THAI NGUYEN UNIVERSITY

INTERNATIONAL SCHOOL

REVIEW OUTLINE

Course title: Financial markets and institutions

Course code: FMI431

Credits: 3

Thai Nguyen, 2023

 2

REVIEW OUTLINE

COURSE TITTLE: FINANCIAL MARKETS AND INSTITUTIONS

Chapter 1: Introduction

Content Keywords

1. Definition and Role of Financial Assets - Financial assets

2. Classifications of Financial Assets

- Financial markets
3. Financial Market Participants
- Asymmetric Information
4. Financial Market Classification
5. Asymmetric information - Bonds

6. Classifications of Bonds - Yield to Maturity

7. Bond Evaluation and Rate of Return
- Derivative contract
8. Factors that affect bond price
9. Yield to Maturity
10. Derivative contracts

Practice Exercises:

1. You expect a stock to reduce from its price of 90 USD/share on Day 1 but does not want to tie up your available funds by investing in this stock.

Thus, you purchase a call option on the stock with the volume of 50 shares and the exercise price of 95USD/share and the premium of 2USD/share.

At the option’s expiration date, the stock price rises to 110USD. Now, what is your decision with this call option contract? What is your profit/loss

with that decision?

You purchased a call option with the following details:

Volume: 50 shares
Exercise price (strike price): $95 USD/share
Premium paid: $2 USD/share
The stock price at expiration is $110 USD/share.
Now, let’s analyze your options:
If you decide to exercise the call option:
Your profit per share would be the difference between the stock price at expiration and the
exercise price:
Profit per share=Stock price at expiration−Exercise price=110−95=15 USD
Total profit for 50 shares: 15×50=750 USD
If you decide not to exercise the call option:
Your loss would be the premium paid per share:
Loss per share=Premium paid=2 USD
Total loss for 50 shares: 2×50=100 USD
Therefore:
 3

If you exercise the call option, your profit would be $750 USD.
If you don’t exercise the call option, your loss would be $100 USD.

2. Choose the best describe each transaction:

Classify the market in which each of the following financial transactions takes place as: (i) money versus capital, (ii) primary versus

secondary, (iii) open versus negotiated, or (iv) spot versus futures or forward.

a) Buy Commercial paper

b) Sell Barclay stocks on London Stock Exchange

c) Open demand account at bank

d) Issue check

a) Buy Commercial Paper:

Market Type:
Money versus Capital: Money market
Primary versus Secondary: Primary market (since it involves the issuance of new commercial paper)
Open versus Negotiated: Negotiated (usually arranged directly between the issuer and the buyer)
Spot versus Futures or Forward: Spot (immediate transaction)
b) Sell Barclay Stocks on London Stock Exchange:
Market Type:
Money versus Capital: Capital market
Primary versus Secondary: Secondary market (since it involves selling existing stocks)
Open versus Negotiated: Open (traded openly on the stock exchange)
Spot versus Futures or Forward: Spot (immediate transaction)
c) Open Demand Account at Bank:
 Market Type:
o Money versus Capital: Money market (demand accounts involve short-term funds)
o Primary versus Secondary: N/A (not applicable, as it’s not a security transaction)
o Open versus Negotiated: Open (anyone can open a demand account)
o Spot versus Futures or Forward: N/A (not applicable)

d) Issue Check:
 Market Type:
o Money versus Capital: Money market (checks involve payment and transfer of funds)
o Primary versus Secondary: N/A (not applicable, as it’s not a security transaction)
o Open versus Negotiated: N/A (not applicable)
o Spot versus Futures or Forward: N/A (not applicable)

3. You recently got a job with the salary for $100,000 per year. Your current savings are $50,000. You have a mortgage loan worth $20,000 that will

require you to make monthly payments of $167 for the next 10 years. Now, you need a car to drive to work and have a small noninterest-bearing

bank account of $5,000. You could either buy a used car for $2,600 or take out a loan for $12,000 for a new car. The new loan would require a

down payment of $3,000 and five years of monthly payments of $250. Your parents are willing to give you $1,000 for support, which you could use

to purchase the car. You estimate that $1,800 per month in discretionary income would be comfortable for you to live on.

a) What is your current net worth (total assets)?

Net worth = Total asset – Total Liabilities

= (Current saving + bank account + support from parent) - (Mortgage loan)

= ($50,000 + $5,000 + $1000) – ($20,000)

= $36,000
 4

b) How much discretionary income would you have each month if you bought the new car? Would it be feasible for her to save $300 per month and

make all your payments?

With the salary of $100,000 annually, your monthly income would be: $100,000/12 = $8,333

If you buy a new car and have to pay a car loan of $250 monthly out of the down payment of $3,000, which you will pay with your current saving

($50,000) plus the financial support from your parents ($1,000). Then, your total expenses monthly will be: $167 + $250 + $1,800 = $2,217.

Thus, your discretionary income every month would be: $8,333 - $2,217 = $6,116

With this discretionary income, you totally have ability to save $300 per month.

