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FIn 353: Lecture 1

Financial Markets and
Administrative Issues and
Course Overview

Today’s plan
 administrative issues
• syllabus
• prerequisite
• add, drop and withdraw
• Two mid-term exams
• Final
• In-class exercises
• final grade
 Introduction to financial markets and institutions

The instructor
 My name is George Li
 Office: BUS 315
 Email:
 Office hours:
• Tuesday: 4:00 to 6:00
• Wednesday: 11:30 to 1:30
 Research interest:
• Corporate finance: real options, technological innovations, and
• Asset pricing: information and stock prices

 Financial Markets and Institutions, by
Saunders and Cornett (5th edition)
 Sorry for the cost

 You are required to take FIN 350 with a
grade of at least C-.
 It is the school’s policy that all the
students in this course must satisfy this
requirement and there is no exception
Add, drop and withdrawal policy
 The business school has the policy for
add, drop and withdrawal
• In the first four weeks, you have to get
enrolled in the class, if you want.
• Students can withdraw once
• Please read the bulletin for detail information
Pass or no pass grade
 Fin 353 is a letter graded course.
 Please don’t change to pass or no-pass
grade course; otherwise you will get a
no-pass grade.
 To help you understand the concepts
taught in class, and prepare for the
mid-term exams and the final exam,
there is a weekly homework set, which
is not graded, but its solution will be
posted in my ilearn. The best way to
learn is to do a lot of problems.
Mid-term exams
 There are two mid-term exams, which are in the form of
multiple choice questions and take about 90 -120
minutes each.
 There are no makeup or in-advance mid-term exams
 The higher-score mid-term exam will have a weight of
0.8 and the lower one will have a weight of 0.2. Each mid-
term exam will have 40 questions.
 You are supposed to allocate your time to take all the
mid-term exams.

The final exam
 The final exam will be in class (closed
book), with a form of multiple choice
 There are no makeup or in-advance
 The final exam is cumulative, based on
the lectures, mid-term exams and
 The final exam will be at the same
classroom and start at the same time. The
final exam takes 150 minutes.
In-class works
 There will be three in-class works. Each is
worth 10 points. The in-class work can be
taken anytime during a lecture. These three
in-class works are used to make sure that
you come to each lecture. The in-class work
is to ask to write some solutions to problems
in a sheet of paper and have your name
written on it. You have to submit the in-class-
work yourself.
FIn 351: Lecture 1
 10 points have been assigned for class performance.
If you don’t disturb the class , you will get a full credit
for class performance. The typical example for
disturbing the class is that you keep talking or
talking to other students during the lecture so that
other students cannot listen to the instructor clearly.
The other example is that you come to lectures late
very often or leave the classroom when the instructor
is lecturing. The class performance score will be
given at the instructor’s discretion.

FIn 351: Lecture 1
Final grade
 Your overall course grade will be based on
your class attendance in the class, the mid-
term exams, and the final exam.

 Class attendance: 10 pts
 In-class works 30 pts
 Two mid-term exams: 30 pts
 Final exam: 50 pts
 Total 120 pts
Grading policy
 Your grades are based on the distribution of
the scores of the class. Specifically, your final
grade is based on the following table.
Ranking Grade
0%-10% A range
10%-50% B range
50%-85% C range
85%-95% D range
95%-100% F
Motivation for taking Fin 353?
 Why are you taking Fin 353?
My approach of teaching Fin 353
 Focus on several fundamental,
important concepts,
 Applications and economic intuitions
 Avoid too many materials
 Help understand finance better.
Why study Financial Markets
and Institutions?
 Markets and institutions have many
important functions to perform.
 They help people to increase income,
reduce risk exposure, and provide all kinds
of economic opportunities.
Financial markets
 A financial market
• Securities are issued and traded
 The classification of the financial market
• By seasoning of claim
• Primary market
• Secondary market
• By nature of market
• Debt market
• Equity market
Financial markets (continue)
• By maturity of claim
• Money market
• Capital market

Primary versus Secondary
 Primary markets
• markets in which users of funds (e.g.,
corporations and governments) raise funds by
issuing financial instruments (e.g., stocks and
 Secondary markets
• markets where financial instruments are traded
among investors (e.g., NYSE and Nasdaq)
Primary versus Secondary
Primary and Secondary Markets
 Do secondary markets add value to society
or are they simply a legalized form of
• How does the existence of secondary markets
affect primary markets?
Money and Capital Markets
 Money markets
• markets that trade debt securities with maturities of one
year or less (e.g., CDs and U.S. Treasury bills)
• little or no risk of capital loss, but low return
 Capital markets
• markets that trade debt (bonds) and equity (stock)
instruments with maturities of more than one year
• substantial risk of capital loss, but higher promised return
Debt and stock Markets
 Debt markets
• markets in which users of funds such as
corporations and governments raise funds by
borrowing money from fund owners or investors.
 Stock markets
• markets in which users of funds (corporations)
raise funds by selling ownership of the firm.

Foreign Exchange (FX)
 FX markets
• trading one currency for another (e.g., dollar for yen)
 Spot FX
• the immediate exchange of currencies at current
exchange rates
 Forward FX
• the exchange of currencies in the future on a specific date
and at a pre-specified exchange rate
Derivative Security Markets
 Derivative security
• a financial security whose payoff is linked to (i.e.,
“derived” from) another security or commodity,
• generally an agreement to exchange a standard quantity
of assets at a set price on a specific date in the future.
Derivative Security Markets
 Selected examples of derivative
• Many options, futures contracts
• Forward contracts
• Forward rate agreements
• Swaps
• Securitized loans
The functions of financial
1. Conducting exchange
2. Providing liquidity
3. Pooling money to fund large corporations
4. (reduce cost)
5. Transferring money across time and distance
6. Risk management (hedge, diversify)
7. Providing information
8. Providing efficient allocation of money

Conducting exchange
 What does it mean ?
 Examples
Providing liquidity
 What does this mean?
 Examples

Pooling money to fund large
corporation investments
 What does this mean?
 Examples
Transferring money across time
and distance
 What does this mean?
 Examples
Risk management
 What does this mean?
 Examples

Providing information
 What does this mean?
 Examples

Providing efficient allocation of
 What does this mean?
 Examples

Financial Market Regulation
 The Securities Act of 1933
• full and fair disclosure and securities registration
 The Securities Exchange Act of 1934
• Securities and Exchange Commission (SEC) is
the main regulator of securities markets
Financial institutions
 Financial Institutions
• institutions through which suppliers channel money to
users of funds.
 Examples of financial institutions
• Commercial banks
• Thrifts
• Savings associations, saving banks, credit unions
• Insurance companies
• Securities firms and investment banks
• Mutual funds
• Financing companies
Asset Size and Number of Selected
U.S. Financial Institutions 2010
(BILL $)
Commercial Banks $12,130 6,622
Savings Associations $ 1,253 1,138
Credit Unions $ 885 7,554
Insurance Companies $ 6,459
Private Pension Funds $ 5,661
Finance Companies $ 1,613
Mutual Funds $ 7,376
Money Market Mutual Funds $ 2,746
Data from September 2010, data sources include Federal Reserve Board, Flow of Funds Accounts, Levels Tables,
FDIC Stats at a Glance and the NCUA website. The mutual funds category excludes money market funds.
Financial Institutions
 Depository institutions:
• commercial banks, savings associations, savings banks,
credit unions
 Non-depository institutions
• Contractual:
• insurance companies, pension funds,
• Non-contractual:
• securities firms and investment banks, mutual funds.