroupofproducts,technologiesorcustomers12FinancialDecisionsofFirmsTheCapitalBudgetingProcessThepreparationofaplanforacquiringfactories,machinery,researchlaboratories,showrooms,warehouses,andhumanassetstoimplementthestrategicplanThebasicunitofanalysisistheinvestmentproject.Investmentprojectsareidentified,triaged,andimplementedinthecapitalbudgetingprocess13FinancialDecisionsofFirmsTheFinancingProcessOnceanewsetofapprovedprojectshasbeenidentified,itmustbefinancedwithretainedearnings,stock,bonds,etceteraCapitalstructureistheamountofthefirm’smarketvalueallocatedtoeachcategoryofissuedsecurities.ItdeterminesownershipandrisklevelofthefirmsfuturecashflowsCapitalstructure’sunitofanalysisisthefirmasawhole(notaninvestmentproject)14FinancialDecisionsofFirmsThecapitalstructurealsodetermineswhocontrolsthefirmunderdifferentcontingenciesCommonstockholdersusuallydeterminethemembershipoftheboardofdirectorsPreferredstockholdersusuallygainsomecontrolifpreferreddividendsarenotpaidBondholdercovenantsrestrictdecisionsthatcouldadverselyaffectbondvalues15FinancialDecisionsofFirmsWorkingCapitalallfirms(includinghighlyprofitableones)thatdonotpaysufficientattentiontoworkingcapitalmanagementmaybeseriouslydamagedbytheresultinglossofinvestorandcreditorconfidencedelayedininvestmentschedulessub-optimaltemporaryfinanceunscheduledsaleofthefirmsassets161.5FormsofBusinessOperationSoleProprietorshipafirmownedbyanindividualorfamilytheassetsandliabilitiesarethepersonalassetsandliabilitiesoftheproprietorunlimitedliabilitylowadministrativecosts17FormsofBusinessOperationPartnershipAfirmwith³2ownerssharingtheequity.Apartnershipagreementusuallystipulateshowdecisionsandprofits(losses)aresharedGeneralpartners³1(unlimitedliability)Limitedpartners³0(don’tmanagebusiness)Changesinownershipinvolvedissolvingtheoldpartnershipandforminganewone18FormsofBusinessOperationCorporationalegalentity,distinctfromitsownershipmayownproperty,borrow,sue,besued,andenterintolegalcontractsnotdissolvedwhensharesaretransferredshareholderselectdirectors,whoappointmanagementpayscorporatetaxes,resultingindoubletaxationofowner(notsub-chapterSCorp.)limitedliability(corporateveilmaybelifted)191.6SeparationofOwnershipandManagementOwnersdelegatemanagementifagencyconflictshaveacost-effectiveresolutionprofessionalmanagershavespecializedskillsefficienciesofscalediversificationofowner’sportfoliosavingsinthecostofinformationgatheringlearningcurve/goingconcernissues201.7GoalofManagementManagementrule:MaximizethewealthofcurrentshareholdersRuledependsonlyuponproductiontechnology,marketinterestrates,marketriskpremiums,andsecuritypricesAlternativerulesstatedintermsof“profitmaximization”arefraughtwithunresolvedissues,andarebetteravoided211.8MarketDiscipline:Takeovers

Theownershipofacorporationgenerallyiswidelydispersed&indirect(mutualfunds)lacksinternalcommunicationchannelsisoftenill-informedaboutmismanagementisn’twillingtopayfor&organizechangecan’twrestlecontrolfromaunitedself-perpetuatingboardofdirectorsjustsellstockwhendissatisfied,contributingtodownwardsharepricepressures22MarketDiscipline:Takeovers

