Lesson 4-7 CAPM

• Financial Intermediaries — the financial institutions that act as a bridge between investors or savers and borrowers.
• OLD — highly specialized financial system. Grant only short-term loans
• NEW — characterized by market-determined or deregulated rates.
• Classification of Financial Intermediaries

  1. Depository Institutions
  2. Non-depository Institutions
• Depository Institutions — refers to the financial institutions that accept deposit from surplus units
• Sample of Depository Institutions

  • Commercial banks
  • universal banks
• MACRO — Management Asset Capital Risk management Operating Results
• CAMEL — Capital adequacy, Asset quality, Management, Earnings, Liquidity
• Non-depository Institutions — issued contracts that are not deposits
• SAMPLE OF NON-DEPOSITORY

  • Insurance companies
  • Fund manager
  • Investment Bank
  • Finance companies
  • Securities dealer
  • Pawnshops
  • Trust companies
  • Lending investors
• Risk — the possibility of actual returns will deviate/differ from what is expected
• Type of Risk

  1. Interest rate/Market Price Risk
  2. Reinvestment Risk
  3. Refinancing Risk
  4. Default/Credit Risk
  5. Inflation Risk/Purchasing Power Risk
  6. Political Risk
  7. Off-Balance Sheet Risk
  8. Technology and Operation Risk
  9. Technology and Operation Risk
  10. Liquidity Risk
  11. Currency/Foreign Exchange Risk
  12. Country Sovereign Risk
• Interest Rate — denotes percentage earnings/ yields on investment
• Yield — other term for earnings
• Demand of Velocity

  1. Transaction Demand
  2. Precautionary Demand
  3. Specilative Demand
• Transaction Demand — the quantity of money of all individual and firms desire to keep on hand
• Precautionary Demand — act of holding balances of money for use in contingency
• Speculative Demand — demand for highly financial assets
• Velocity of Money — the average of times a unit of currency is used to purchase final goods and services.
• Interest — the amount paid in addition to the principal
• Ineterest Rate — refers to the percentage of the principal
• Nominal Rate — simplest type of interest
• Real Interest Rate — adjusted for expected changes in the price level
• Fixed Interest Rate — you will be charge over the term loan
• Variable Interest Rate — floating rate
• TVM — denotes value of money over time. Central concept in discounted Cash flows (DCF) analysis
• Simple Interest — based in the principal amount of a loan or deposit
• Compund Interest — based on the principal amount and the interest that accumulates on it every period
• Present Value — present discounted value
• discount rate = discount yield
• Ordinary Annuities — makes payment at the end of each period
• Annuity Due — comes at the beginning of each period
• CAPM Component — risk-free rate. The market premium. asset beta
• CAPM 2 DISTINCT RISK

  • Systematic Risk
  • Unsystematic Risk
• CAPM developed by : William F. Sharpe / Harry Markotwitz
• CAPM = Cost of Equity