FIN550: Financial Markets & Institutions

Transcription

1 FIN550: Financial Markets & Credit Hours: 3 Contact Hours: This is a 3-credit course, offered in accelerated format. This means that 16 weeks of material is covered in 8 weeks. The exact number of hours per week that you can expect to spend on each course will vary based upon the weekly coursework, as well as your study style and preferences. You should plan to spend hours per week in each course reading material, interacting on the discussion boards, writing papers, completing projects, and doing research. Faculty Information Name: Phone: CSU-GC Virtual Office Hours: Course Description and Outcomes This course presents an overview of the roles played by the various markets, institutions and financial authorities. Specific topics include an introduction the U.S. Financial system; the supply of and demand for loan funds; securities and obligations. Emphasis is placed upon policy effects of financial institutions and markets upon various sectors of the economy. Course Learning Outcomes: 1. Describe the operations, mechanics, and structure of US and global financial system. 2. Discuss how various activities, markets, institutions, and regulations contribute to achieving the overall objective of a financial system. 3. Explain the roles and functions of the Federal Reserve. 4. Describe the core concepts of financial markets, financial instruments, and financial institutions, as well as their roles on investment, finance, and valuation. 5. Identify types of risk faced by financial institutions. Participation & Attendance Prompt and consistent attendance in your online courses is essential for your success at CSU-Global Campus. Failure to verify your attendance within the first 7 days of this course may result in your withdrawal. If for some reason you would like to drop a course, please contact your advisor.

2 Online classes have deadlines, assignments, and participation requirements just like on-campus classes. Budget your time carefully and keep an open line of communication with your instructor. If you are having technical problems, problems with your assignments, or other problems that are impeding your progress, let your instructor know as soon as possible. Course Materials Required: Saunders, A. & Cornett, M.M. (2012). Financial markets and institutions (5th Ed.). New York, NY: McGraw Hill Irwin. ISBN13: Recommended: Board of Governors of the Federal Reserve System. (2005). The federal reserve system purposes & functions [electronic book]. Washington, D.C. Retrieved from Cohen, H. (2012). Preventing the fire next time: Too big to fail. Texas Law Review, 90(7), Nishimura, K. G. (2010). Financial system stability and market confidence. Asian Economic Papers, 9(1), Course Schedule Due Dates The Academic Week at CSU-Global begins on Monday and ends the following Sunday. Discussion Boards: The original post must be completed by Thursday at 12 midnight MT and Peer Responses posted by Sunday 12 midnight MT. Late posts may not be awarded points. Mastery Exercises: Students may access and retake mastery exercises through the last day of class until they achieve the scores they desire. Critical Thinking Activities: Assignments are due Sunday at 12 midnight MT. Week # Readings Assignments 1 Chapter 1 and Appendix 1A in Financial Markets and Critical Thinking (50 points) Chapter 2 in Financial Markets and Critical Thinking (70 points) Chapter 4 in Financial Markets and Critical Thinking (60 points) Chapters 5, 6 & 7 in Financial Markets and Chapters 8, 9 & 10 in Financial Markets and Critical Thinking (75 points) Critical Thinking (60 points)

3 6 7 8 Chapters 11, 12 & 13 in Financial Markets and Chapters 14, 15 & 16 in Financial Markets and Chapters 17, 18 & 19 in Financial Markets and Critical Thinking (75 points) Critical Thinking (60 points) Portfolio (350 points) Assignment Details This course includes the following assignments/projects: Module 1 Critical Thinking: Financial Markets and Financial Crisis (50 points) 1. Assume you are a financial manager of a Fortune 500 company. Your firm is planning to expand into new markets; hence, you need to borrow $100 million within the next year. Answer the following questions in detail: a. Describe the ways you can borrow the $100 million. b. If you decide to issue debt securities, describe the types of financial institutions that may purchase these securities. c. Discuss how individuals indirectly provide the financing for your firm when they maintain deposits at depository institutions, invest in mutual funds, purchase insurance policies, or invest in pensions. 2. Financial institutions are subject to regulations to curb excessive risk taking and ensure smooth flow of funds through financial markets. For obvious reasons, during the financial crisis, many individuals were hesitant about using financial institutions for financial transactions. Why do you believe existing regulations were ineffective at ensuring a safe financial system? Complete your 1-3 page response using Microsoft Word. Your well-written paper should be supported with credible sources and formatted according to CSU-Global APA guidelines, with any sources properly cited. Module 2 Critical Thinking: Interest Rates and Time Value of Money (70 points) 1. A security s equilibrium rate of return is 7 percent. For all securities, the inflation risk premium is 1.65 percent and the real interest rate is 3.25 percent. The security s liquidity risk premium is.25 percent and maturity risk premium is.75 percent. The security has no special covenants. Calculate the security s default risk premium. 2. You are considering an investment in 30-year bonds issued by Envision Corporation. The bonds have no special covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Envision Corporation bonds: Real interest rate is 2.20% Default risk premium is 1.00% Liquidity risk premium is 0.50% Maturity risk premium is 1.75% a. What is the inflation premium? b. What is the fair interest rate on Moore Corporation 30-year bonds? 3. One-year Treasury bills currently earn 3.25 percent. You expect that one year from now, one-year Treasury bill rates will increase to 3.55 percent. If the unbiased expectations theory is correct, what should the current rate be on two-year Treasury securities? 4. Suppose we observe the following rates: 1 R 1 =.10, 1 R 2 =.16, and E ( 2 r 1 ) =.10. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2?

