Corporate Treasury Management Flashcards
Corporate Treasury Management Learning goals
Why Study Financial Markets and Institutions?
Markets and institutions are primary channels to allocate capital in our society.
Proper capital allocation leads to growth in:
▶ Societal wealth.
▶ Income.
▶ Economic opportunity.
What are financial institutions?
What do they do?(FI)
Goals of the Financial System
Financial System is a place for …
Economic agents get …
Financial Markets
Financial markets are one type of structure through which funds flow.
Financial markets can be distinguished along two dimensions:
- primary versus secondary markets.
- money versus capital markets.
Primary versus Secondary Markets
Money versus Capital Markets
Foreign Exchange (F X) Markets
Derivative Security Markets
Financial Institutions (F I s)
Financial Institutions.
• Institutions through which suppliers channel money to users of funds.
Financial Institutions are distinguished by:
- Whether they accept insured deposits.
- Depository versus non-depository financial institutions.
- Whether they receive contractual payments from customers.
Be careful…
▶ First, although stocks and bonds make up about 45% of financing in total, the vast bulk of this (about 90%) comes from financial institutions such as mutual funds and pension plans.
▶ Only about 10% (or 4.5% of the total) comes from
households in the form of direct financing. So indirect
financing is much more important as a source of funds,
either from banks or other types of financial institutions.
Depository versus Non-Depository FIs
▶ Depository institutions:
commercial banks, savings associations, savings banks, credit unions。
▶ Non-depository institutions
Contractual: insurance companies, pension funds,
Non-contractual: securities firms and investment banks, mutual funds.
Regulation of Financial Institutions
- FIs are heavily regulated to protect society at large from market failures
- Regulations impose a burden on FIs; before the financial crisis, U.S. regulatory changes were deregulatory in nature
- Regulators attempt to maximize social welfare while minimizing the burden imposed by regulation
Various Interest Rate Measures
Bond Pricing
• Example
Bond Valuation
• A premium bond has a coupon rate (INT) greater
than the required rate of return (r) and the fair
present value of the bond (Vb) is greater than the
face or par value (Par).
- Premium bond: If INT > r; then Vb > Par.
- Discount bond: If INT < r, then Vb < Par.
- Par bond: If INT = r, then Vb = Par.
Equity Valuation
Equity Valuation Concluded
Impact of a Bond’s Maturity on its Price Sensitivity
Impact of a Bond’s Coupon Rate on its Price Sensitivity
Impact of r on Price Volatility
Duration…
Duration and Price Volatility
Price Sensitivity and Maturity
⚫ In general, the longer the term to maturity, the greater the sensitivity to interest rate changes
⚫ The longer maturity bond has the greater drop in price because the payment is discounted a greater number of times
Remarks
- The higher the yield to maturity on the bond,
the more the investor earns on reinvested coupons and the shorter the time to recover the initial investment. - The shorter the maturity on the bond, the more quickly the initial investment is recovered.
Duration example
Duration and Modified Duration
Factors affecting Duration
Duration changes as the coupons are paid to the bondholder. Coupon rate and Yield also affect the bond’s duration. Bonds with high coupon rates and in turn high yields will tend to have a lower duration than bonds that pay low coupon rates, or offer a low yield. This makes sense, since when a bond pays a higher coupon rate the holder of the security received repayment for the security at a faster rate. The diagram below summarizes how duration changes with coupon rate and yield.
