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TABLE OF CONTENTS
CHAPTER 1 .................................................................................................................................. 5 WHAT IS MARKET .................................................................................................................... 5 TYPES OF MARKET................................................................................................................. 5 FACTOR MARKET................................................................................................................ 6 PRODUCT MARKET............................................................................................................. 6 SPOT MARKET...................................................................................................................... 6 FUTURE OR FORWARD MARKET .................................................................................... 6 OPTION MARKET................................................................................................................. 6 PERFECT MARKET .............................................................................................................. 7 EFFICIENT MARKET ........................................................................................................... 7 OPEN MARKET..................................................................................................................... 7 NEGOTIATED MARKET...................................................................................................... 7 WHAT IS FINANCIAL MARKET................................................................................................ 8
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SECURITIES MARKET ........................................................................................................ 8 CAPITAL MARKET .............................................................................................................. 8 MONEY MARKET................................................................................................................. 8 PRIMARY MARKET ............................................................................................................. 8 SECONDARY MARKET....................................................................................................... 9 DERIVATIVES MARKET...................................................................................................... 9 FOREIGN EXCHANGE MARKET........................................................................................... 9 CHAPTER 3 .................................................................................................................................. 9 WHAT IS FINANCIAL ASSETS................................................................................................ 9
DIFFERENT KINDS OF FINANCIAL ASSETS.......................................................................... 9 MONEY ...................................................................................................................................... 9 FUNCTIONS OF MONEY ..................................................................................................... 9 EQUITIES................................................................................................................................. 10 DEBT SECURITIES................................................................................................................. 10 INTERNAL FINANCING............................................................................................................ 10 EXTERNAL FINANCING .......................................................................................................... 10 THE VALUE OF MONEY AND OTHER FINANCIAL ASSETS AND INFLATION ............ 10 INFLATION.............................................................................................................................. 11 DEFLATION ............................................................................................................................ 11 CONSUMER PRICE INDEX................................................................................................... 11 TYPES OF FINANCING: ............................................................................................................ 11 DIRECT FINANCING ............................................................................................................. 11 SEMI DIRECT FINANCING................................................................................................... 11 INDIRECT FINANCING ......................................................................................................... 11
CLASSIFICATION OF FINANCIAL INSTITUTION ............................................................... 11 DEPOSITORY INSTITUTIONS.............................................................................................. 12 CONTRACTUAL INSTITUTIONS......................................................................................... 12 INVESTMENT INSTITUTIONS ............................................................................................. 12 DISINTERMEDIATION.............................................................................................................. 12 GROUP PRESENTATION: ...................................................................................................... 12 WHAT ARE FINANCIAL ASSETS......................................................................................... 12 DIFFERENT KINDS OF FINANCIAL ASSETS .................................................................... 13 MONEY................................................................................................................................. 13 FUNCTIONS OF MONEY ................................................................................................... 13
INFLATION.............................................................................................................................. 14 DEFLATION ............................................................................................................................ 14 CONSUMER PRICE INDEX................................................................................................... 14 FINANCIAL INSTITUTION....................................................................................................... 15 CLASSIFICATION OF FINANCIAL INSTITUTIONS ......................................................... 15 DEPOSITORY INSTITUTION................................................................................................ 15 CONTRACTUAL INSTITUTION ........................................................................................... 15 INVESTMENT INSTITUTION ............................................................................................... 15 DISINTERMEDIATION.............................................................................................................. 15 MIDDLEMAN .......................................................................................................................... 15 BENEFITS OF DISINTERMEDIATION ................................................................................ 16 DIRECT FINANCING ................................................................................................................. 16 UNDERWRITER...................................................................................................................... 16 BENEFITS OF DIRECT FINANCING.................................................................................... 16 INDIRECT FINANCING............................................................................................................. 17
