Untitled Flashcards Set

Study Schedule (3-Day Plan)

• Day 1: Global Financial Markets Overview + Interest Rates

• Day 2: Bond Markets + Valuation Formulas

• Day 3: Risks, Duration, and Yield Curve

📖 Day 1: Global Financial Markets Overview + Interest Rates

Key Concepts

1. Why do we need financial markets?

   • They channel funds from lender-savers (people with excess funds) to borrower-spenders (those who need funds).

   • Helps with efficient capital allocation.

2. Types of Financial Markets

   • Primary Market: Where new securities (stocks/bonds) are issued.

   • Secondary Market: Where previously issued securities are traded (e.g., NYSE, NASDAQ).

3. Types of Financial Instruments

   • Bonds (Debt securities)

   • Stocks (Equity securities)

   • Forex Market (Foreign exchange)

   • Derivatives (Contracts like options, futures)

   • Money Market (Short-term loans, <1 year)

   • Commodities Market (Gold, oil, agricultural goods)

   • Cryptocurrency Market (Bitcoin, Ethereum)

📌 Important Equations for Interest Rates

1. Simple Interest Formula

Simple Interest= P x r x n

• P = Principal amount

• r = Interest rate

• n= Time period in years

2. Compound Interest Formula

FV= P x (1 + r)^t

• FV = Future Value

• P = Principal

• r = Interest rate

• t = Years

📚 Study Method

• Review the slides and write down the functions of each financial market.

• Memorize key formulas and calculate simple & compound interest using examples.

• Practice explaining primary vs. secondary markets out loud.

📖 Day 2: Bond Markets + Valuation Formulas

Key Concepts

1. What is a bond?

   • A bond is a loan given to a company/government.

   • Investors (lenders) receive fixed interest payments (coupon payments).

   • At maturity, the bond issuer repays the principal amount.

2. Types of Bonds

   • Zero-coupon bonds: No periodic payments, just one lump sum at maturity.

   • Fixed-rate bonds: Constant interest payments.

   • Floating-rate bonds: Interest rates adjust over time.

3. Bond Pricing

   • The price of a bond fluctuates based on market interest rates.

   • If interest rates go up → bond prices go down.

   • If interest rates go down → bond prices go up.

📌 Important Equations for Bonds

1. Present Value of a Bond

PV=∑ C/(1 + r)^t + FV/(1 + r)^n

• C = Coupon payment

• r = Discount rate (expected return)

• FV = Face value (amount repaid at maturity)

• n = Number of years

Example:
If a bond has a face value of $1,000, coupon of $40, and matures in 10 years at 5%:

• Calculate the present value of future payments.

• Compare with market price to decide whether to buy.

2. Yield to Maturity (YTM)

Y = C + (FV - P)/n/(FV + P)/2

• P = Market price of the bond.

• If P falls below face value → YTM rises.

• If P rises above face value → YTM falls.

📚 Study Method

• Work through an example bond valuation problem.

• Compare bonds trading at par, premium, and discount.

• Write out and explain YTM to a friend or in a voice recording.

📖 Day 3: Risks, Duration, and Yield Curve

Key Concepts

1. Types of Bond Risks

   • Credit/Default Risk: Risk of issuer failing to pay.

   • Inflation Risk: Inflation reduces real purchasing power of returns.

   • Liquidity Risk: Difficulty selling the bond at a fair price.

   • Call Risk: Issuer repays early, affecting returns.

   • Interest Rate Risk: If interest rates rise, bond prices fall.

2. Duration

   • Measures a bond's sensitivity to interest rates.

   • If a bond has a 4-year duration:

     • A 1% rise in rates → bond loses 4% in value.

     • A 1% drop in rates → bond gains 4% in value.

3. Yield Curve

   • Normal Yield Curve: Long-term bonds yield higher than short-term.

   • Inverted Yield Curve: Long-term bonds yield lower than short-term (signals recession).

   • Flat Yield Curve: Short & long-term yields are similar.

📌 Important Equations

1. Bond Duration Formula

D=∑(CFt/(1 + r)^t x t)/PV

• CFt = Cash flow in year ttt.

• r = Yield to maturity.

• PV = Present Value.

2. Yield Curve Analysis

• Watch for steep yield curves (economic expansion).

• Watch for inverted curves (possible recession).

📚 Study Method

• Read about bond risks and list examples of each.

• Use examples to calculate bond duration.

• Sketch a yield curve and explain its meaning.

🎯 Final Review:

• Memorize key formulas.

• Review example problems.

• Make flashcards for financial market types & bond risks.

• Take a self-quiz to check understanding.