FIN 4244
Money and Capital Markets

Overview of Financial Assets and Capital Markets

- Financial Assets
- Capital Markets

w Debt versus Equity Markets
w Debt versus Money Markets
w Purpose of Capital Markets

Livingston: Chapter 1

Taxonomy of Debt and Money Market Instruments (brief overview of security types)
- Some Distinguishable Features

Livingston: Chapter 5 (skip pg. 81), Chapter 16 (pgs. 351-360)

Security Market Microstructure

           - Primary Market versus Secondary Market

w Primary Market Debt Issuing Procedures
w Secondary Market Structure

Part 2: Interest Rates

Interest Rate Concepts
      - Time Value

w Future Value
w Present Value

- Yields on Discount Securities and Coupon-bearing Bonds
- Interest Rates versus Returns

Livingston: Chapter 10, 16 (pgs. 360-369)

Real versus Nominal Interest Rates

- Inflation
- The Fisher Equation

Livingston: Chapter 2 (pgs. 22-27)

Interest Rate Determination

- Intertemporal Consumption/Savings and Investment Decisions
- Loanable Funds Model
- Other Models

Livingston: Chapters 2, 3, 4

Term Structure of Interest Rates

- Some Background
- Deriving the Term Structure of Interest Rates
- Theories and Empirical Evidence

      w Pure Expectations Theory
                w Liquidity Theory
                w Preferred Habitat Theory
                w Market Segmentation Theory

- Interpreting Yield Curves

Part 3: Bond Valuation

Review
   - Bond Prices
    - Yields

Factors Influencing Bond Prices

Livingston: Review Chapters 9, 10, 16 (pgs. 360-369)

1st Midterm: Parts 1-3

Part 4: Managing Bond Risk

Determinants of Bond Risk

- Reinvestment Rate Risk
- Price Risk
- Default Risk
- Call Risk
- Inflation and Yields
- Taxes and Yields

Reinvestment Rate Risk and Price Risk

- Interest Rate Risk
- Duration
- Convexity
- Immunization
- Interest Rate Futures, Options and Swaps
- Other Specialized Financial Instruments (financial engineering)

Livingston: Chapters 11, 21, 22, 23 (pgs. 533-536), 20 (options will be covered thoroughly in Part 5)

Default Risk

- Financial Distress
- Bond Ratings
- Risk Structure of Interest Rates
   w Yield Spreads and Default Premia

Livingston: Review Chapter 13

Call Risk

- Introduction to Bonds with Embedded Options (covered in Part 5)
   w Characteristics and Purpose of Callable Bonds

Livingston: Chapter 14 (Callable Bonds will be covered thoroughly in Part 5)
Inflation

- Inflation and Yields<>

Livingston: Review Chapter 2 (pgs. 22-27)

Taxes
    - Tax Treatment of Bonds
    - Taxes and Yields

Livingston: Chapter 18

Part 5: Bonds with Embedded Options

Options

- Introduction and Definitions
- Valuation
- Factors
- Black-Scholes Option Pricing Model

Livingston: Chapter 20

Convertible Bonds

Livingston: Chapter 23 (pgs. 537-540)

Callable Bonds and Sinking Funds

Livingston: Chapter 14

Mortgage Backed Securities

Livingston: Chapter 15

Final Exam: Parts 4-5

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