BENEFITS OF INDIRECT FINANCING ............................................................................... 17 INTERNAL FINANCING............................................................................................................ 17 BENEFITS OF INTERNAL FINANCING .............................................................................. 17 CHAPTER 4 ................................................................................................................................ 18 FINANCIAL FORCE RESHAPING THE MONEY AND CAPITAL MARKETS TODAY ....................................................................................................................................................... 18 FINANCIAL INNOVATION ................................................................................................... 18 COMPETITION........................................................................................................................ 18 CONSOLIDATION .................................................................................................................. 18 GLOBALIZATION .................................................................................................................. 18
DEREGULATION.................................................................................................................... 18 CONVERGENCE ..................................................................................................................... 19 MARKET BOARDING............................................................................................................ 19 SECURITIZATION...................................................................................................................... 19 CHAPTER 6 ................................................................................................................................ 19 MEASURING AND CALCULATING INTEREST RATES AND FINANCIAL ASSETS PRICES........................................................................................................................................ 19 METHODS FOR CALCULATING RATE OF RETURN, YIELDS ON FINANCIAL ASSETS ....................................................................................................................................................... 19 METHODS FOR CALCULATING INSTITUTIONAL LOAN RATE ...................................... 20 COUPON RATE........................................................................................................................... 20 CURRENT YIELD....................................................................................................................... 20 RATE OF RETURN ON A PERPETUITY FINANCIAL INSTRUMENT ................................ 21 PERPETUITY RATE ............................................................................................................... 21 YIELD TO MATURITY .......................................................................................................... 21 HOLDING - PERIOD YIELD.................................................................................................. 21
THE BANK DISCOUNT RATE .............................................................................................. 22 CHAPTER 7 ................................................................................................................................ 22 WHAT KINDS OF RISK DO INVESTORS FACE IN THE FINANCIAL MARKET ...... 22 MARKET RISK........................................................................................................................ 23 REINVESTMENT RISK .......................................................................................................... 23 DEFAULT RISK....................................................................................................................... 23 INFLATION RISK ................................................................................................................... 24 CURRENCY RISK ................................................................................................................... 24 POLITICAL RISK .................................................................................................................... 24
CHAPTER 1
WHAT IS MARKET It is institution through which buyers and sellers meet to exchange goods, services and productive resources. Examples include: physical retail markets, such as local farmers' markets (which are usually held in town squares or parking lots on an ongoing or occasional basis), shopping centers and shopping malls (non-physical) internet markets. ad hoc auction markets markets for intermediate goods used in production of other goods and services labor markets international currency and commodity markets stock markets, for the exchange of shares in corporations Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate externalities, such as pollution permits. Illegal markets such as the market for illicit drugs, arms or pirated products.
TYPES OF MARKET Factor market Product Market Spot Market Future or Forward Market Option Market Perfect Market Efficient market Open Market Negotiated Market
FACTOR MARKET The factor markets allocate factors of production land, labor, managerial skills and capital market wages, rental payments and so on to the owners of productive resources. It is market for a factor of production, such as labor or capital; in which supply and demand interact to determine the equilibrium price of the factor. PRODUCT MARKET Product market is a mechanism that allows people to easily buy and sell products. SPOT MARKET A spot market is one in which assets are traded for immediate delivery (usually within one or two business days). A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective. A futures transaction for which commodities can be reasonably expected to be delivered in one month or less. Though these goods may be bought and sold at spot prices, the goods in question are traded on a forward physical market. If you pick the telephone and instruct your broker to purchase telecom corporation stock at todays price. This is spot market transaction. FUTURE OR FORWARD MARKET Future market is designed to trade contracts calling for the future delivery of financial instruments. An auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit. For Example: You may call your broker and ask to purchase a contract calling for delivery to you 1 million in government bonds six month from today. OPTION MARKET Option market also offers investors in the money and capital markets opportunities to reduce risk. The market make possible the trading of options on selected stocks and bonds which are contracts that give an investor the right to either buy designated securities from or sell designated securities to the writer of the option at guaranteed price at any time during the life of contract. The exchange where most of the buying and selling of options contracts take place is called the options market. The most common way of trading options is through
standardized options contracts. These are listed in various futures and options exchanges. The listing of the contracts and their respective prices is done using ticker symbols. These exchanges publish the options prices continuously and create live options markets for options trading. Thus, the exchange offers the trading parties a platform to discover prices and execute transactions. These exchanges assume the role of intermediaries for buyers and sellers. The Role of an Option Market These exchanges ensure that the contract terms are backed by the credit of the exchange. They also safeguard the anonymity of the counterparties and enforce market regulations to ensure that the trades remain fair and transparent. During fast trading conditions, these exchanges ensure the maintenance of orderly markets. PERFECT MARKET It is one in which cost of carrying out transactions is zero or nearly so and all market participant are price taker. In such market there are no significant government restrictions on trading and movement of fund. In economics, a perfect market is defined by several conditions, collectively called perfect competition. Among these conditions are Perfect market information No participant with market power to set prices No barriers to entry or exit Equal access to production technology EFFICIENT MARKET A market in which prices fully reflected the latest available information is an efficient market. OPEN MARKET Some corporate bonds are sold in the open market to the highest bidder and are brought and sold any number of times before they mature and paid off NEGOTIATED MARKET In the negotiated market for corporate bonds, securities generally are sold to one or few buyers under private contract.