4. You have the assets include: (i) a market value of $80,000 for your home; (ii) $5,000 in stock; (iii) a T-bond with a face value of $2,000 to be

received at the end of the month, for which the current market value was $960; (iv) a deposit account of $3,000 at bank; and (vi) some other items

that have the values of $20,000. Your only have a liability, which is your university tuition loan, which has a balance totaling $50,000. It is now the

end of the month and you’ve just received $6,000 of your salary, along with the income from the maturing T-bond and interest on your bank

deposits, which were paying an annualized interest rate of 4 percent annually (4/12 percent per month). Your tuition loan payment was $1,700, of

which $700 would go toward the principal. Your other expenses for the month came to $3,500. You had planned to make an additional tuition loan

payment for the month, all of which would go to paying down the principal on the loan. However, your girlfriend wants to go to Phu Quoc with you

for the summer vacation. The expense of your trip would be an additional $2,000.

a) Would you be able to make the additional tuition loan payment and fund your trip with girlfriend without reducing your deposit account

balance?

Your total income this month is: salary + interest rate from bank account + T-bond payment = $6,000 + (4/12% x $3,000) + $2,000 = $8,010

Your total expected expense is: monthly tuition loan payment + additional tuition loan payment + summer vacation trip expenses + other

expenses of the month = $1,700 + $1,700 + $2000 + $3,500 = $8,900

Because your total income is lower than total expense, you will have to use the money from your bank account to make good the shortage,

thus, the bank account balance will be reduced at the amount of: $8,010 - $8,900 = - $890

b) What would your net asset be if you funded your trip and made the additional tuition loan payment?

Your net asset will be = Total asset – Total liabilities = (House value + Stock value + new deposit account balance + other assets value) – (new

tuition loan balance) = ($80,000 + $5,000 + ($3,000 - $890) + $20,000) – ($50,000 - $1,700 - $1,700) = $107,110 - $46,600 = $60,510

c) What would your net asset be you did not fund the trip and only made the additional tuition loan payment?

Repeat part a) and b) with new information.

d) Would your net worth change if you decided to fund the trip, but did not make the additional tuition loan payment? Explain.

Repeat part a) and b) with new information.

5. You purchased a new home valued at $300,000. You paid a 25 percent initial down payment. You looked at your balance sheet to determine what

your cash flow would be for the month. Your new mortgage payment was $1,500, of which only $200 would go toward the principal in the first

month. You had a bank deposit account of $4,500, which you had set aside for a short vacation. You also owned $5,000 of stock. Your income for

the month was $8,000, but you anticipate receiving a sales bonus of $2,500. You estimated your usual monthly expenses, other than your mortgage,

to be $3,000.

a) If your estimates are all accurate, would you have any additional income left over at the end of the month that you could add to the money you

had set aside for the upcoming vacation.

 5

If your estimates are correct, you will receive $8,000+$2,500 = $10,500 in income this month and will have $1,250+$3,000=$4,250 of

expenses.

This means you will have $10,500-$4,250=$6,250 left over that you could add to your vacation account.

b) If you failed to receive the sales bonus, would you have to sell stock to keep from drawing down your bank deposit account and having to

curtail your vacation?

If you fail to receive your sales bonus, you will still earn $8,000.

In this case you will have $8,000-$4,250 = $3,750 left over to put toward your vacation.

Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms

Content Keywords

1. Financial services - Financial services

2. Financial Institutions definition and roles

- Financial institution
3. Financial intermediaries’ definition, classification, functions, roles,
- Financial intermediary
4. Asset Management Firms’ operation, benefits to customers and the main

types - Asset management firms

5. Types of Liabilities
- Liabilities
6. Risks Management
- Risk Management

- Net Asset Value

- Riskless arbitrage

Chapter 3: Depository Institutions: Activities and Characteristics

Content Keywords

1. Commercial bank definition, classification and operations (Sources of fund, - Consolidation in Bank industry

Uses of fund, Liquidity management, Interest rate management)

- Risk-based capital requirement
2. Commercial bank industry
- Reserve Requirement
3. Off-balance sheet activities

4. Thrift banks definition, operations, regulation - CAMEL rating

 6

Content Keywords

Chapter 4: The U.S. Federal Reserve and the Creation of Money

Content Keywords

1. Central bank definition and roles - Central bank

2. Central bank’s activities

Chapter 5: Monetary Policy

Content Keywords

1. Monetary policy objectives - Monetary policies

2. Monetary policy tools, types and trade-off

 7

Content Keywords

Chapter 6: Insurance Companies

Content Keywords

1. Insurance company operation (sources of income, expenditures) - Term life vs Whole life

2. Ownership of insurance company

- Universal life
3. Types of insurance products (Life, Health, P&C, Investment oriented)
- GIC vs Annuity
4. Insurance industry trend

Chapter 7: Investment banks and Security firms

Content Keywords

1. Investment bank definition and roles - Underwriting function

2. Investment bank services

- Firm-commitment underwriting arrangement
3. Security firm services
 8

Content Keywords

vs a best-efforts arrangement

- Leveraged buyouts

Chapter 8: Pension Funds

Content Keywords

1. Pension fund definition and classifications - Private vs public pension fund

2. Pension fund operation

- Defined-benefit plan vs defined-contribution

plan

- Hybrid pension plan