FINANCIAL INSTITUTION AND MARKET

FINANCIAL INSTITUTION AND MARKET
AREA OF STUDY: CORE
BAC310

Year: 3
Semester: 5

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* Continuous
** Duration: 3 hours

Objectives: The objective of this course is to provide the students with understanding of the nature and functioning of capital and money markets in Nepal.
Unit 1: Introduction L.H.5
Money and inflation, money and business cycle, money and interest rate, conduct of monetary policy, budget deficits and monetary policy. Financial intermediation, banking and money supply. Financial markets (bond markets, stock markets and foreign exchange market): Meaning and functions of money; Medium of exchange; Unit of account; Store of value; Theoretical and empirical definitions of money. Types of financial systems: Direct and indirect barter; warehouse receipt system; fractional reserve banking system, fiat system, electronic system, fiat system; electronic system.
Unit 2: Functions of Financial Markets: L.H.6
Functions of financial markets; Structure of financial markets; Debt and equity markets; Primary and secondary markets; Exchange and over the counter markets; Money and capital markets; Functions of financial intermediaries; Financial markets instruments: Money markets instruments: Treasury bills; commercial paper; negotiable certificate of deposit; banker's acceptance; government bonds, euro-dollars; interest rate in the money markets, capital markets instruments.
Unit 3: Interest Analysis: L.H.6
Time value of money; Compounding of single and multiple payments, presents value of single and multiple payments, determination of interest rates. Interest practices-annual percentage rates, add-on and discount rates, effective interest rates- frequency of compounding and effective interest rates; Determinants of the general level of interest rates; Supply of funds and demand for funds. Inflation and interest rates; Interest rate differentials; Term structure of interest rates; Risk and required rates of return; Forecasting interest rates; Value: fixed income assets; equity securities
Unit 4: Risks of Financial Intermediation: L.H.4
Interest rate risk, Market Risk, Credit Risk, Off-balance sheet risk, technology and operational risk , Foreign exchange risk, country risk, liquidity risk, insolvency risk, other risk and interaction of risk.
Unit 5: Financial Statement Analysis of Financial Intermediaries L.H.6
Common size financial statements, ratio analysis- liquidity, profitability, return on equity, return on total assets, equity capital ratio, spread, net operating cost ratio, short-term investments to total assets, purchased liabilities to total assets, credit quality, credit loss provision to total assets, credit loss reserves total assets, capital adequacy, equity capital ratio.
Unit 6: Asset and Liability Management L.H.5
Types of assets and liabilities: Considerations in asset-liability management-profitability, liquidity, risk, flexibility and regulatory requirements; Principles of asset-liability structure management: profitability; liquidity, interest rate risk; business risk.
Unit 7: Liquidity and Interest Rate Risk Management: L.H.5
Liquidity management- reserve requirements, methods to meet liquidity needs, liquidity measurement, flow approaches to liquidity measurement, liquidity gap analysis; Interest rate risk management: measurement of interest rate risk, duration, tools for managing interest rate risk.
Unit 8: Capital Adequacy and Required Returns: L.H.6
Capital adequacy; Functions of capital; types of capital; Measurement of capital adequacy; ratio approach to capital adequacy ; Required returns for depository institutions; Cost of equity, cost of capital notes and debenture; cost of time and saving deposits; cost of non-interest bearing deposits; required return on assets, spread management and required return.
Unit 9: Loan Management: L.H.5
The credit cycle; types of loans; loan profitability management - timing and profitability. Assignment of joint costs; credit decisions - individual credit decisions, credit decisions for commercial loans, Monitoring loan profitability.
Suggested Reading
1. Charles Henning, Financial Markets and Economy, PHI
2. Fred Yeager and Neil Seitz, Financial Institutions Management Prentice hall
3. Frederic Mishkin, Money, Banking and Financial Markets, Harper Collins Publishers
4. Ronald Kidwell and Peterson, Financial Institutions, Markets & Money Dryden Press
5. T. Robinson and DD Wightman, Financial Markets: The Accumulation and Allocation of Wealth(McGraw Hill)
6. Saunders and Cornett , Financial Institutions Management, McGraw Hill