4 5. Assume you received $8,000 five years from today. Calculate the present value of the $8,000 if your investments pay a. 6 percent compounded annually b. 8 percent compounded annually c. 10 percent compounded annually d. 10 percent compounded semiannually e. 10 percent compounded quarterly Discuss your answer. Specifically, what do your answers to these questions tell you about the relation between present values and interest rates and between present values and the number of compounding periods per year? 6. Assume you received $8,000 today. Calculate the future value in five years of the $8,000 if your investments pay a. 6 percent compounded annually b. 8 percent compounded annually c. 10 percent compounded annually d. 10 percent compounded semiannually e. 10 percent compounded quarterly Discuss your answer. Specifically, what do your answers to these questions tell you about the relation between future values and interest rates and between future values and the number of compounding periods per year? 7. Assume you just retired and you have accumulated $900,000 in your retirement account. You opted to receive annual payment of $60,000 for the next 30 years. Determine the interest rate on this annuity. Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited. Module 3 Critical Thinking: Federal Reserve Requirements and Policy (60 points) 1. Patriotic Bank currently has $800 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8 percent. a. Present the balance sheet (before and after changes) of both the Federal Reserve and Patriotic Bank if Patriotic Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to Patriotic Bank as transaction deposits. b. Present the balance sheet of both the Federal Reserve and Patriotic Bank if Patriotic Bank converts 75 percent of its excess reserves to loans and borrowers return 60 percent of these funds to Patriotic Bank as transaction deposits. 2. Assume that you are the manager of a firm. You are concerned about a potential increase in interest rates because it would reduce the demand for your products. Currently, economic growth is high but annual inflation has increased from 3 percent to 5 percent within the last six months. Unemployment rate is very low and cannot go higher. The Federal Reserve (Fed) is meeting next week to assess economic conditions and set monetary policy. a. Given the current economic situation, should the Fed adjust or not adjust economic policy? If so, how? If not, why? b. Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this affect your expectation of what the Fed will decide at its upcoming meeting? Suppose the Fed has just learned that the Treasury will need to borrow a larger amount of funds than originally expected. Explain how this information may affect the degree to which the Fed changes the monetary policy.

5 Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited. Module 4 Critical Thinking: Money, Bond Returns, and Mortgage Amortization Schedule (75 points) 1. You can purchase a T-bill that is 90 days from maturity for $9,970. The T-bill has a face value of $10,000. a. Calculate the T-bill s quoted yield. b. Calculate the T-bill s bond equivalent yield. c. Calculate the T-bill s EAR. 2. You plan to purchase a $130,000 house using a 15-year mortgage obtained from your local bank. The mortgage rate is 5.25 percent. You will make a down payment of 20 percent of the purchase price. a. Calculate your monthly payments on this mortgage. b. Using an Excel Spreadsheet, construct the amortization schedule for the first 12 payments. c. Compute a breakdown of the total payments of the mortgage into interest and principal payment. 3. As a portfolio manager for an insurance company, you are about to invest funds in one of three possible investments: a. 10-year coupon bonds issued by the U.S. Treasury, b. 20-year zero-coupon bonds issued by the Treasury, or c. One-year Treasury securities. Each possible investment is perceived to have no risk of default. You plan to maintain this investment for a one-year period. The return of each investment over a one-year horizon will be about the same if interest rates do not change over the next year. However, you anticipate that the U.S. inflation rate will decline substantially over the next year, while most of the other portfolio managers in the United States expect inflation to increase slightly. a. If your expectations are correct, how will the return of each investment be affected over the one-year horizon? b. If your expectations are correct, which of the three investments should have the highest return over the one-year horizon and why? Offer possible reasons you might not select the investment that would have the highest expected return over the one-year investment horizon. Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited. Upload your completed work to the Week 4 Assignments page. Module 5 Critical Thinking: Derivatives and Foreign Exchange Markets (60 points) 1. Suppose you are a manager of a financial institution. You recently purchased a three-year interest rate collar with LIBOR as the interest rate index. The interest rate cap specifies a fee of 2 percent of $60 million notional principal and an interest rate ceiling of 9 percent. The interest rate floor specifies a fee of 3 percent of the $60 million notional principal and an interest rate floor of 7 percent. Assume that LIBOR is expected to be 6 percent, 10 percent, and 12 percent (respectively) at the end of each of the next three years. a. If you are certain that interest rates will rise, should you consider purchasing a callable swap instead of the collar? Explain. b. Explain the conditions under which your purchase of an interest rate collar could have unintended consequences.

