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