Capital Market

• interest rate/market price risk


  financial intermediaries perform what is knows as asset transformation in their buying primary securities and selling secondary securities.
• Reinvestment risk


  The risk that earnings from a financial asset need to be reinvested in lower yielding assets or investment because interest rates have fallen or decreased
• Refinancing risk


  The risk that the cost of rolling over or re-borrowing funds could be more than the return earned on asset investment
• Default/Credit Risk


  The risk that the borrower will be unable to pay interest on a loan or principal of a loan or both
• Inflation/purchasing power risk


  The risk of increase in value of goods and services reducing the purchasing power of money to purchase goods or services
• Political risk


  The risk that government laws or regulations will affect the investor's expected return on investment and recovery of investment adversely or negatively
• Off-balance-sheet risk


  Transactions that do not appear in the financial institutions balance sheet but represent transactions that pose contingent if it does not actually exist currently but may happen in the future
• Technology_and_operation risk


  Advancement in technology poses an operational risk to all businesses, including financial institutions
• Liquidity risk


  Results from withdrawal of funds by investors or exercise of loan rights or credit lines of clients
• Currency_or_foreign exchange risk


  Possible loss resulting from an unfavorable change in the value of foreign currencies
• Country or sovereign risk


  While investing in securities denominated on the other foreign currencies is advantageous, for a financial intermediary, it is likewise posing a country or sovereign risk in investing in securities denominated in foreign currency
• Transaction costs


  Refer to all fees, commissions, and other charges paid when buying or selling securities including research costs, cost of distributing securities to investors, cost of SEC registration, and the time and hassle of the financial transaction
• Risk


  Refers to chances that the outcome of an event is unfavourable or undesirable. A chance or possibility of danger, loss, injury, and the like
• Returns


  Refer to yields or earnings on an investment
• Types of Risk

  • Systematic risk (also called undiversified risk or market risk)
  • Unsystematic risk (sometimes called diversifiable risk, residual risk, or company specific risk)
• (BS 25999)


  Risk is an average affect by assuming the combined effect of each possible consequence weighted by the associated likelihood of each consequence
• (ISO_27005)


  Risk estimation is the process to assign values to the probability and consequence of risk
• (NFPA_1600)


  Risk assessment categorizes threats, hazards, or perils by both their relative frequency and severity
• Expected returns


  Future cash flows associated with investment
• Terminal_value


  Maturity value of an investment
• Present_values


  Discounted value of the future returns
• Rate of return


  The ratio of the net cash flows and the principal of initial investment
• Variance


  A measure of how spread out numbers are, that is, how far each value the data set is from the mean
• Portfolio Variance


  is a collection of financial asset or investment such as stocks, bonds, and cash
• Standard Deviation


  Calculated as the square root of variance
• Yield curve


  Graphical representation of the term structure of interest rates at a particular point in time
• Ascending_yield_curve


  The longer the maturity of the security, the higher the interest rates, which is the general trend
• Downward sloping 


  Short term rates are higher than long-term rates which can happen under certain market conditions
• Theories of Term Structure

  • Pure of unbiased expectations theory
  • Liquidity/term premium theory
  • Segmented markets theory
  • Preferred habitat theory
• Concept_of Inter rates


  Percentage earnings or yield on investment. It is the cost of using money expressed as percentage of the principal for a given period of time, which is usually per year
• Demand for money


  The amount of money that people desire to hold as a store of value
• Types of Demand for Money

  • Transaction demand
  • Precautionary demand
  • Speculative demand
• Velocity_of_money


  The average number of times a unit of currency is used to purchase final goods and services
• Types of Interest Rates

  • Nominal interest rate
  • Real interest rate
  • Fixed interest rate
  • Variable interest rate
• 1. Pure_of_unbiased expectations theory

  -states that for the same holding period (term), investors should expect to earn the samereturn, whether they invest in short-term or long-term securities.
• Liquidity/term premium theory

  -emanates from the pure expectations theory based on the idea investors will hold long-term maturities only if they are offered a premium to compensate for future uncertainty in a security’s value which increases with an asset’s maturity, that is, the longer term of the security, the riskier the security becomes, relative to default.
• Segmented markets theory

  -total opposite of the pure expectations theory where securities with different maturities are perfect substitute for each other. 
• Preferred habitat theory

  -combines the elements of the three other theories of term structure.
• Transaction demand- is a payment for expected expenditures like purchases of goods, payments for electricity bill, water bill, telephone bill, tuition fee and others, does not coincide with the receipt of income, people tend to hold on to money to pay for all those expenses.
• Precautionary demand- others hold on to money in preparation for unseen additional expenses caused by unexpected evens like sickness injury from accident, or loss of property.