FIN550: Financial Markets & Institutions
Credit Hours:
3
Contact Hours:
This is a 3-credit course, offered in accelerated format. This means that 16 weeks of
material is covered in 8 weeks. The exact number of hours per week that you can
expect to spend on each course will vary based upon the weekly coursework, as
well as your study style and preferences. You should plan to spend 10-25 hours per
week in each course reading material, interacting on the discussion boards, writing
papers, completing projects, and doing research.
Faculty Information
Name:
Phone:
CSU-GC Email:
Virtual Office Hours:
Course Description and Outcomes
This course presents an overview of the roles played by the various markets, institutions and financial
authorities. Specific topics include an introduction the U.S. Financial system; the supply of and demand for
loan funds; securities and obligations. Emphasis is placed upon policy effects of financial institutions and
markets upon various sectors of the economy.
Course Learning Outcomes:
1. Describe the operations, mechanics, and structure of US and global financial system.
2. Discuss how various activities, markets, institutions, and regulations contribute to achieving the
overall objective of a financial system.
3. Explain the roles and functions of the Federal Reserve.
4. Describe the core concepts of financial markets, financial instruments, and financial institutions, as
well as their roles on investment, finance, and valuation.
5. Identify types of risk faced by financial institutions.
Participation & Attendance
Prompt and consistent attendance in your online courses is essential for your success at CSU-Global Campus.
Failure to verify your attendance within the first 7 days of this course may result in your withdrawal. If for some
reason you would like to drop a course, please contact your advisor.
Online classes have deadlines, assignments, and participation requirements just like on-campus classes. Budget
your time carefully and keep an open line of communication with your instructor. If you are having technical
problems, problems with your assignments, or other problems that are impeding your progress, let your
instructor know as soon as possible.
Course Materials
Required:
Saunders, A. & Cornett, M.M. (2012). Financial markets and institutions (5th Ed.). New York, NY: McGraw
Hill Irwin. ISBN13: 9780078034664.
Recommended:
Board of Governors of the Federal Reserve System. (2005). The federal reserve system purposes & functions
[electronic book]. Washington, D.C. Retrieved from http://www.federalreserve.gov/pf/pdf/pf_complete.pdf
Cohen, H. (2012). Preventing the fire next time: Too big to fail. Texas Law Review, 90(7), 1717-1743.
Nishimura, K. G. (2010). Financial system stability and market confidence. Asian Economic Papers, 9(1), 25-47.
Course Schedule
Due Dates
The Academic Week at CSU-Global begins on Monday and ends the following Sunday.
 Discussion Boards: The original post must be completed by Thursday at 12 midnight MT and Peer
Responses posted by Sunday 12 midnight MT. Late posts may not be awarded points.
 Mastery Exercises: Students may access and retake mastery exercises through the last day of class until
they achieve the scores they desire.
 Critical Thinking Activities: Assignments are due Sunday at 12 midnight MT.
Week #
1
2
3
4
5
Readings
Assignments

Chapter 1 and Appendix 1A in Financial Markets
and Institutions


Discussion (25 points)
Critical Thinking (50 points)

Chapter 2 in Financial Markets and Institutions

Chapter 4 in Financial Markets and Institutions

Chapters 5, 6 & 7 in Financial Markets and
Institutions
Chapters 8, 9 & 10 in Financial Markets and
Institutions








Discussion (25 points)
Critical Thinking (70 points)
Discussion (25 points)
Critical Thinking (60 points)
Discussion (25 points)
Critical Thinking (75 points)
Discussion (25 points)
Critical Thinking (60 points)

6
7
8



Chapters 11, 12 & 13 in Financial Markets and
Institutions
Chapters 14, 15 & 16 in Financial Markets and
Institutions
Chapters 17, 18 & 19 in Financial Markets and
Institutions