Inacompetitivemarket,amechanismthatreducesmismanagementisthecorporatetake-over.Example:acustomer,supplier,competitor,orprofessionalraidergainsspecializedknowledgeofthemismanagementtheraiderpurchasesacontrollinginterestinthestock,andinstallsnewmanagementThevalueofthestockrises,andtheraiderliquidatesownershipataprofit231.9TheRolesofFinancialSpecialistinaCorporationFinancialexecutive--apersonwithauthorityinthefollowingfunctions:24ChiefExecutiveOfficerTheCEOistypicallythepresidentreportstotheboardofdirectors25ChiefFinancialOfficerTheCFOhasresponsibilityforallfinancialfunctionsinthecompany26TreasurerThetreasurerisresponsibleformanagingthefinancialactivitiesofthefirmandforworkingcapitalrelationshipswithinvestingcommunitymanagingcurrencyandinterestraterisksmanagingthetaxdepartment27VPFinancialPlanningTheVPFinancialPlanninganalyzesmajorcapitalexpendituresnewbusinessventuresexitingexistingbusinessesmergers,acquisitions,andspin-offs28Comptroller/ControllerTheComptrolleroversees:financial,managerial&costaccountingauditingpreparesinternalreportscomparingplannedwithactualcostspreparesfinancialstatementsusedbyshareholders,creditors,andregulators29FinancialFunctionsinaCorporation:PlanningProvisionofCapitalAdministrationofFundsAccountingandControlProtectionofAssetsTaxAdministrationInvestorRelationsEvaluationandConsultingManagementInformationSystems30Planninglongandshort-termfinancialplanningbudgetingforcapitalexpendituresbudgetingforoperationssalesforecastingperformanceevaluationpricingpolicieseconomicappraisalsanalysisofacquisitionsanddivestments31ProvisionofCapitalestablishmentandexecutionofprogramsfortheprovisionofcapitalrequiredbythebusiness32AdministrationofFundsmanagementofcashmaintenanceofbankingarrangementsreceipt,custody,anddisbursementofthecompany’smoniesandsecuritiescreditandcollectionmanagementmanagementofpensionfundsmanagementofinvestmentscustodialresponsibilities33AccountingandControlestablishmentofaccountingpoliciesdevelopment&reportingofaccountingdatacoststandardsinternalauditingsystemsandprocedures(accounting)governmentreportingreporting&interpretingoperationsresultscomparingperformancewithoperatingplansandstandards34ProtectionofAssetsprovisionofnecessaryinsurancecoverageassureprotectionofbusinessassets,andlossprevention,throughinternalcontrolsandinternalauditsrealestatemanagement35TaxAdministrationestablishmentandadministrationoftaxpoliciesandproceduresregulationwithtaxingagenciespreparationoftaxreportstaxplanning36InvestorRelationsestablishmentandmaintenanceofliaisonwiththeinvestmentcommunityestablishmentandmaintenanceofcommunicationswithcompanystockholderscounselingwithanalysts--publicfinancialinformation37EvaluationandConsultingconsultationwith,andadviseto,othercorporateexecutivesoncompanypolicy,operations,objectives,andeffectivenessthereof38ManagementInformationSystemsdevelopmentanduseofelectronicdataprocessingfacilitiesdevelopmentanduseofmanagementinformationsystemsdevelopmentanduseofsystemsandprocedures39Chapter2:

FinancialMarketsand InstitutionsObjectiveUnderstandingtheworkingsofthefinancialsystemDeterminingratesofreturn40Chapter2Contents2.1WhatisaFinancialSystem?2.2TheFlowofFunds2.3TheFunctionalPerspective2.4FinancialInnovation&the“InvisibleHand”2.5FinancialMarkets2.6FinancialMarketRates2.7FinancialIntermediaries2.8FinancialInfrastructureandRegulation2.9Governmental&Quasi-GovernmentalOrganizations41TheFinancialSystemFinancialdecisionsaremadewithinthecontextofafinancialsystemThefinancialsystembothconstrainsandenablesthedecisionmakerThischapterprovidesaframeworkforunderstandinghowfinancialsystemswork422.1WhatistheFinancialSystem?AFinancialSystemiscomprisedofmarkets,intermediaries,servicefirmsandotherinstitutionsusedtocarryoutthefinancialdecisionsofhouseholds,businessfirms,andgovernments43GeographyoftheMarketssomemarketsforaparticularmarketinstrumentmayhaveawelldefinedgeographiclocationsuchastheNewYorkStockExchangeortheOsakaOptionsandFuturesExchangeothermarketinstrumentsaretradedonover-the-counteroroff-exchangemarketsforbonds,stocks,andforeignexchange44ContractualJurisdictionsThejurisdictiongoverningatradeneedstobeclearlyestablishedbeforemakingsignificantinvestments,particularlywhentradingoveracomputernetworkJurisdictionalconflictsaretoofrequent,andhavesignificanteconomicconsequencesbecauselegalprinciplesvarysignificantlybetweenjurisdictions452.2TheFlowofFundsFundsmayflowfromthesurplusunittothedeficitunitDirectlyThroughmarketsThroughintermediaries46FinancialIntermediaryafirmwhoseprimarybusinessistoprovidefinancialservicesandfinancialproductsExamples:bank(checkingaccounts,loans,CDs…)investmentcompany(mutualfunds…)insurancecompany(termlifeinsurance…)47TheFlowofFundsDiagramMarketsIntermediariesSurplusUnitsDeficitUnits48TheFlowofFundsDiagramWeshallexaminevariouspathwaysfromthesurplusunittothedeficitunit49FundFlowsviaMarketAhouseholdwithsurplusfundsinveststhemingovernmentbonds50FundFlowsviaMarketMarketsIntermediariesSurplusUnitsDeficitUnits51FundFlowsviaIntermediaryHoldersofsurplusfundsmayuseanintermediary,suchasabank,toinvestthem.Thebankreceivesthesurplusfunds,sayas90-daydeposits,andaddsthemtothebank’sassets(creatingabankliability).Moneyisfungible,sothecorrespondingloancannotbeidentified52FundFlowsviaIntermediaryMarketsIntermediariesSurplusUnitsDeficitUnits53FundFlowsviaIntermediaryandMarketSometimestheintermediaryitselfhassurplusfunds,andinveststheminthemarketoranotherintermediaryAbankthatborrowsandinvestsinthemoneymarketcanincreaseitsflexibility,reduceitsrisks,andturnaprofitEventually,thesurplusfundsareconsumedbyadeficitunit54FundFlowsviaIntermediaryandMarketMarketsIntermediariesSurplusUnitsDeficitUnits55FundFlowviaMarketsandIntermediariesIntermediariessuchasGeneralMotorsAcceptanceCorporationissuecommercialpapertofinancecarloansandleasesmadetohouseholdsneedingacarInthiscase,thepaperhasashortermaturitythantheloan,leadingtoarisk56FundsFlowviaMarketsandIntermediaries

MarketsIntermediariesSurplusUnitsDeficitUnits57FundsFlow:DisintermediationSometimesthecostofusingmarketsandintermediariescannotbejustified,andsurplusunitsanddeficitunitscontractdirectlyatitsdiscretion,thedeficitunitmayrepurchasecontractsbeforetheirmaturity,(ataproperdiscount),toavoiddisruptingsecondarymarkets,andtoaddliquidity58FundsFlow:DisintermediationMarketsIntermediariesSurplusUnitsDeficitUnitsMarketsIntermediariesSurplusUnitsDeficitUnits59FundsFlow:SecuredCreditPoorcreditriskssometimesreceivecreditcardapplicationsfrombanksofferinga$1,000creditlimit,if$1,000isdepositedintoasavingsaccountascollateral19.56%ischargedonthecardbalance,while3.5%ispaidondeposits.Ahighannualfeeisalsocharged60FundsFlow:SecuredCreditMarketsIntermediariesSurplusUnitsDeficitUnitsPoorCreditRisk612.3FunctionalPerspectiveAU.S.bankstodaydiffersfroma1928U.S.bank,andaSaudibanktoday.AcreditunionintheU.S.todaysharesmanyofthesamefunctionsasaU.S.bankAnalyzinginstitutionsfromafunctionalperspectivehelpsustounderstandwhyinstitutionsdifferovertimeandjurisdiction62SixKeyFinancialFunctions:TransferringResourcesAcrossTime&SpaceManagingRiskClearingandSettlingPaymentsPoolingResourcesandSubdividingSharesProvidingInformationDealingwithIncentiveProblems63TransferringResourcesAcrossTimeandSpaceAfinancialsystemprovideswaystotransfereconomicresourcesthroughtime,acrossgeographicregions,andamongstindustries64TransferringResourcesAcrossTimeandSpace(Illustration)ADutchhouseholdcurrentlyhasexcessfundsneededintenyearsAChinesebusinesswouldbecomemoreprofitablewithnewinvestmentfundsFinancialmarketsmakethismatch65ManagingRiskAfinancialsystemprovideswaystomanageRisk66ManagingRisk

