* value: (stock, bond, mortgage, etc.) equals the present value of its expected cash flows, discounted (reduced) for their risk and timing.
* Expected cash INflows are the most likely cash payments (dividends, interest, capital gain or loss) that you can expect (not hope) to receive. Expected cash OUTFflows are money you can expect to pay under debt owed
*Discount: multiply a number by less than one.
*Discount rate: a function of time of ECFs and risk associated with receiving cash: discount rate = f (time, risk). INCREASE for securities with greater default risk and DECREASE for securities with lower default risk.
*Discount factor: a function of both time and the discount rate- [discount factor = f (time, discount rate)]. ex: if discount rate is 1.06 (6%) and 1 yr cash flow, divide 1 yr by 1.06 to get .9434. if ECF is 2 yrs, divide .9434 by 1.06, and keep going. it will decrease with increasing time to payment and decreases with incereasing discount rate
*Present value (PV) of an investment is the sum of the expected cash flows multiplied by their respective discount factors
-The yield curve, also known as the term structure of interest rates, describes the relationship between the yield on a security and its maturity
-The shape of the yield curve, depending on the rate of inflation or deflation, the economy and monetary policies, can be upward sloping - which is the most common, downward sloping - when a significant slowdown in inflation is anticipated, flat, or humped
- securities represented differ only in maturity, not other factors especially not risk
- typically determined by yields on non-callable, risk free, highly liquid US treasury securities
*According to Fundamental Analysis approach, the company's current and future operating and financial performance determine the value of the company's stock
*The assumption underlying this approach is that a company's stock has a true or intrinsic value to which its price is anchored. When there is an price divergence, the price over time will gravitate to its intrinsic value.
*To assess a company's prospects, fundamental analysts evaluate overall economic, industry and company data to estimate a stock's value
* value is a function of revenue, growth, earnings, dividends, cash flows, profit margins, risk, interest rates, etc
* basis for LT buy/sell decisions. if stock price is BELOW intrinsic value, BUY the stock; if above intrinsic value, SELL stock
* to individual lenders/borrowers
* accept deposits and pay interest on deposits, checking accts, credit card financing, mortgage loans, car loans, personal loans, school loans, installment loans
*clearinghouse for transactions under which consumers purchase goods w/ non-cash instruments (credit cards, checks, debit cards).
* target to individual consumers in need of banking intermediation to borrow, save and exchange
* wall street dies, victim of its own greed, arrogance and stupidity
*JP morgan takes over Bear Stearns - orchestrated by US Treasury/Fed
* 2 large mortgage lenders (Fannie Mae and Freddy Mac) put into conservatorship and placed under control of US Treasury
*Private lenders such as IndyMac seized by FDIC
*FDIC increases deposit insurance from 100K$ to 250K$ to prevent total banking panic
* big killer: Lehman Brothers file for bankruptcy, causes chaos and panic
* CEO of Merrill Lynch sells company to Bank of America (last chance to cut a deal) same night
* markets cease to function, prices of stock/bonds plummet, feared there would be a run of $3 trillion money mkt industry. Treasury steps in to guarantee money mkt funds
* Goldman Sachs and Morgan Stanley are now the only 2 large investment banks left; stock prices plummet, rumors spread of their pending bankruptcy
- Fed says: convert to commercial banks and receive FDIC insurance. both, out of fear, apply to do so
* in span of 9 days, 4 large Wall street firms ceased to exist! they had all been buying risky, illiquid assets using too much debt. value of these assets dropped with markets, their equity was dropping! debt had exceeded equity
* after Bear Stearns, Treasury and Fed start pumping money into economy, shoring up credit markets and introducing new credit facilities
* Emergency Economic Stabilization Act of '08, US Treasury: bailout. authorized Treasury to create 700 billion dollar Troubled Asset relief Program (TARP) to purchase distressed mortgage backed assets/make capital injections
* treasury pumps money into and buys preferred stock in 9 biggest commercial banks
* By end of october, investors had lost $11 trillion+