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Money, payments, and the financial system
· 5 categories of financial assets
· Direct vs. indirect finance
o Role of financial markets and institutions
o Flow of funds and returns
· Types of financial intermediaries
· Primary federal regulators: SEC, Fed, FDIC, OCC
o Full names and purpose
· Basic structure and purpose of the Federal Reserve
· 3 key financial services
· Origins of and response to the financial crisis
o Lehman bankruptcy
o Pros and cons of government “safety net”
· Four functions of money
· History of money
o Commodity vs. fiat currency
o Problems of hyperinflation and deflation
o Gold standard and 1971
o Bitcoin and cryptocurrency
· Payments system and ACH
· Money supply and M1, M2
· Money supply, inflation, and quantity theory of money
· CPI and measuring inflation (calculations)
· What is equity? Shares, ownership, dividends
· Primary vs. secondary market
· Exchanges: NYSE and NASDAQ
· U.S. equity indexes: DJIA, S&P500, NASDAQ
o Compare and contrast
o Current level of the Dow
· Provide examples of international equity indexes
· Bull market, bear market
· Equity pricing
o One-year equity pricing model (calculations)
o Gordon growth model
o Cost of equity and required rate of return on equity
o Role of risk-free rate
· Rational expectations, efficient markets hypothesis, and the implications
o Prices and fundamental values
· Behavioral finance
Introduction to banking
· Examples of fintech
· Financial system and economic performance
· Information costs and the role of financial intermediaries
· Asymmetric information
o Explain adverse selection
o Explain moral hazard
· How do banks solve adverse selection and moral hazard?
o Relationship banking
o Screening and monitoring
· Draw the basic bank balance sheet
· Key asset and liability of a bank
o Loan making
o Deposit taking (defining characteristic)
· What does a credit analyst do?
· What is a relationship manager?
· T-account for a deposit (calculations)
· ROA, loans, and securities
· Bank profitability and net interest margin
· ROE and leverage (calculations)
· How does a regulatory capital ratio reduce the risk of bank failure?
· Are treasury bonds a risky investment? Why?
· Why charge interest?
· The dual meaning of “discount bond”
· The payments in an amortizing loan
· Bond pricing (calculations)
o Coupon rate
o Yield to maturity and current yield
o Relationship between bond price and yield
o Interest rate risk (IRR)
o IRR and bond maturity
· Nominal vs. real interest rates (calculations)
o Actual vs. expected inflation
· Historical context of period of “low interest rates”
· Recent trends in U.S. interest rates and inflation
· Supply and demand in bond market (draw and use)
o Factors that shift demand
o Factors that shift supply
· Why do interest rates fall in a recession?
· What happens when expected inflation rises?
Risk and term structure
· How is the universe of interest rates related to the risk-free rate?
· The two interest rate premiums
o The “risk premium”
o The “term premium”
· Default risk, default risk premium, and interest rates
· How do you quantify credit risk?
· Credit ratings agencies
o Moody’s, S&P, Fitch
o Buy side vs. Sell side
· Purpose of credit ratings
· Investment grade and non-investment grade debt
· The different names for non-investment grade debt
· Default risk and shifts in bond demand
o Effect on price and yield
· Risk premium and recessions
· How do you measure the risk premium?
· What other factors determine same-maturity yields?
· Potential conflicts of interest at ratings agencies
· What is the “term premium”? (term structure of interest rates)
· Treasury yield curve
o Explanation of slope
o Historical trends
· Sovereign bond market
o Role of central banks and investors
· Expectations theory of the term structure (calculations)
o If given current short and long rate, what is expectation of future short rate?
· Yield curve and the business cycle
· Discussion of the current yield curve
· Should we be worried?
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