Discussion (25 points)
Critical Thinking (75 points)
Discussion (25 points)
Critical Thinking (60 points)
Discussion (25 points)
Portfolio (350 points)
Assignment Details
This course includes the following assignments/projects:
Module 1 Critical Thinking: Financial Markets and Financial Crisis (50 points)
1.
Assume you are a financial manager of a Fortune 500 company. Your firm is planning to expand into new markets;
hence, you need to borrow $100 million within the next year. Answer the following questions in detail:
a. Describe the ways you can borrow the $100 million.
b. If you decide to issue debt securities, describe the types of financial institutions that may purchase these
securities.
c. Discuss how individuals indirectly provide the financing for your firm when they maintain deposits at
depository institutions, invest in mutual funds, purchase insurance policies, or invest in pensions.
2.
Financial institutions are subject to regulations to curb excessive risk taking and ensure smooth flow of funds
through financial markets. For obvious reasons, during the financial crisis, many individuals were hesitant about
using financial institutions for financial transactions. Why do you believe existing regulations were ineffective at
ensuring a safe financial system?
Complete your 1-3 page response using Microsoft Word. Your well-written paper should be supported with credible
sources and formatted according to CSU-Global APA guidelines, with any sources properly cited.
Module 2 Critical Thinking: Interest Rates and Time Value of Money (70 points)
1.
2.
A security’s equilibrium rate of return is 7 percent. For all securities, the inflation risk premium is 1.65 percent and
the real interest rate is 3.25 percent. The security’s liquidity risk premium is .25 percent and maturity risk premium
is .75 percent. The security has no special covenants. Calculate the security’s default risk premium.
You are considering an investment in 30-year bonds issued by Envision Corporation. The bonds have no special
covenants. The Wall Street Journal reports that one-year T-bills are currently earning 3.25 percent. Your broker
has determined the following information about economic activity and Envision Corporation bonds:
Real interest rate is 2.20%
Default risk premium is 1.00%
Liquidity risk premium is 0.50%
Maturity risk premium is 1.75%
a. What is the inflation premium?
b. What is the fair interest rate on Moore Corporation 30-year bonds?
3.
4.
One-year Treasury bills currently earn 3.25 percent. You expect that one year from now, one-year Treasury bill
rates will increase to 3.55 percent. If the unbiased expectations theory is correct, what should the current rate be
on two-year Treasury securities?
Suppose we observe the following rates: 1R1= .10, 1R2= .16, and E (2r1) = .10. If the liquidity premium theory of the
term structure of interest rates holds, what is the liquidity premium for year 2?
5.
Assume you received $8,000 five years from today. Calculate the present value of the $8,000 if your investments
pay
a. 6 percent compounded annually
b. 8 percent compounded annually
c. 10 percent compounded annually
d. 10 percent compounded semiannually
e. 10 percent compounded quarterly
Discuss your answer. Specifically, what do your answers to these questions tell you about the relation between present values
and interest rates and between present values and the number of compounding periods per year?
6.
Assume you received $8,000 today. Calculate the future value in five years of the $8,000 if your investments pay
a.
b.
c.
d.
e.
6 percent compounded annually
8 percent compounded annually
10 percent compounded annually
10 percent compounded semiannually
10 percent compounded quarterly
Discuss your answer. Specifically, what do your answers to these questions tell you about the relation between future
values and interest rates and between future values and the number of compounding periods per year?
7.
Assume you just retired and you have accumulated $900,000 in your retirement account. You opted to receive
annual payment of $60,000 for the next 30 years. Determine the interest rate on this annuity.
Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit.
Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited.
Module 3 Critical Thinking: Federal Reserve Requirements and Policy (60 points)
1.
Patriotic Bank currently has $800 million in transaction deposits on its balance sheet. The current reserve
requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8 percent.
a. Present the balance sheet (before and after changes) of both the Federal Reserve and Patriotic Bank if Patriotic
Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to Patriotic
Bank as transaction deposits.
b. Present the balance sheet of both the Federal Reserve and Patriotic Bank if Patriotic Bank converts 75 percent
of its excess reserves to loans and borrowers return 60 percent of these funds to Patriotic Bank as transaction
deposits.
2.
Assume that you are the manager of a firm. You are concerned about a potential increase in interest rates because
it would reduce the demand for your products. Currently, economic growth is high but annual inflation has
increased from 3 percent to 5 percent within the last six months. Unemployment rate is very low and cannot go
