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Intro to Finance > Intro to Financial Intermediaries > Flashcards

Intro to Financial Intermediaries Flashcards

1
Q

Capital Raising

A

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

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2
Q

Savings Mechanism

A

Individuals have more capital than they require for monthly expenses.

These entities are typically the “Investors” of securities that we will be discussing

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3
Q

Allocation of Risk

A

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

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4
Q

Information Gathering

A

The financial services sector provides information regarding the risk expected performance of these assets
-quarterly reporting
-analyst reports
-rating agency opinions
-security pricing

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5
Q

What are the 3 categories of banks?

A
  1. retail banking
  2. commercial banking
  3. corporate & investment banking
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6
Q

What are the target customers of retail banks?

A

Individuals and small businesses (less than $5MM in revenue)

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7
Q

What are the services offered from retail banking?

A
  1. deposit and money management
  2. checkings account
  3. savings account
  4. certificate of deposits (CDs)
  5. safety deposit
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8
Q

Lending services of retail banking

A
  1. mortgage
  2. auto loan
  3. unsecured personal loan
  4. educational loan
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9
Q

How is the bank’s profitability driven in retail banking?

A

It is driven by raising funds (deposits) at low rates and lending out at higher rates

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10
Q

Retail Banking: Reserve Requirements

A

a percent of a bank’s total deposits that it must hold at the federal reserve

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11
Q

Higher reserve requirements

A

-More money sitting at the fed
-Less money available to lend
-Supply down, demand held constant, interest rates increase

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12
Q

Federal funds rate

A

overnight rate that banks charge one another to borrow money overnight.

this directly impacts the rates that the banks charge their customers

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13
Q

What is the target market of commercial banks?

A

companies with between $10MM and $1Bn in revenue per annum

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14
Q

What is the source of funds for commercial banks?

A

deposits and borrowing in the Bond market

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15
Q

What are the two primary loan offerings?

A
  1. Commercial & Industrial Lending
  2. Commercial Real Estate Lending
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16
Q

Commercial & Industry lending is loans made….
The 3 types are…..

A

loans made directly to the Company
1. revolving lines of credit
2. term loan
3. leases

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17
Q

Revolving lines of credit function…

A

like a credit card for the Company, albeit at a much much lower rate

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18
Q

Term loan

A

the Company receives the funds, and then makes quarterly payments, with a portion due at maturity

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19
Q

Leases

A

financing of property, plant, and equipment used in the Company’s operations

20
Q

Commercial Real estate Lending are loans made

A

to an entity for the express purpose of acquiring real estate which the Company will then use to generate income via rent

21
Q

Cash management offerings of commercial banks: (3 types)

A
  1. money market accounts
  2. corporate operation accounts
  3. P-cards
22
Q

LIBOR is

A

London Inter-Bank Offered Rate

23
Q

LIBOR is defined as

A

the rate that banks charge one another to led to one another

24
Q

Calculating LIBOR

A

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

25
Q

Why does LIBOR matter?

A

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

26
Q

What is the risk of an important benchmark being calculated via a survey?

A

LIBOR Scandal
- 2012 report that traders at various financial institutions manipulated the rates
-Outcome: $9Bn in aggregate fines, and the discontinuation of LIBOR

27
Q

What does SOFR stand for?

A

Secured Overnight Financing Rate

28
Q

SOFR is defined as…

A

the average cost of borrowing overnight when you provide treasuries as collateral

SOFR is the primary benchmark for loans

29
Q

Corporate banks…

A

offer the same cash management and cash financing as commercial banks EXCEPT they target large corporate clients (revenue in excess of $1Bn)

30
Q

Investment banks…

A

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

31
Q

What is the corporate and investment banking hierarchy?

A
  1. analyst: entry level, immediately out of school
  2. associate: post MBA, or promotion after 3 years of being an analyst
  3. vice president: promotion after 3 years of being an Associate
  4. senior vice president/ director
  5. managing director
32
Q

Investment banking structure (2 groups)

A

product groups & industry groups

33
Q

Product groups consist of:

A

-mergers and acquisitions
-leveraged finance
-equity capital markets
-debt capital markets
-restructuring (distressed scenarios)

34
Q

Industry groups include

A

-healthcare
-technology, media, and telecom
-financial institutions group
-natural resources
-consumer and retail
-industrials
-real estate
-gaming and lodging
-financial sponsors (private equity)

35
Q

What are 4 factors of mutual funds?

A
  1. diversification
  2. state investment objective
  3. available to any investor
  4. highly regulated
36
Q

Passive investing

A

you invest in some sort of index fund which has exposure to the broad market

average fees: 0.04% of total assets

37
Q

Active investing

A

actively trying to find undervalued securities
-average fees: 1% of total assets

38
Q

Hedge funds

A

-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)

39
Q

Family Office

A

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

40
Q

Pension Fund

A

-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

41
Q

Private Equity

A

-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

42
Q

Rating Agencies

A

-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

43
Q

Brokerage allows clients to

A

-allow clients to place trades in public securities

44
Q

ask price is the

A

price at which clients can buy

45
Q

bid price is the

A

price at which clients can sell

46
Q

bid/ ask spread is

A

broker profit

47
Q

5 largest brokerage firms in the US

A

fidelity
vanguard
charles schwab
merrill lynch wealth management
jp morgan wealth management

Intro to Finance (11 decks)

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