Table of Contents
Chapter 1 - Financial Markets & Intermediaries -
Section 1............................................ 9
1.1 Overview of Financial Markets................................................................................................... 9
1.1.1 What are
financial markets?.................................................................................................................. 9
1.1.2 Market
participants................................................................................................................................. 9
1.2 Structure of Financial Markets.............................................................................................. 11
1.2.1 Debt and
equity markets....................................................................................................................... 11
1.2.2 Primary
and secondary markets.......................................................................................................... 12
1.2.3
Exchanges and over-the-counter markets......................................................................................... 12
1.2.4 Money
and capital markets.................................................................................................................. 13
Chapter 1 - Section 1 Review Questions........................................................................................... 14
Chapter 1 - Financial Markets & Intermediaries -
Section 2.......................................... 16
1.3 Pricing Theory in Financial
Markets.................................................................................... 16
1.3.1 Pricing
mechanisms............................................................................................................................... 16
1.3.2 The
efficient market hypothesis........................................................................................................... 16
1.4 Financial Intermediaries............................................................................................................... 18
1.4.1 Role of
financial intermediaries......................................................................................................... 18
1.4.2
Depository institutions.......................................................................................................................... 19
1.4.3
Contractual savings institutions......................................................................................................... 20
1.4.4
Investment intermediaries..................................................................................................................... 21
Chapter 1 - Section 2 Review Questions........................................................................................... 24
Chapter 2 - Interest Rates - Section 3............................................................................................... 26
2.1 Overview of Interest Rates.......................................................................................................... 26
2.1.1 What are
interest rates?........................................................................................................................ 26
2.1.2 Simple
and compound interest............................................................................................................ 27
2.1.3 Fixed
and floating interest rates......................................................................................................... 27
2.1.4 Annual
percentage rates (APR)........................................................................................................... 28
2.1.5
Yield-to-maturity (YTM)........................................................................................................................ 28
2.2 Determination of Interest
Rates............................................................................................. 28
2.2.1 Demand
for loanable funds............................................................................................................. 29
2.2.2 Supply
of loanable funds................................................................................................................. 29
2.2.3 Market
equilibrium................................................................................................................................ 30
2.2.4
Inflation and the Fisher effect............................................................................................................. 31
Chapter 2 - Section 3 Review Questions........................................................................................... 32
Chapter 2 - Interest Rates - Section 4............................................................................................... 34
2.3 Risk Structure of Interest
Rates............................................................................................. 34
2.3.1 Default
risk.............................................................................................................................................. 34
2.3.2
Liquidity................................................................................................................................................... 35
2.3.3 Income
tax considerations.................................................................................................................... 36
2.3.4
Estimating bond yields.......................................................................................................................... 36
Chapter 2 - Section 4 Review Questions........................................................................................... 38
Chapter 2 - Interest Rates - Section 5............................................................................................... 40
2.4 Term Structure of Interest
Rates........................................................................................... 40
2.4.1 The
yield curve........................................................................................................................................ 40
2.4.2
Expectations theory............................................................................................................................... 41
2.4.3
Segmented markets theory.................................................................................................................... 42
2.4.4
Liquidity premium theory..................................................................................................................... 43
Chapter 2 - Section 5 Review Questions........................................................................................... 46
Chapter 3 - Central Banking and Monetary Policy -
Section 6.................................... 47
3.1 The Federal Reserve System......................................................................................................... 47
3.1.1 Federal
Reserve Banks.......................................................................................................................... 48
3.1.2 Member
Banks......................................................................................................................................... 49
3.1.3 Board of
Governors............................................................................................................................... 49
3.1.4 Federal
Open Market Committee (FOMC)........................................................................................ 50
3.1.5 Federal
Advisory Council (FAC)........................................................................................................ 50
Chapter 3 - Section 6 Review Questions........................................................................................... 52
Chapter 3 - Central Banking and Monetary Policy - Section
7.................................... 53
3.2 Monetary Policy................................................................................................................................... 53
3.2.1 Open
market operations........................................................................................................................ 54
3.2.2 Reserve
requirements............................................................................................................................. 55
3.2.3 Discount
lending.................................................................................................................................... 56
Chapter 3 - Section 7 Review Questions........................................................................................... 58
Chapter 3 - Central Banking and Monetary Policy -
Section 8.................................... 60
3.3 The Money Supply.................................................................................................................................. 60
3.3.1 Money
supply measures........................................................................................................................ 60
3.3.2 History
of the money supply and monetary policy........................................................................... 61
Chapter 3 - Section 8 Review Questions........................................................................................... 64
Chapter 4 - Money Markets - Section 9............................................................................................. 65
4.1 Introduction to Money Markets.............................................................................................. 65
4.1.1 Money
markets defined.......................................................................................................................... 65
4.1.2 Money
markets participants................................................................................................................. 66
Chapter 4 - Section 9 Review Questions........................................................................................... 69
Chapter 4 - Money Markets - Section 10........................................................................................... 70
4.2 Money Market Instruments.......................................................................................................... 70
4.2.1 Treasury
bills.......................................................................................................................................... 70
4.2.2 Federal
funds.......................................................................................................................................... 71
4.2.3
Commercial paper.................................................................................................................................. 73
Chapter 4 - Section 10 Review Questions........................................................................................ 76
Chapter 4 - Money Markets - Section 11........................................................................................... 78
4.2.4
Certificates of deposit........................................................................................................................... 78
4.2.5
Repurchase agreements........................................................................................................................ 80
4.2.6 Bankers
acceptances............................................................................................................................ 82
Chapter 4 - Section 11 Review Questions........................................................................................ 85
Chapter 5 - Capital Markets (Part I) - Section 12...................................................................... 87
5.1 The Bond Market................................................................................................................................... 87
5.1.1 Bond
markets defined............................................................................................................................ 87
5.1.2 Bond
markets participants................................................................................................................... 88
5.2 Types of Bonds......................................................................................................................................... 88