higher. The Federal Reserve (Fed) is meeting next week to assess economic conditions and set monetary policy.
a. Given the current economic situation, should the Fed adjust or not adjust economic policy? If so, how? If not,
why?
b. Recently, the Fed has allowed the money supply to expand beyond its long-term target range. Does this
affect your expectation of what the Fed will decide at its upcoming meeting?
Suppose the Fed has just learned that the Treasury will need to borrow a larger amount of funds than originally expected.
Explain how this information may affect the degree to which the Fed changes the monetary policy.
Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit.
Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited.
Module 4 Critical Thinking: Money, Bond Returns, and Mortgage Amortization Schedule (75 points)
1.
You can purchase a T-bill that is 90 days from maturity for $9,970. The T-bill has a face value of $10,000.
a. Calculate the T-bill’s quoted yield.
b. Calculate the T-bill’s bond equivalent yield.
c. Calculate the T-bill’s EAR.
2.
You plan to purchase a $130,000 house using a 15-year mortgage obtained from your local bank. The mortgage
rate is 5.25 percent. You will make a down payment of 20 percent of the purchase price.
a. Calculate your monthly payments on this mortgage.
b. Using an Excel Spreadsheet, construct the amortization schedule for the first 12 payments.
c. Compute a breakdown of the total payments of the mortgage into interest and principal payment.
3.
As a portfolio manager for an insurance company, you are about to invest funds in one of three possible
investments:
a. 10-year coupon bonds issued by the U.S. Treasury,
b. 20-year zero-coupon bonds issued by the Treasury, or
c. One-year Treasury securities.
Each possible investment is perceived to have no risk of default. You plan to maintain this investment for a
one-year period. The return of each investment over a one-year horizon will be about the same if interest
rates do not change over the next year. However, you anticipate that the U.S. inflation rate will decline
substantially over the next year, while most of the other portfolio managers in the United States expect
inflation to increase slightly.
a. If your expectations are correct, how will the return of each investment be affected over the one-year
horizon?
b. If your expectations are correct, which of the three investments should have the highest return over the
one-year horizon and why?
Offer possible reasons you might not select the investment that would have the highest expected return over the one-year
investment horizon.
Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit.
Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly cited.
Upload your completed work to the Week 4 Assignments page.
Module 5 Critical Thinking: Derivatives and Foreign Exchange Markets (60 points)
1.
Suppose you are a manager of a financial institution. You recently purchased a three-year interest rate collar
with LIBOR as the interest rate index. The interest rate cap specifies a fee of 2 percent of $60 million notional
principal and an interest rate ceiling of 9 percent. The interest rate floor specifies a fee of 3 percent of the $60
million notional principal and an interest rate floor of 7 percent. Assume that LIBOR is expected to be 6
percent, 10 percent, and 12 percent (respectively) at the end of each of the next three years.
a. If you are certain that interest rates will rise, should you consider purchasing a callable swap
instead of the collar? Explain.
b. Explain the conditions under which your purchase of an interest rate collar could have unintended
consequences.
2.
As a portfolio manager of a US-based financial institution, you are responsible for managing domestic and
international investments of your institution. Approximately 25 percent of the stock portfolio you manage is
British stocks. Your expectation is that the British stock market will perform well over the next year.
Therefore, you plan to sell the stocks one year from now and then convert the British pounds received to
dollars at that time. However, you are worried that the British pound may depreciate against the dollar over
the next year.
a. Explain how you could use a forward contract to hedge the exchange rate risk associated with your
position in British stocks.
b. If interest rate parity holds, does this limit the effectiveness of a forward contract as a hedge?
c. Explain how you could use an options contract to hedge the exchange rate risk associated with
your position in stocks.
d. Assume that, although you are worried about the potential decline in the pound’s value, you also
believe that the pound could appreciate against the dollar over the next year. You would like to
benefit from the potential appreciation but also wish to hedge against the possible depreciation.
Should you or should you not use forward contract or options contracts to hedge your position?
Explain.
Complete your 2-4 page response using Microsoft Word. For calculations, you must show work to receive credit. Your wellwritten response should be formatted according to CSU-Global APA guidelines, with any sources properly cited.
Module 6 Critical Thinking: Commercial Bank’s Financial Statement Analysis (75 points)