6 2. As a portfolio manager of a US-based financial institution, you are responsible for managing domestic and international investments of your institution. Approximately 25 percent of the stock portfolio you manage is British stocks. Your expectation is that the British stock market will perform well over the next year. Therefore, you plan to sell the stocks one year from now and then convert the British pounds received to dollars at that time. However, you are worried that the British pound may depreciate against the dollar over the next year. a. Explain how you could use a forward contract to hedge the exchange rate risk associated with your position in British stocks. b. If interest rate parity holds, does this limit the effectiveness of a forward contract as a hedge? c. Explain how you could use an options contract to hedge the exchange rate risk associated with your position in stocks. d. Assume that, although you are worried about the potential decline in the pound s value, you also believe that the pound could appreciate against the dollar over the next year. You would like to benefit from the potential appreciation but also wish to hedge against the possible depreciation. Should you or should you not use forward contract or options contracts to hedge your position? Explain. Complete your 2-4 page response using Microsoft Word. For calculations, you must show work to receive credit. Your wellwritten response should be formatted according to CSU-Global APA guidelines, with any sources properly cited. Module 6 Critical Thinking: Commercial Bank s Financial Statement Analysis (75 points) The financial statements for People s National Bank (PNB) are shown below: Peoples National Bank Balance Sheet as of December 31, 20XX Assets Liabilities & Equity Cash 600 Demand deposits 5,590 Demand Deposits from other Fls 1,890 Small time deposits 9,867 Investment 3,680 Jumbo CDs 3,198 Federal funds sold 1,988 Federal funds purchased 2,500 Loans 16,145 Equity 3,728 Reserve for loan losses (1,040) Premises 1,620 Total Assets 24,883 Total Liabilities and Equity 24,883 Peoples National Bank Income Statement for the Year Ended December 31, 20XX Interest on fees and loan 1,200 Interest on investment securities 700 Interest on repurchase agreement 780 Interest on deposits in banks 265 Total Interest Income 2,945 Interest on deposits 945 Interest on debentures 689 Total Interest Expense 1,634 Provision for loan losses 140 Noninterest income 185 Noninterest expense 281

7 Total 236 Income before taxes 1,075 Taxes 215 Net Income Analyze the following eight ratios for PNB s financial statements: Earning Assets, Return on Assets, Total Operating Income, Asset Utilization, Net Interest Margin, Spread, Overhead Efficiency, and Tax Ratios. 2. Compare the results of PNB s ratios to the banking industry average. Then, interpret the results of the comparison. Complete your 2-4 page response using Microsoft Word and/or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited. Module 7 Critical Thinking: Insurance Companies Ratios and Investment Banks Activities (60 points) 1. National Property Casualty has $9,500,000 in premiums on its auto insurance line. The line s losses amount to $6,245,900, expenses are $2,906,430, and dividends are $189,650. The insurer earns $397,110 in the investment of its premiums. Calculate the auto insurance line s loss ratio, expense ratio, dividend ratio, combined ratio, investment ratio, operating ratio, and overall profitability. 2. Goode Investment Bank agrees to underwrite 1,000,000 CFS Company s shares on a best efforts basis. It then sells 800,000 shares to the public for $20 each. The agreement is that Goode will charge 1.50 per share sold. a. How much money does CFS receive? b. How much money does CFS pay? c. What Is Goode s profit? d. What is the stock price of CFS? Complete your 2-4 page response using Microsoft Word and/or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited. Upload your completed work to the Week 7 Assignments page. Module 8 Portfolio Project: Financial Crisis and its Impact on Financial and Markets (350 Points) Financial institutions and markets are important components of the economy. The recent financial crisis that started in 2007 affected many organizations including financial institutions and markets. In an 8-10 page, double-spaced research paper you will examine the financial crisis and its impact on financial institutions and markets. You are required to submit an outline in which you list the major headings and sections of your paper. Upload your completed outline to the Week 5 Assignments page by the end of the Week 5. This outline is a required component of the Portfolio Project assignment. No points will be assigned for this, but points will be deducted from your final grade on the Portfolio Project if you fail to submit this assignment as required. In your completed paper you should be certain to address the following issues:

