Intro to Financial Intermediaries Flashcards
Capital Raising
These individuals, or entities, need additional capital for some sort of investment into real assets.
These entities would be the “Issuers” of the securities that we will be discussing
Savings Mechanism
Individuals have more capital than they require for monthly expenses.
These entities are typically the “Investors” of securities that we will be discussing
Allocation of Risk
The Issuers will pass on some of the risk, and potential upside, of their investment in real assets to the Investors, in exchange for the up-front capital
Information Gathering
The financial services sector provides information regarding the risk expected performance of these assets
-quarterly reporting
-analyst reports
-rating agency opinions
-security pricing
What are the 3 categories of banks?
- retail banking
- commercial banking
- corporate & investment banking
What are the target customers of retail banks?
Individuals and small businesses (less than $5MM in revenue)
What are the services offered from retail banking?
- deposit and money management
- checkings account
- savings account
- certificate of deposits (CDs)
- safety deposit
Lending services of retail banking
- mortgage
- auto loan
- unsecured personal loan
- educational loan
How is the bank’s profitability driven in retail banking?
It is driven by raising funds (deposits) at low rates and lending out at higher rates
Retail Banking: Reserve Requirements
a percent of a bank’s total deposits that it must hold at the federal reserve
Higher reserve requirements
-More money sitting at the fed
-Less money available to lend
-Supply down, demand held constant, interest rates increase
Federal funds rate
overnight rate that banks charge one another to borrow money overnight.
this directly impacts the rates that the banks charge their customers
What is the target market of commercial banks?
companies with between $10MM and $1Bn in revenue per annum
What is the source of funds for commercial banks?
deposits and borrowing in the Bond market
What are the two primary loan offerings?
- Commercial & Industrial Lending
- Commercial Real Estate Lending
Commercial & Industry lending is loans made….
The 3 types are…..
loans made directly to the Company
1. revolving lines of credit
2. term loan
3. leases
Revolving lines of credit function…
like a credit card for the Company, albeit at a much much lower rate
Term loan
the Company receives the funds, and then makes quarterly payments, with a portion due at maturity
Leases
financing of property, plant, and equipment used in the Company’s operations
Commercial Real estate Lending are loans made
to an entity for the express purpose of acquiring real estate which the Company will then use to generate income via rent
Cash management offerings of commercial banks: (3 types)
- money market accounts
- corporate operation accounts
- P-cards
LIBOR is
London Inter-Bank Offered Rate
LIBOR is defined as
the rate that banks charge one another to led to one another
Calculating LIBOR
18 member banks are surveyed every day at what rate they could borrow overnight. The top and bottom 4 are thrown out, the average of the middle 10 is LIBOR
Why does LIBOR matter?
LIBOR has been used to price loans. A typical pricing shorthand would be L+200. This means 200 basis points (bps) over LIBOR
Transactions worth hundreds of trillions of dollars used LIBOR as a benchmark
What is the risk of an important benchmark being calculated via a survey?
LIBOR Scandal
- 2012 report that traders at various financial institutions manipulated the rates
-Outcome: $9Bn in aggregate fines, and the discontinuation of LIBOR
What does SOFR stand for?
Secured Overnight Financing Rate
SOFR is defined as…
the average cost of borrowing overnight when you provide treasuries as collateral
SOFR is the primary benchmark for loans
Corporate banks…
offer the same cash management and cash financing as commercial banks EXCEPT they target large corporate clients (revenue in excess of $1Bn)
Investment banks…
assist its clients in accessing the capital markets by putting them in contact with various institutional investors.
investment banks also help their clients execute mergers and acquisitions
What is the corporate and investment banking hierarchy?
- analyst: entry level, immediately out of school
- associate: post MBA, or promotion after 3 years of being an analyst
- vice president: promotion after 3 years of being an Associate
- senior vice president/ director
- managing director
Investment banking structure (2 groups)
product groups & industry groups
Product groups consist of:
-mergers and acquisitions
-leveraged finance
-equity capital markets
-debt capital markets
-restructuring (distressed scenarios)
Industry groups include
-healthcare
-technology, media, and telecom
-financial institutions group
-natural resources
-consumer and retail
-industrials
-real estate
-gaming and lodging
-financial sponsors (private equity)
What are 4 factors of mutual funds?
- diversification
- state investment objective
- available to any investor
- highly regulated
Passive investing
you invest in some sort of index fund which has exposure to the broad market
average fees: 0.04% of total assets
Active investing
actively trying to find undervalued securities
-average fees: 1% of total assets
Hedge funds
-only open to accredited investors
-unregulated
-high risk strategies (only open to wealthy individuals because of this)
-very high fees
(average 1.4% of invested capital, 16.4% return)
Family Office
similar to a hedge fund, with the main distinction that the fund is only investing the money of a high-net worth family. It does not accept outside investors’ capital
Pension Fund
-eligible employees are guaranteed an annual payment in retirement based on their years of employment, and average salary at retirement
-pension funds manage a portfolio for the sole purpose of funding its members retirement
–will make small investment in hedge funds (typically 3% of total capital or less)
–incredibly long time horizon- not concerned with quarterly market movements
Private Equity
-invest in controlling positions in private companies. Or purchase all of the shares of a public company and take it private (Twitter)
-typically financed through a leveraged buyout (use of debt)
-accredited investors only, as this is a high-risk investment
Rating Agencies
-provide an unbiased opinion of the credit worthiness of various borrowers
-the three main agencies in the US are S&P, Moody’s, & Fitch Ratings
-publicly rated companies’ borrowing costs are driven largely by their public rating
Brokerage allows clients to
-allow clients to place trades in public securities
ask price is the
price at which clients can buy
bid price is the
price at which clients can sell
bid/ ask spread is
broker profit
5 largest brokerage firms in the US
fidelity
vanguard
charles schwab
merrill lynch wealth management
jp morgan wealth management
