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Money and Banking

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Money & Banking ­ MGT411
VU
Lesson 27
NON- DEPOSITORY INSTITUTIONS
Non-depository Institutions
Insurance Companies
Securities Firms
Finance Companies
Government Sponsored Enterprises
Non-depository Institutions
Insurance Companies
Securities Firms
Brokerage firms
Investment banks
Mutual fund companies
Finance Companies
Government Sponsored Enterprises
Insurance Companies
Insurance companies began hundreds of years ago with long sea voyages
The most famous insurance company, Lloyd's of London, was established in 1688
Besides insuring traditional assets like airplane and ships, it also insures singers' voices,
pianists' fingers and even food critics' taste buds
Underwriting process refers to the risk assessment and loss reimbursement guarantee by the
individual risk experts of the relevant field joining together to form a syndicate.
When an insurance contract is offered, these syndicates sign up for a certain portion of the risk
in return for a portion of the risk premiums
Insurance process
Insurance companies accept premiums in exchange for the promise of compensation if certain
event occurs
A home owner pays premium in return for the promise that if the house burns down, the
insurance company will pay to rebuild it
So for individuals, insurance is way for transferring the risk
In terms of financial system as whole, insurance companies:
Pool small policies and make large investments
Diversify risks across a large population
Screen and monitor policyholders to mitigate the problem of asymmetric information
Two Types of Insurance Company:
Life insurance
Property and casualty insurance
Type of Life insurance
Term life insurance
Which makes a payment to the insured's beneficiaries upon the death of the insured
Group insurance is obtained through employers
Whole life insurance
Combination of term life insurance and a savings account
A payment of a fixed premium over lifetime in return for a fixed benefit in case of death of
policy holder
The cash value can be refunded if the policyholder decides to discontinue the policy
Over the years, the emphasis shifts from insurance to savings
Property and casualty Insurance
Auto insurance is a combination of property insurance on the car and casualty insurance on the
driver
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Money & Banking ­ MGT411
VU
The policyholder pays premium in exchange for protection
Balance sheet
Liabilities
Promises to policyholders
Assets
Combination of bonds and stocks
Short term money market instruments (in case of property and casualty insurance)
The Role of Insurance Companies:
Insurance companies pool risk to generate predictable payouts
Adverse selection and moral hazard create problems in the insurance market that are worse than
those in the stock and bond markets
Cancer Patients
Fire Insurance
To deal with this, insurance companies carefully screen applicants before issuing them policies
Medical Examination
Driving Records
Policies may also include restrictive covenants in order to reduce moral hazard
Fire extinguishing system and training
Careful
The future of insurance must be considered in the light of advances in medical technology,
particularly with regard to the decoding of the human genome.
In the future, people with inherited tendencies toward certain diseases may not be able to get
insurance
Securities Firms
The broad class of securities firms includes brokerages, investment banks, and mutual fund
companies.
In one way or another, these are all financial intermediaries
The primary services of brokerage firms are accounting and the provision of access to
secondary markets.
They also provide loans to customers who wish to purchase stock on margin, and they provide
liquidity by offering check-writing privileges and by allowing investors to sell assets quickly
All securities firms are very much in the business of producing information; but this is truly at
the heart of the investment banking business
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Table of Contents:
  1. TEXT AND REFERENCE MATERIAL & FIVE PARTS OF THE FINANCIAL SYSTEM
  2. FIVE CORE PRINCIPLES OF MONEY AND BANKING:Time has Value
  3. MONEY & THE PAYMENT SYSTEM:Distinctions among Money, Wealth, and Income
  4. OTHER FORMS OF PAYMENTS:Electronic Funds Transfer, E-money
  5. FINANCIAL INTERMEDIARIES:Indirect Finance, Financial and Economic Development
  6. FINANCIAL INSTRUMENTS & FINANCIAL MARKETS:Primarily Stores of Value
  7. FINANCIAL INSTITUTIONS:The structure of the financial industry
  8. TIME VALUE OF MONEY:Future Value, Present Value
  9. APPLICATION OF PRESENT VALUE CONCEPTS:Compound Annual Rates
  10. BOND PRICING & RISK:Valuing the Principal Payment, Risk
  11. MEASURING RISK:Variance, Standard Deviation, Value at Risk, Risk Aversion
  12. EVALUATING RISK:Deciding if a risk is worth taking, Sources of Risk
  13. BONDS & BONDS PRICING:Zero-Coupon Bonds, Fixed Payment Loans
  14. YIELD TO MATURIRY:Current Yield, Holding Period Returns
  15. SHIFTS IN EQUILIBRIUM IN THE BOND MARKET & RISK
  16. BONDS & SOURCES OF BOND RISK:Inflation Risk, Bond Ratings
  17. TAX EFFECT & TERM STRUCTURE OF INTEREST RATE:Expectations Hypothesis
  18. THE LIQUIDITY PREMIUM THEORY:Essential Characteristics of Common Stock
  19. VALUING STOCKS:Fundamental Value and the Dividend-Discount Model
  20. RISK AND VALUE OF STOCKS:The Theory of Efficient Markets
  21. ROLE OF FINANCIAL INTERMEDIARIES:Pooling Savings
  22. ROLE OF FINANCIAL INTERMEDIARIES (CONTINUED):Providing Liquidity
  23. BANKING:The Balance Sheet of Commercial Banks, Assets: Uses of Funds
  24. BALANCE SHEET OF COMMERCIAL BANKS:Bank Capital and Profitability
  25. BANK RISK:Liquidity Risk, Credit Risk, Interest-Rate Risk
  26. INTEREST RATE RISK:Trading Risk, Other Risks, The Globalization of Banking
  27. NON- DEPOSITORY INSTITUTIONS:Insurance Companies, Securities Firms
  28. SECURITIES FIRMS (Continued):Finance Companies, Banking Crisis
  29. THE GOVERNMENT SAFETY NET:Supervision and Examination
  30. THE GOVERNMENT'S BANK:The Bankers' Bank, Low, Stable Inflation
  31. LOW, STABLE INFLATION:High, Stable Real Growth
  32. MEETING THE CHALLENGE: CREATING A SUCCESSFUL CENTRAL BANK
  33. THE MONETARY BASE:Changing the Size and Composition of the Balance Sheet
  34. DEPOSIT CREATION IN A SINGLE BANK:Types of Reserves
  35. MONEY MULTIPLIER:The Quantity of Money (M) Depends on
  36. TARGET FEDERAL FUNDS RATE AND OPEN MARKET OPERATION
  37. WHY DO WE CARE ABOUT MONETARY AGGREGATES?The Facts about Velocity
  38. THE FACTS ABOUT VELOCITY:Money Growth + Velocity Growth = Inflation + Real Growth
  39. THE PORTFOLIO DEMAND FOR MONEY:Output and Inflation in the Long Run
  40. MONEY GROWTH, INFLATION, AND AGGREGATE DEMAND
  41. DERIVING THE MONETARY POLICY REACTION CURVE
  42. THE AGGREGATE DEMAND CURVE:Shifting the Aggregate Demand Curve
  43. THE AGGREGATE SUPPLY CURVE:Inflation Shocks
  44. EQUILIBRIUM AND THE DETERMINATION OF OUTPUT AND INFLATION
  45. SHIFTS IN POTENTIAL OUTPUT AND REAL BUSINESS CYCLE THEORY