WHAT IS FINANCIAL MARKET Financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities at low transaction costs. Financial markets may be classified as Securities Market Derivatives Market Foreign exchange Market SECURITIES MARKET Securities market deals with both long term and short term debt securities and equity and equity related instruments. Securities market is further divided into Capital market Money market CAPITAL MARKET Capital Market deals with long term securities. A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. MONEY MARKET Money market deals with short term securities. The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. PRIMARY MARKET The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue.
SECONDARY MARKET A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. DERIVATIVES MARKET The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. FOREIGN EXCHANGE MARKET The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies.
CHAPTER 3
WHAT ARE FINANCIAL ASSETS It is claim against the income or wealth of a business firm, household, or unit of government, represented usually by a certificate, receipt computer record file, other legal document, and usually created by or related to the lending of money. DIFFERENT KINDS OF FINANCIAL ASSETS Money Equities
Debt Securities Derivatives MONEY Money is any object or record, that is generally accepted as payment for goods and services and repayment of debts in a given country FUNCTIONS OF MONEY A medium of exchange A unit of account A store of value A standard of deferred payment
A MEDIUM OF EXCHANGE A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system A UNIT OF ACCOUNT Unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets. A STORE OF VALUE To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved EQUITIES Ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities. DEBT SECURITIES Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount borrowed), interest rate and maturity/renewal date. Debt securities include government bonds and preferred stock INTERNAL FINANCING Funds produced from a business' operations, as opposed to external financing, such as the issuance of debt or equity. EXTERNAL FINANCING External financing is the issuance of debt or equity in order to finance company operations. Also referred to as outside financing. THE VALUE OF MONEY AND OTHER FINANCIAL ASSETS AND INFLATION Inflation Deflation Price Index
INFLATION Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. DEFLATION Deflation is a decrease in the general price level of goods and service. Deflation occurs when the annual inflation rate falls below 0% (a negative inflation rate). CONSUMER PRICE INDEX A consumer price index (CPI) is a measure estimating the average price of consumer goods and services purchased by households. TYPES OF FINANCING: Direct Financing Semi Direct Financing Indirect Financing DIRECT FINANCING Direct financing is financing done without the use of an underwriter or broker. In the situation of direct financing, the securities are sold directly to investors in order to avoid the cost of underwriting.
SEMI DIRECT FINANCING Third party is involved to facilitate transactions between SSUs and DSUs. Third party does not take a position in the transaction and strictly serves as a middleman(broker). INDIRECT FINANCING Indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary. This is different from direct financing where there is a direct connection to the financial markets as indicated by the borrower issuing securities directly on the market.
CLASSIFICATION OF FINANCIAL INSTITUTION
Depository Institutions Contractual Institutions
Investment Institutions DEPOSITORY INSTITUTIONS In financial economics, a financial institution is an institution that provides financial services for its clients or members. Commercial banks, credit unions, savings and loan associations, mutual savings banks, and federal savings banks. CONTRACTUAL INSTITUTIONS Financial institutions that attract savings from the public by offering contracts that protect the saver against risk in the future, such as insurance policies and pension plans. INVESTMENT INSTITUTIONS Investment institution sell shares to the public and invest the proceeds in stocks, bonds and other assets in the hope of providing higher returns to the shareholders. DISINTERMEDIATION In economics, disintermediation is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.
GROUP PRESENTATION: Ayesha Arshad Anum Maqsood Saira Saeed Habiba Mustufa
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WHAT ARE FINANCIAL ASSETS It is claim against the income or wealth of a business firm, household, or unit of government, represented usually by a certificate, receipt computer record file, other legal document, and usually created by or related to the lending of money. Cash
Cash Equivalents Short Term Investments Accounts Receivable DIFFERENT KINDS OF FINANCIAL ASSETS Money Equities Debt Securities Derivatives MONEY Money is any object or record, that is generally accepted as payment for goods and services and repayment of debts in a given country. Money is the most liquid of all assets because it need not be converted into any other form to be spend. FUNCTIONS OF MONEY A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system. It is usually the only financial asset that virtually every business , household, and unit of government will accept in payment for goods and services. Now government have separated precious metals from money and issue paper or plastic money instead of gold or silver used as money in past. Unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets. It express the price of all things as in one unit. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved. Money may not be the good store of value in term of future value and worth but still maintain a value in inflation and deflation factors are not there
A "standard of deferred payment" is an accepted way to settle a debt a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts. INFLATION Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. Inflation lowers the value or purchasing power of money and special problem in money and capital market as it can damage the value of financial assets such as bonds or deposits. DEFLATION Deflation is a decrease in the general price level of goods and service. Deflation occurs when the annual inflation rate falls below 0% (a negative inflation rate). Less common than inflation, deflation benefit those whose income doesn't also decline with prices and , therefore, can buy more goods and services than they could in the past. Unfortunately, deflation may be accompanied by a troubled economy so that, even though living cost are less, many people may still find themselves with sharply reduced income 9 purchasing power).
