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Lecture Financial institutions, markets, and money (9th Edition): Chapter 20 - Kidwell, Blackwell, Whidbee, Peterson

Chapter 20 - Risk management in financial institutions. The last several chapters have discussed what banks and other financial institutions do to generate profits. In simple terms, financial institutions sell financial claims with one set of characteristics and buy financial claims with a different set of characteristics. | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 20 Investment Companies History of Investment Companies Investment companies were first started in Belgium in 1822. Early U.S. investment companies Began at end of 1800s Closed-end companies First mutual fund in 1924 Declines in Great Depression Regulations enhanced confidence Growth very rapid in 1945 to 1965 period as the stock market performed well. Inflation, high interest rates, and poor market performance hurt growth in 1970s. History of Investment Companies (continued) New types of funds post 1970s Municipal bonds funds - tax-free income Government security funds - safety Money market funds - safety and high rates with inverse yield curve. Exchange traded Funds (ETFs) – represents indices. Investment Funds Purchase direct, long term, capital market securities and issue indirect, liquid, small denomination securities, called shares. (IF) offer the financial investor the following: Provide risk intermediation by investing in a diversified portfolio of assets. Provide denomination intermediation by issuing shares in smaller denominations than the direct securities purchased. Provide marketability for IF shares. Offer economies of scale in investment management and transaction costs. Net Asset Value (NAV) Value of shares is called Net Asset Value (NAV) Closed-end Investment Companies Have a fixed number of shares outstanding like any publicly traded corporation. Shares are traded and priced in the market. Market value of close- end fund shares sells at a 10%-20% discount off the NAV. Closed-end Investment Companies Size of discount varies by type of closed-end fund – equity versus bond funds, domestic vs. global equity funds. [See Exhibit 20.1]. Discounts could be due to a variety of reasons including poor . | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 20 Investment Companies History of Investment Companies Investment companies were first started in Belgium in 1822. Early U.S. investment companies Began at end of 1800s Closed-end companies First mutual fund in 1924 Declines in Great Depression Regulations enhanced confidence Growth very rapid in 1945 to 1965 period as the stock market performed well. Inflation, high interest rates, and poor market performance hurt growth in 1970s. History of Investment Companies (continued) New types of funds post 1970s Municipal bonds funds - tax-free income Government security funds - safety Money market funds - safety and high rates with inverse yield curve. Exchange traded Funds (ETFs) – represents indices. Investment Funds Purchase direct, long term, .