The financial statements for People’s National Bank (PNB) are shown below:
Peoples’ National Bank
Balance Sheet as of December 31, 20XX
Assets
Cash
Demand Deposits from other Fls
Investment
Federal funds sold
Loans
Reserve for loan losses
Premises
Total Assets
Liabilities & Equity
Demand deposits
Small time deposits
Jumbo CDs
Federal funds purchased
Equity
600
1,890
3,680
1,988
16,145
(1,040)
1,620
24,883
Total Liabilities and Equity 24,883
Peoples’ National Bank
Income Statement for the Year Ended December 31, 20XX
Interest on fees and loan
Interest on investment securities
Interest on repurchase agreement
Interest on deposits in banks
Total Interest Income
1,200
700
780
265
2,945
Interest on deposits
Interest on debentures
Total Interest Expense
945
689
1,634
Provision for loan losses
Noninterest income
Noninterest expense
5,590
9,867
3,198
2,500
3,728
140
185
281
Total
236
Income before taxes
Taxes
Net Income
1,075
215
860
1. Analyze the following eight ratios for PNB’s financial statements:
Earning Assets, Return on Assets, Total Operating Income, Asset Utilization, Net Interest Margin, Spread,
Overhead Efficiency, and Tax Ratios.
2. Compare the results of PNB’s ratios to the banking industry average. Then, interpret the results of the
comparison.
Complete your 2-4 page response using Microsoft Word and/or Excel. For calculations, you must show work to receive
credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly
cited.
Module 7 Critical Thinking: Insurance Companies’ Ratios and Investment Banks’ Activities (60 points)
1.
National Property Casualty has $9,500,000 in premiums on its auto insurance line. The line’s losses amount to
$6,245,900, expenses are $2,906,430, and dividends are $189,650. The insurer earns $397,110 in the investment of
its premiums. Calculate the auto insurance line’s loss ratio, expense ratio, dividend ratio, combined ratio, investment
ratio, operating ratio, and overall profitability.
2.
Goode Investment Bank agrees to underwrite 1,000,000 CFS Company’s shares on a best efforts basis. It then sells
800,000 shares to the public for $20 each. The agreement is that Goode will charge 1.50 per share sold.
a.
b.
c.
d.
How much money does CFS receive?
How much money does CFS pay?
What Is Goode’s profit?
What is the stock price of CFS?
Complete your 2-4 page response using Microsoft Word and/or Excel. For calculations, you must show work to receive
credit. Your well-written response should be formatted according to CSU-Global APA guidelines, with any sources properly
cited. Upload your completed work to the Week 7 Assignments page.
Module 8 Portfolio Project: Financial Crisis and its Impact on Financial Institutions and Markets (350 Points)
Financial institutions and markets are important components of the economy. The recent financial crisis that started in
2007 affected many organizations including financial institutions and markets. In an 8-10 page, double-spaced research
paper you will examine the financial crisis and its impact on financial institutions and markets.
You are required to submit an outline in which you list the major headings and sections of your paper. Upload your
completed outline to the Week 5 Assignments page by the end of the Week 5. This outline is a required component of the
Portfolio Project assignment. No points will be assigned for this, but points will be deducted from your final grade on the
Portfolio Project if you fail to submit this assignment as required.
In your completed paper you should be certain to address the following issues:
Causes of Problems for Financial Institutions During the Financial Crisis: Briefly discuss the financial crisis. Determine and
discuss the underlying causes of problems experienced by financial institutions during the recent financial crisis. Explain
how these problems might have been avoided.
Impact of Financial Crisis on Financial Market Liquidity: Explain the link between the financial crisis and the lack of liquidity
in the financial markets. Specifically, offer some insight as to the reasons the debt markets became inactive at the time.
How were interest rates affected? What happened to initial public offering (IPO) activities during the crisis period?
Risk Management: Discuss whether or not institutional investors that purchased mortgage-backed securities containing
subprime mortgages followed reasonable investment guidelines and risk management. Address this issue for various types
of financial institutions such as pension funds, commercial banks, insurance companies, and mutual funds.
If financial institutions were taking on too much risk, explain whether or not current regulations (especially those passed
during and after the financial crisis) are adequate to avert future recurrence. In addition, recommend how regulations can
be changed to limit excessive risk taking.
Spend time to ensure that the formatting complies with CSU-Global APA guidelines, and thoroughly proofread and
grammar-check your final product. Be sure to examine the Portfolio Project grading rubric on the Course Information page
for details. Ensure you have both title and reference page. Include a list of 6-8 credible sources cited in your paper. Your
references must be credible and be formatted according to CSU-Global APA guidelines.
The Portfolio deliverables and the Modules they are due are:


Module 5: Submit a draft of the project outline.
Module 8: Submit complete project.
Course Policies
Late Work
Students are permitted a 7 day grace period during which they may submit a Critical Thinking assignment after
the original due date without penalty. Papers submitted between 8 and 14 days after the original due date will
be accepted with a potential 10 percent reduction in grade for late submission. Papers submitted 15 or more
days beyond the original due date may not be accepted unless prior arrangements have been made with the
instructor. No Portfolios will be accepted late and no assignments will be accepted after the last day of class
unless a student has requested an incomplete grade in accordance with the Incomplete Policy.
Course Grading
20% Discussion Participation
45% Critical Thinking Activities
35% Final Portfolio Project
Grading Scale and Policies
A
95.0 – 100
A-
90.0 – 94.9
B+
86.7 – 89.9
B
83.3 – 86.6
B-
80.0 – 83.2
C+
75.0 – 79.9
C
70.0 – 74.9
D
60.0 – 69.9
F
59.9 or below
FN*
Failure for Nonparticipation
I**
Incomplete
* Students who stop attending class and fail the course for nonparticipation will be issued the “FN” grade. The FN grade may have
implications for financial aid and scholarship awards.
** An “I” grade may be assigned at the Instructor’s discretion to students who are in good standing (passing) in the course. Students
should have completed a majority of the coursework in order to be eligible for the “I” grade. Students should request an "I" grade from
the Instructor with a written justification, which must include explanation of extenuating circumstances that prevented timely
completion of the coursework. If the request is approved, the Instructor will require a written agreement consisting of a) the specific
coursework to be completed, b) the plan to complete the coursework, and c) the deadline for completion. The agreement will be kept on
file at CSU-Global Campus. An incomplete course must be satisfactorily completed within the time frame stipulated in the agreement, but
no later than the end of the following semester from the date the “I” was given. An incomplete not removed within one year shall
convert to an F and be included in the computation of the student’s grade point average.
Plagiarism
Plagiarism offenses are to be reported to the Office of Student Success, which will record offenses, instruct
Faculty of needed interventions, and meet with students as appropriate. For more information on the penalties
for plagiarism, please review the Student Handbook.
APA
Students are expected to follow the CSU-Global APA requirements when citing in APA (based on the APA Style
Manual, 6th edition). For details on CSU-Global APA style, please review the APA resources located under the
Library tab in Blackboard.
Netiquette
All posts and classroom communication must be conducted in a professional and respectful manner in
accordance with the student code of conduct. Think before you push the Send button. Did you say just what you
meant? How will the person on the other end read the words?
Any derogatory or inappropriate comments regarding race, gender, age, religion, sexual orientation, are
unacceptable and subject to disciplinary action.
If you have concerns about something that has been said, please let your instructor know.
Institutional Policies
Refer to the Academic Catalog for comprehensive documentation of CSU-GC institutional policies.