CONSUMER PRICE INDEX A consumer price index (CPI) is a measure estimating the average price of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indexes and sub-subindexes are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index.
FINANCIAL INSTITUTION Financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government. CLASSIFICATION OF FINANCIAL INSTITUTIONS Financial institutions are classified in three categories Depository Institution Contractual Institution Investment Institution DEPOSITORY INSTITUTION In financial economics, a financial institution is an institution that provides financial services for its clients or members. Commercial banks, credit unions, savings and loan associations, mutual savings banks, and federal savings banks. CONTRACTUAL INSTITUTION Financial institutions that attract savings from the public by offering contracts that protect the saver against risk in the future, such as insurance policies and pension plans. INVESTMENT INSTITUTION Investment institution sell shares to the public and invest the proceeds in stocks, bonds and other assets in the hope of providing higher returns to the shareholders. DISINTERMEDIATION is the removal of intermediaries in s supply chain or cutting out the middleman. MIDDLEMAN Distributor Wholesaler Broker
Agent Retailer BENEFITS OF DISINTERMEDIATION Companies deal with customers directly Drop in the cost of servicing customers directly Results in high market transparency Buyers aware of supply prices direct from manufacturers Consumers has to pay less because of direct interaction Stock purchasing through E-trade is enhanced in the financial market DIRECT FINANCING Direct financing is done without the use of underwriter or broker. Securities are sold directly to investors. Direct financing without the use of underwriters is also SEC exempt in most cases. Common methods for direct financing include a financial auction (where price of the security is bid upon) or an initial public offering (where the security is sold for a set initial price).
UNDERWRITER Underwriters are usually investment banks who hype up the stock for the initial public offering BENEFITS OF DIRECT FINANCING Done in order to avoid cost of underwriting Direct financing without the use of underwriters is also SEC exempt in most cases. That eliminates the need to file securities with the SEC.
INDIRECT FINANCING Indirect finance is where borrowers borrow funds from the financial market through indirect means, such as through a financial intermediary. This is different from direct financing where there is a direct connection to the financial markets as indicated by the borrower issuing securities directly on the market. BENEFITS OF INDIRECT FINANCING Insured against the risk of default as the bank will cover the loan Have a 'monitoring' role to ensure no overly risky loans are made. Intermediaries also provide a means for portfolio adjustment, and serve as a basis for the payments mechanism. INTERNAL FINANCING Funds produced from business operations as opposed to the external financing, such as the issuance of the debt or equity. Firm using its profits as a source of capital for new investment.
BENEFITS OF INTERNAL FINANCING Capital is immediately available

No interest payments No control procedures regarding creditworthiness Spares credit line No influence of third parties Less expensive for the firm because it does not involve any transaction cost.
CHAPTER 4 FINANCIAL FORCE RESHAPING THE MONEY AND CAPITAL MARKETS TODAY Financial Innovation - Consolidation Competition Deregulation Homogenization - Convergence - Globalization - Market boarding
FINANCIAL INNOVATION In general, Innovation refers to the creating and marketing of new types of securities. The development of many new financial service and instruments. Equity credit line, International mutual fund etc COMPETITION Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. One of the cause of the ongoing rush to innovate and develop new services and techniques is the rise of intense competition among financial service providers. Banks, Insurance companies. CONSOLIDATION Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. GLOBALIZATION The global expansion of operations and the falling of geographical barriers. The expansion of business operation to international level. DEREGULATION Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.
CONVERGENCE The occurrence of two or more things coming together. Convergence is a coming together of two or more distinct entities. in this context the term refers to the combination of two or more different technologies in a single device. MARKET BOARDING The expansion of traditionally local markets to become regional, national, or even international in scope. SECURITIZATION Securitization is the financial practice of pooling various types of contractual debt, such as residential mortgages. commercial mortgages. CHAPTER 6 MEASURING AND CALCULATING INTEREST RATES FINANCIAL ASSETS PRICES Methods for calculating rate of return, yields on financial assets Methods for calculating institutional loan rate
AND
METHODS FOR CALCULATING RATE OF RETURN, YIELDS ON FINANCIAL ASSETS Coupon rate Current rate Annual rate of return on a perpetual financial Instrument. Yields to maturity Holding period yields The bank discount rate
METHODS FOR CALCULATING INSTITUTIONAL LOAN RATE There are six popular methods for calculating institutional loan rate are as fallow: Add-on rate of interest approach Discount loan method Home mortgage interest rate Annual percentage rate The simple interest method Compound interest rate COUPON RATE The Coupon rate is the contracted interest rate that the bond issuer agrees to pay at the time a bond is issued and often is set close to prevailing interest rate on comparables financial assets at the time a bond is sold. For example: A company issues a bond with a coupon rate printed on its face of 9 percent, the borrower has promised the lender an annual interest payment of 9 percent of the bond s par value. Par value of the bond is $1,000.Calculate the amount of Coupon. The amount of promised annual interest income paid by a bond is called its coupon.