Futureflowshaveassociatedrisks.Likeflows,risksmaybeunbundleandrepackagedbyafinancialsystemusingportfolios,financialderivatives,andguaranteesManyfinancialcontractstargetrisksratherthanflows67ManagingRisk

Afundmanagermayincreasesrisk(andexpectedreturns)ofafundbyissuingbondssecuredagainstthefundsassets,writingputoptions,buyingcalloptions,andgoing“long”marketindexfuturesAnotherfundmanagermaydecreaseriskbyinvestinginthemoneymarket,putoptions,andshortindexfutures68ClearingandSettlingPaymentsAfinancialsystemprovideswaysofclearingandsettlingpaymentstofacilitatetheexchangeofgoods,services,andassets69ClearingandSettlingPaymentsBarter(Levijeans,oldstamps&coins)Gold(requirespurityassay,heavy)Papermoney(restrictedgeographically)Creditcards(notuniversallyaccepted)Personal,cashier'sortraveler’schecks(acceptabilityvaries,denomination)70PoolingResourcesandDividingOwnershipinLargeAssetsAfinancialsystemprovidesamechanismforthepoolingoffundstoundertakelarge-scaleindivisibleenterpriseorforthesubdividingofsharesinlargeenterpriseswithmanyowners71PoolingResourcesandDividingOwnershipinLargeAssetsT-billshaveaminimumfacevalueof$10,000,buthaveverylowrisk(Solution:moneymarketmutualfund)Developingapromisingtechnologywouldexposeasinglefirmtotoomuchcapitalrisk(Solution:jointventure)Ahouseholdwishestodivestitselfofitsownershipinachainofrestaurants(Solution:Formacorporation,andsellitsstock72ProvidingInformationAfinancialsystemprovidespriceinformationthathelpscoordinatedecentralizeddecision-makinginvarioussectorsoftheeconomy73ProvidingInformationInvestorsneedcurrentpricestoevaluatetheirportfoliosofquotedsecuritiesQuotedpricesmaybeusedtoestimatethevalueofsimilarnon-quotedsecuritiesOptionpricesmaybeusedtodeterminethemarket’sassessmentofastock’srisk74FamilyLoans:AdvantagesFavorableinformationaboutyouthat’savailabletoyourfamilymaynotbeavailabletocommerciallendersThisaberrationleadstoanopportunityYoumaybeabletoobtainafamilyloanatalowerinterestrateYourfamilymembermaymakeahigherreturnonasimilarrisk75FamilyLoans:DisadvantagesFamilyloanstendtobehardertocollect,becausecollectionmaythreatenfamilytiesFamilymembersareoftennaivewhenevaluatingthecreditriskoflovedonesCommerciallyavailableinvestmentsareliquid,andoffermoreappropriatecashflowsandrisk-rewardtradeoffsThefamilylenderisexposedtoindividualriskthatisdiversifiedaway(withoutsignificantcost)inacommercialinvestment76DealingwithIncentiveProblemsAfinancialsystemprovideswaystodealwiththeincentiveproblemsthatoccurwhenonepartytoafinancialtransactionhasinformationthattheotherpartydoesnot,orwhenonepartyisanagentandmakesdecisionsforanother77MoralHazardAsituationinwhichhavinginsuranceagainstsomeriskcausestheinsuredpartytotakegreaterriskortotakelesscareinpreventingtheeventthatgivesrisetotheloss.78Moral-HazardAdamentersintoaninsurancecontractwithCarmel.AdampaysCarmelapremiumof$10,000.CamelwillreimburseAdam’scostsshouldafiredamagehisbusinessduringthenextyear,butpaynothingotherwise.Adambelieveshecanreducetheprobabilityoffirebyinstallingacheapsprinkler.Withoutthecontracthewouldcertainlyinstalltheunit,buthegainsnothingbyinstallingtheunitwiththeinsurancecontractinforce.Adamisexposedtoamoralhazard.AdamisnowtakinglesscareofhisassetsnowthatCarmelhasassumedtheriskoftheirloss79AdverseSelectionAtypeofincentiveprobleminwhichthosewhopurchaseinsuranceagainstriskaremorelikelytobeatriskthanthegeneralpopulation.80AdverseSelectionCarmelhasidentified100businessesthatfallintothecategoryofhavingafloodonaverageonceevery200-years.Basedonthisestimate,Carmelsetsapremiumbasedon1%oftheinsuredamount.Adam’sbusinessisoneofthe100,andheacceptsthecontractbelievingthathisbusinesspremisesaresubjecttofloodaboutevery50-years.Dillip’sbusinessisanotherofthe100,buthedoesnotacceptthecontractbecausehebelievesthatthereisalmostnochanceofflooddamaginghisbusiness81Principal-AgentProblemAsituationarisingwhenagentsdonotmakethesamedecisionsthattheprincipalswouldhavemadeiftheprincipalsknewwhattheagentsknewandweremakingthedecisionsthemselves.82Principal-AgentProblemsAdamisthereal-estateagentmarketingCarmel’shousethat’sworth$200,000fora6%commissionAdam’sagencyhasamultiple-listingagreementwithotheragencies,wherebylistingagentsreceive2.5%,andsellingagentsreceive3.5%Bernadettewishestobuythehomeforonly90%ofitsmarketvalue,$180,000.AdamurgesCarmeltoaccepttheoffer.Why?theagencywillreceiveonly$5,000ifitissoldbyanotheragencyatfullvaluetheagencymakes$10,800ifAdamcanpersuadeCarmeltosellatthelowerprice83InsureandBurnAbusinesshasawarehousefullofunfashionableclothesTheownerarrangesforinsuranceatabovetruemarketvalueforthewarehouse,itscontent,andlossofbusinessAfireisthensettocollecttheinsurance84InsureandBurn:SolutionsMoralriskincreaseswith[marketvalue-insuredvalue],so:understandthebusinessofinsuredcompaniesinsisttheinsuredassumessomeriskoflossavoid“unlucky”ownerswithdubiousmoralitygainareputationforaggressiveforensicinvestigationsrequiretheuseofmodernsurveillance,detectionandprotectiveequipment85InsureandBurn:Consequences

Insurancebecomesover-priced,giventherisks,leadingtoreduceduseInsurancecompaniesareexposedtomoreclaimsduringrecessionsTheeconomylosesassetsthatitwouldhavehadAbarriertoentryiscreatedfornew(honest)businessesthatlackaclaimstrack-recordIncreasedadministrativecostsLongerverificationdelayswhensettlingclaims86SmallBusinessAsasmallbusinessowner,yourlevelofeffortmaydependonthesourceofborrowingIfmoneywasborrowedfromafriend,ratherthanabank,youmayworkharder.ItishardtoletdownafriendIfthemoneywasborrowedfromabank,ratherthanafriend,youmayworkharder.BanksarelessforgivingthanfriendsIfyourbehaviordependsuponthesourceofaloan,thenyouarethevictimofmoralhazard87AdverseSelectionYouhaveapaininyourchest,obtainlifeinsurance,andthenvisityourdoctorTheinsurancecompanyhasfraudulentlyassumedahighriskKnowingthatyouwilldiesoon,youwon’tnowpurchasethatlifeannuity,leadingtoanon-fraudulentadverseselectionAsymmetricalinformationhasresultedinadverseselectionInsurancecompaniesadjusttheirpremiumsforadverseselection88AdverseSelectionSomeinsurancecompaniesexploitrulesdesignedtoprotectthemagainstfraudulentadverseselectionYouvisitthedoctorwiththeusualspectrumofmedicalcomplaints,thedoctortakesnotes,andneitherofyouareconcernedYouobtain$1,000,000inlifeinsuranceingoodfaithLater,acarmountsthesidewalk,killingyouTheinsurancecompanyrefusestopayyourestate,claimingapreexistingconditionfoundinyourrecordsthatwouldhavecausedthemtorefusetherisk89Principal-AgentProblemYourarestilldead.Yourspousedials:1-555-SUE-THEM,andagreestothelawyer’s33.33%contingencyTheinsurancecompanyofferstosettlethe$1,000,000claimfor$300,000Acceptanceoftheofferearnsthelawyerarisk-less$100,000fortwohoursworkRejectingtheofferleadstohigherriskandexpectedreward,butattheexpenseofconsiderabletrialpreparationThelawyeradviseshervulnerableclienttosettleSomeinsurancecompanies“size”theirsettlementtobeattractiveprimarilytothelawyer,whowillthen“sell”ittotheirclient90Principal-AgentExamplesAnemployeeselectsanairline,hotelorcarrentalcompanytoobtainfreeflightmileageforpersonaluseThedecisionhasbeenmadeininterestoftheemployee,ratherthanthecompanyThecompanymaylosetime,orpayahigherpriceforservice91Principal-AgentExamplesAsuppliergivesgiftstoitscustomers’employeeshavinginfluenceoverpurchasedecisionsTraditionally,thesegiftsincludeCaribbeansweepstakes,giftvouchers,entertainment,andoutrightbribesThesupplierisattemptingtosubvertemployeeloyaltybycreatinganprincipal-agentconflictInsomeindustriesthereisatradition,toleratedbyhighermanagement,ofaccepting“adultentertainment”fromsuppliersInadditiontoperpetuatinganprincipal-agentconflict,bothcompaniesexposethemselvestolargesexualdiscriminationsuitsfromfemalebuyersandsalespeople922.4FinancialInnovation&the“InvisibleHand”Financialinnovationoccursspontaneouslyfromtheindividualactionsofentrepreneursandfirms,andnotfromtheactionsofacentralauthority.Example:Creditcards932.5FinancialMarkets:ByBasicFinancialAssetsDebt(Alsocalledfixedincomesecurities,BondsandLoans)FixedIncomeInstrumentspromisingfixedfuturepaymentsEquities(CommonStock/Shares)Residualclaimonassets.LimitedliabilityDerivatives(Options,Forwards,Futures)Securitiesthatderivetheirvaluefromothersecurities94Markets:ByMaturityMoneyMarketMostlydebtinstrumentsissuedbygovernmentsandsecurelargecorporationsHighlyliquid:QuicklyconvertibletocashGloballyintegratedCapitalMarketEquities,anddebtinstrumentswithalifegreaterthanayear952.6FinancialMarketRates

InterestratesExchangeratesStock-marketindicators96FinancialMarketRatesInterestRatesThePromisedrateofreturn.Examples:MortgagerateCommercialRateDependupon:UnitofaccountMaturityDefaultRisk97UnitofAccountThemediuminwhichthepaymentsaredenominatedUsuallyacurrency,butmaybeacommoditysuchasgold,silver,astandard“basket”ofgoodsandservices98Exchange-RateRiskonT-BillsAbondissuedbyacentralgovernmentisrisk-freeonlyinthatcountryThebond’sreturninaforeigninvestor’scurrencyisuncertainbecauseexchangeratesfluctuate,andfuturecashflowsaredenominatedinthedomesticcountry’sunitofaccount99OtherRisksonT-BillsT-Billsaredefault-free,butnotrisk-lessYouobservethatthe12-monthT-Billhasahigheryieldthanthe6-monthT-Bill.YouplantotakeadvantageofthisbybuyingaT-Billwithamaturityof12months,andplantosellitafter6monthstopaycollegefees.Interestratefluctuationsresultinaslightlyhigher(orlower)thanexpectedcapitalreturnOccasionally,the3-monthratemaybehigherthanthe6-monthrate,butrolling-overa3-monthbillresultsinrisk,tooEvena6-monthbillisnotrisk-lesstoyouifinflationisuncertain.Thiscollegemayincreasefeesby20%100Example:ExchangeRateRiskSuppose:YouareaJapaneseInvestorwishingtomakea1-yearinvestmentCurrentexchangerate(Spot)of150Japaneseyen/poundsterlingJapanesebondsyield3%Britishbondsyield9%Investment15,000¥Crystalball:Spot1-yearfromnow140¥/£

101ExchangeRateExample15000¥15260¥15450¥£100£109Time3%¥/¥(direct)1.73%¥/£/£/¥150¥/£9%£/£140¥/£JapanU.K.102ExchangeRateExampleThe