5.2.1 U.S.
Treasury bonds............................................................................................................................... 89
5.2.2
Municipal bonds.................................................................................................................................... 92
5.2.3
Corporate bonds.................................................................................................................................... 93
Chapter 5 - Section 12 Review Questions........................................................................................ 96
Chapter 5 - Capital Markets (Part I) - Section 13...................................................................... 99
5.3 The Stock Market................................................................................................................................. 99
5.3.1 Common
and preferred stock............................................................................................................... 99
5.3.2 Stock
quotations.................................................................................................................................. 101
5.3.3 Stock
markets and exchanges............................................................................................................ 102
5.3.4 Stock
indexes........................................................................................................................................ 104
Chapter 5 - Section 13 Review Questions...................................................................................... 107
Chapter 6 - Capital Markets (Part II) - Section 14.................................................................. 110
6.1 The Mortgage Market.................................................................................................................... 110
6.1.1
Mortgages defined............................................................................................................................... 110
6.1.2 Mortgage
characteristics................................................................................................................... 111
6.1.3
Mortgage-lending institutions.......................................................................................................... 113
6.1.4 Mortgage
underwriting process....................................................................................................... 114
Chapter 6 - Section 14 Review Questions...................................................................................... 117
Chapter 6 - Capital Markets (Part II) - Section 15.................................................................. 120
6.2 Mortgage Securitization
Process......................................................................................... 120
6.2.1
Definition and brief history............................................................................................................... 120
6.2.2 Benefits
of securitization.................................................................................................................... 121
6.2.3
Participants in the process................................................................................................................ 121
6.2.4
Structuring the transaction............................................................................................................... 123
6.3 Types of Mortgage-backed
Securities................................................................................ 126
6.3.1 Mortgage
pass-through securities.................................................................................................... 127
6.3.2
Collateralized mortgage obligations.............................................................................................. 127
6.3.3 Stripped
mortgage-backed securities.............................................................................................. 128
Chapter 6 - Section 15 Review Questions...................................................................................... 130
Chapter 7 - Foreign Exchange Markets - Section 16........................................................... 132
7.1 Introduction to Foreign
Exchange Markets................................................................ 132
7.1.1 Foreign
exchange defined................................................................................................................. 132
7.1.2 Market
characteristics........................................................................................................................ 133
7.1.3 Payment
& settlement systems........................................................................................................... 135
7.1.4
Institutional use of foreign exchange markets............................................................................... 136
7.2 Foreign Exchange Rates................................................................................................................ 137
7.2.1 Exchange
rates defined...................................................................................................................... 137
7.2.2 Quotes.................................................................................................................................................... 137
7.2.3 Exchange
rate determination............................................................................................................ 138
7.2.4
Purchasing Power Parity (PPP)....................................................................................................... 140
Chapter 7 - Section 16 Review Questions...................................................................................... 142
Chapter 7 - Foreign Exchange Markets - Section 17........................................................... 144
7.3 Foreign Exchange Transactions............................................................................................. 144
7.3.1 Spot
transactions................................................................................................................................. 144
7.3.2 Forward
transactions......................................................................................................................... 144
7.4 International Arbitrage............................................................................................................. 146
7.4.1
Locational arbitrage........................................................................................................................... 146
7.4.2 Covered
interest arbitrage................................................................................................................. 147
Chapter 7 - Section 17 Review Questions...................................................................................... 150
Chapter 8 - Derivatives Markets - Section 18........................................................................... 152
8.1 Financial Risk Management....................................................................................................... 152
8.1.1
Financial risks...................................................................................................................................... 152
8.1.2 Hedging
financial risk........................................................................................................................ 154
8.1.3
Derivative instruments........................................................................................................................ 154
Chapter 8 - Section 18 Review Questions...................................................................................... 157
Chapter 8 - Derivatives Markets - Section 19........................................................................... 159
8.2 Forward Markets............................................................................................................................... 159
8.2.1 Forward
contracts............................................................................................................................... 159
8.2.2 Forward
rate agreements................................................................................................................... 160
8.3 Futures Markets................................................................................................................................. 161
8.3.1 Futures
contracts................................................................................................................................. 161
8.3.2 Futures
exchanges............................................................................................................................... 161
8.3.3 Market
mechanics................................................................................................................................ 162
Chapter 8 - Section 19 Review Questions...................................................................................... 164
Chapter 8 - Derivatives Markets - Section 20........................................................................... 166
8.4 Swap Markets........................................................................................................................................ 166
8.4.1 Swap
contracts..................................................................................................................................... 166
8.4.2 Interest
rate swaps............................................................................................................................... 166
8.4.3 Other
types of swaps............................................................................................................................ 168
8.5 Options Markets.................................................................................................................................. 168
8.5.1 Options
contracts................................................................................................................................. 168
8.5.2 Options
trading.................................................................................................................................... 169
8.5.3 The
Options Clearing Corporation (OCC)..................................................................................... 170
Chapter 8 - Section 20 Review Questions...................................................................................... 172
Review Answers................................................................................................................................................ 174
Glossary................................................................................................................................................................ 245
Index.......................................................................................................................................................................... 259
Final Examination......................................................................................................................................... 265
CPASelfstudy.com Course Evaluation.......................................................................................... 295