The annual coupon may be determined from the formula Coupon = Coupon rate * Par value CURRENT YIELD Current yield is the ratio of the annual income (dividends or interest ) generated by the assets relative to its current market value. For Example: A share of common stock selling in the market for $30 and paying an annual dividend to the share holder of $3 would have current yields calculated as follows: Current yields = Annual Income Market price of the asset
Current Yields =
$3/$30
Current Yields = 0.10 or 10% RATE OF RETURN ON A PERPETUITY FINANCIAL INSTRUMENT PERPETUITY RATE the return on a financial instrument that never matures but promises a fixed income to its holder every year. Annual rate of return on a perpetual financial instrument cash flow promised / Current price or present price = Annual
YIELD TO MATURITY Yield to maturity (YTM) is the annualized rate of interest that equates the purchase price of a financial assets with present value of all of its expected net cash inflows (Income) until the assets reaches its maturity date. . YTM = maturity Coupon payment + [ Par value purchase value]/Period of (Par value + purchase price)/2 Coupon payment = Coupon rate * Par value Example: Suppose your bond is selling for $950, and has a coupon rate of 7%; it matures in 4 years, and the par value is $1000. What is the YTM? HOLDING - PERIOD YIELD The total return received from holding an asset or portfolio of assets. Holding period return/yield is calculated as the sum of all income and capital growth divided by the value at the beginning of the period being measured.
Suppose that you spend $1000 on ten shares of the blue chip stock. At the end of the year, you have $40 in dividends (10 shares x $4); and the price of the stock rises to $110/share. THE BANK DISCOUNT RATE The interest rate for short-term money-market instruments like commercial paper and Treasury bills. The bank discount rate is based on the instrument's par value and the amount of the discount. The Discount Rate = days/Days to maturity (Par value Purchase price) /par value * 360
For example, suppose there is a U.S Treasury bill that sells for $95 and par value $100 government bond schedule to mature in 180 days.
CHAPTER 7 WHAT KINDS OF RISK DO INVESTORS FACE IN THE FINANCIAL MARKET Market Risk Reinvestment Risk Default Risk Inflation Risk Currency Risk
Political Risk MARKET RISK Risk which is common to an entire class of assets or liabilities. The value of investments may decline over a given time period simply because of economic changes or other events that impact large portions of the market. Market risk is the risk that the value of an investment will decrease due to moves in market factors. REINVESTMENT RISK The risk that future proceeds will have to be reinvested at a lower potential interest rate. The risk resulting from the fact that interest or dividends earned from an investment may not be able to be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. For example, falling interest rates may prevent bond coupon payments from earning the same rate of return as the original bond. DEFAULT RISK Another important factor causing one interest rate to differ from another in the global marketplace is the degree of default risk carried by individual assets. Investor in financial assets face many different kinds of risk, but one of the most important is default risk Default risk is the risk that borrower will not make all promised payments at the agreed- upon times. All debt except some government securities is subject to varying degrees of default risk. For example you purchase a 10 year corporate bond with a $ 1,000 par value and a coupon rate of 9%, the issuing company promises in the indenture (bond contract) to pay you $90 a year for 10 years plus $ 1,000 at the end of 10 year period. Failure to meet any of these promised payments on time puts the borrower in default, and the lender may have to go to court to recover the money owned.
INFLATION RISK The risk that increases in the general price level will reduce the purchasing power of earning s from a loan, security, or other investment. For example, $1,000,000 in bonds with a 10% coupon might generate enough interest payments for retiree to live on, but with an annual 3% inflation rate, every $1,000 produced by the portfolio will only be worth $970 next year and about $940 the year after that. The rising inflation means that the interest payments have less and less purchasing power. CURRENCY RISK The risk that adverse movements in the price of one national currency another will reduce the net rate of return from a foreign investment. Sometimes referred to an exchange rate risk. POLITICAL RISK The probability that changes in government laws or regulations will reduce an investors expected return from an investment.

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Depository Institutions Contractual Institutions

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BENEFITS OF INTERNAL FINANCING Capital is immediately available

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