Money Markets vs. Capital Markets
Money Markets: the organized exchange on which participants can lend and borrow large sums of money for a period of one year or less
Capital Markets: long-term investing where issuing and trading stocks/bonds
Money markets + capital markets = financial market
Single Tier vs. Two Tier Corporate Structure
Single Tier: shareholders elect CEO; CEO reports to shareholders (more informal arrangement)
Two-Tier: institutionalized shareholder and supervisory body elect CEO; CEO reports to board of directors
A corporate bond entails which rights for an investor?
- a debt obligation (bond)
- semi-annual coupon payments; upon a coupon rate until bond expires
- upon expiration = face value is paid back
- paid back before shareholders: bonds are lower risk than equity
How can a corporate bond be valued?
1. calculate cash flows as per coupon rate per annum
2. calculate present value, using discount rate (PV = cash flow / 1 + discount rate)
3. add the new sum over time to find bond price today
Explain the difference between a spot and a forward interest rate.
- Spot is today's interest rate (T=0)
- Forward Interest Rate: is the future interest rate
Imagine you are a long-term stock investor. Should you care about the resale price of the stock when it comes to valuing the stock today? Explain.
- resale price will not reflect the real value of the stock
- daily stock prices can be volatile
- better to consider the sum of present values of the future dividents
- it is impossible to forecast future dividents but one can try using past/present information
Discuss and explain the main assumptions, the derivation and the results of the Markowitz Portfolio Theory verbaly and by the use of a graph.
- x axis: standard deviation %; y axis: expected returns
- the efficient frontier shows the portfolios with the highest return for a given risk / or lowest risk for a given return
- efficient portfolios are on the line
- Result - diversify your stock portfolio to reduce systematic risk
- covariance suggests the correlation between stocks; which reduces with a diversified portfolio
- everyone is an return risk optimizer (looking for highest return related to lowest risk)
- higher risks = higher returns
Explain the difference between primary and secondary equity markets
- primary markets for private placements, intial public offerings (IPOs and warrants
- secondary markets involve stock exchanges and are the primary venue for public investment in corporate equity