8 Causes of Problems for Financial During the Financial Crisis: Briefly discuss the financial crisis. Determine and discuss the underlying causes of problems experienced by financial institutions during the recent financial crisis. Explain how these problems might have been avoided. Impact of Financial Crisis on Financial Market Liquidity: Explain the link between the financial crisis and the lack of liquidity in the financial markets. Specifically, offer some insight as to the reasons the debt markets became inactive at the time. How were interest rates affected? What happened to initial public offering (IPO) activities during the crisis period? Risk Management: Discuss whether or not institutional investors that purchased mortgage-backed securities containing subprime mortgages followed reasonable investment guidelines and risk management. Address this issue for various types of financial institutions such as pension funds, commercial banks, insurance companies, and mutual funds. If financial institutions were taking on too much risk, explain whether or not current regulations (especially those passed during and after the financial crisis) are adequate to avert future recurrence. In addition, recommend how regulations can be changed to limit excessive risk taking. Spend time to ensure that the formatting complies with CSU-Global APA guidelines, and thoroughly proofread and grammar-check your final product. Be sure to examine the Portfolio Project grading rubric on the Course Information page for details. Ensure you have both title and reference page. Include a list of 6-8 credible sources cited in your paper. Your references must be credible and be formatted according to CSU-Global APA guidelines. The Portfolio deliverables and the Modules they are due are: Module 5: Submit a draft of the project outline. Module 8: Submit complete project. Course Policies Late Work Students are permitted a 7 day grace period during which they may submit a Critical Thinking assignment after the original due date without penalty. Papers submitted between 8 and 14 days after the original due date will be accepted with a potential 10 percent reduction in grade for late submission. Papers submitted 15 or more days beyond the original due date may not be accepted unless prior arrangements have been made with the instructor. No Portfolios will be accepted late and no assignments will be accepted after the last day of class unless a student has requested an incomplete grade in accordance with the Incomplete Policy. Course Grading 20% Discussion Participation 45% Critical Thinking Activities 35% Final Portfolio Project Grading Scale and Policies A A B B B C C D

9 F FN* I** 59.9 or below Failure for Nonparticipation Incomplete * Students who stop attending class and fail the course for nonparticipation will be issued the FN grade. The FN grade may have implications for financial aid and scholarship awards. ** An I grade may be assigned at the Instructor s discretion to students who are in good standing (passing) in the course. Students should have completed a majority of the coursework in order to be eligible for the I grade. Students should request an "I" grade from the Instructor with a written justification, which must include explanation of extenuating circumstances that prevented timely completion of the coursework. If the request is approved, the Instructor will require a written agreement consisting of a) the specific coursework to be completed, b) the plan to complete the coursework, and c) the deadline for completion. The agreement will be kept on file at CSU-Global Campus. An incomplete course must be satisfactorily completed within the time frame stipulated in the agreement, but no later than the end of the following semester from the date the I was given. An incomplete not removed within one year shall convert to an F and be included in the computation of the student s grade point average. Plagiarism Plagiarism offenses are to be reported to the Office of Student Success, which will record offenses, instruct Faculty of needed interventions, and meet with students as appropriate. For more information on the penalties for plagiarism, please review the Student Handbook. APA Students are expected to follow the CSU-Global APA requirements when citing in APA (based on the APA Style Manual, 6th edition). For details on CSU-Global APA style, please review the APA resources located under the Library tab in Blackboard. Netiquette All posts and classroom communication must be conducted in a professional and respectful manner in accordance with the student code of conduct. Think before you push the Send button. Did you say just what you meant? How will the person on the other end read the words? Any derogatory or inappropriate comments regarding race, gender, age, religion, sexual orientation, are unacceptable and subject to disciplinary action. If you have concerns about something that has been said, please let your instructor know. Institutional Policies Refer to the Academic Catalog for comprehensive documentation of CSU-GC institutional policies.