Course Outline

AIR UNIVERSITY Multan Campus

Spring 2020
Faculty of Administrative Sciences
Department of Business
Administration

Course Title: Financial Institutions and Markets

Course Code: AF353
Lab: (Required / Not Required)
Class: BBA 6th Semester
Credit Hrs: 3
Prerequisites For this Course: AF251
This Course is Prerequisite For: NA
Instructor: Mr Allah Ditta
e-mail: [email protected] Address: Air University, Khan Center, 4th Floor,
Faculty Room
Web: http://www.au.edu.pk
Office Hours: Monday (10:00-14:00 hrs.)
Tel: 061-4780091, Ext. 162
Text Book (s)  Financial Markets and Institutions By Frederic S. Mishkin,
and Stanely G. Eakins 7th Ed
Reference  Foundation of Financial Markets and Institutions By
Book(s)
Fabozzi, Modigliani Jones and Ferri, 3rd Edition
 The Economics of Financial Markets and Institutions By.
Frederic S. Mishkin
Learning
Resources  “Financial Institutions Management” By Anthony Saunders
6th edition
 The Economics of Money, Banking and Financial Markets
By. Frederic S. Mishkin.
Other State Bank of Pakistan Website
Resource(s) Krachi Stock Exchange Website
HEC/AU Digital Library
Course Description
Financial Markets and Institutions encourages students to understand the connection between the theoretical
concepts and their real-world applications. By enhancing students’ analytical abilities and concrete problem-
solving skills, this course prepares students for successful careers in the financial services industry or
successful interactions with financial institutions, whatever their jobs. The purpose of this course is to
provide with an understanding of the role that financial institutions and markets play in our modern
economy. We will examine interest rates, monetary policy, money and foreign exchange markets, SBP, and
how financial institutions manage risk. Many of the topics we will cover this semester are in the news
everyday. The decisions made by policymakers affect our daily life. We will discuss many of these
decisions as well as the information the decision makers use to reach their conclusions.

Course Learning Objectives

To prepare students for their future careers, Financial Markets and Institutions has the following objectives:

 To enable the students to develop awareness about financial sector environment with special reference to
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Pakistan and basic concepts and principles regarding financial system.
 To describe the structure of financial markets (debt, equity, and foreign exchange etc.) and the structure of
utility of relevant financial instruments in the overall financial system.
 To introduce the regulatory role and main functions of the State Banks in general and the State Bank of
Pakistan (SBP) in particular in the country’s economy.
 To develop a complete understanding of issuance of financial securities and equity trading process
employed in the Pakistan Stock Market (PSX).
 To equip students with the necessary knowledge of risk management techniques in the context of
international financial system.
 To introduce the special functions of Financial Institutions and take an analytical look at how financial
intermediation benefits today’s economy.
Course Learning Outcomes
Learning outcomes of the course are:

 Understanding of a unifying analytic framework that uses a few basic principles that organize students’
thinking. These principles include: Asymmetric information (agency) problems Conflicts of interest
Transaction costs Supply and demand Asset market equilibrium Efficient markets Measurement and
management of risk
 Case studies helped students understand the structure and financial instruments traded in financial markets
and institutions.
 Numerous cases and disvussions helped enhance students’ about central bank’s role and responsibilities to
ensure smooth functioning of financial system.
 A careful step-by-step development of models that enable students to comprehend the financial system
(including financial intermediaries and financial markets) more easily.
 International perspectives are completely integrated throughout the discussions and students learned risk
management techniques.
 A comprehensive understanding of the role of financial institutions in country’s economy.
Class/Lecture Format
This course adopts the principles of student-centered learning and dialectics. This involves a combination of
providing information to students and motivating them to use this information in problem-solving
environments. The way students present and argue the reasoning behind their solutions demonstrates their
knowledge of the area, as one cannot convincingly argue something that is not understood. Arguing an issue
also expands one’s understanding of a topic as one is forced to consider alternative points of view. Finally,
dialectics empower students to collaboratively negotiate, rather than passively learn, an area or topic.
The course undertakes the following activities for achieving the objectives.
 Lectures
 Class Discussions
 Assignments
 Quizzes
 Presentations
 Workshops
 Individual and group learning activities/projects
Each class will have a topic, specific tasks, and reading material set in advance. A class will typically
involve a lecture/seminar – presenting a new topic and related readings – followed by hands-on activities
related to the topic for the week. Students will be expected to present or discuss pre-specified reading
material in the class. Please bring your printed preparation work to class because these may be collected in
selected weeks.

Weekly Lecture Plan:

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Wee Reading Reference
Topic
k & Activity
Introduction to Financial Markets and Institutions?
1.1. Why Study Financial Markets?
Debt Markets and Interest Rates
The Stock Market
The Foreign Exchange Market
1.2. Why Study Financial Institutions?
Depository Institutions
1.3. Structure of the Financial System
1.4. Financial Crises Mishkin & Eakins
Overview of Financial System Chapter 1&2
2.1. Financial Markets
Function of Financial Markets
1,2 Structure of Financial Markets Assignment No. 1:
Debt and Equity Market The Role of State
Primary and Secondary Markets Bank of Pakistan in
Exchanges and Over-the-Counter Markets the Financial
Money and Capital Markets Regulation.
Internationalization of Financial Markets
International Bond Market, Eurobonds, and Eurocurrencies
2.2. Types of Financial Intermediaries
Depository Institutions
Contractual Savings Institutions
Investment Intermediaries
The Importance of Financial Intermediaries Relative to
Securities Markets
What Do Interest Rates Mean and What Is Their Role in
Valuation?
1.1. Measuring Interest Rates
1.2. Present Value
1.3. Types of Credit Market Instruments
1.4. Yield to Maturity Mishkin & Eakins
1.5. The Distinction Between Real and Nominal Interest Chapter 3
3
Rates
1.6. The Distinction Between Interest Rates and Returns
1.7. Maturity and the Volatility of Bond Returns:
Interest-Rate Risk
Reinvestment Risk
1.8. Calculating Duration: Duration and Interest-Rate Risk
Quantitative Problem Discussion
Why Do Interest Rates Change?
1.1. Determinants of Asset Demand Mishkin & Eakins
Wealth, Expected Returns, Risk Liquidity Chapter 4
1.2. Supply and Demand in the Bond Market Case: Changes in
4 1.3. Supply-and-Demand Analysis Interest Rate Due to
Demand Curve, Supply Curve, Market Equilibrium, Inflation
Changes in Equilibrium Interest Rates Quiz 1
Shifts in the Demand for Bonds, Shifts in the Supply of
Bonds
5 Money Market Mishkin & Eakins
1.1 The Money Markets defined Chapter 11
Why Do We Need the Money Markets?
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 1.2 Money Market Cost Advantages
1.3 The Purpose of Money Markets
1.4 Who participates in Money Markets? Assignment 2:
1.5 Money Market Instruments: Case: Pakistani
Treasury Bills Treasury Bills:
Federal Funds Key features of the
Repurchase Agreements Market Treasury
Negotiable Certificates of Deposit Bills, How to Invest
Bankers Acceptances in MTBs. Primary
Commercial Papers Dealers of MTBs.
1.6 Comparing Money Market Securities: Interest Rates, Quiz 2
Liquidity
The Bond Market
1.1. Purpose of the Capital Market
1.2. Capital Market Participants
1.3. Capital Market Trading
1.4. Types of Bonds
Treasury Notes and Bonds Mishkin & Eakins
Treasury Bond Interest Rates Chapter 12
Treasury Inflation-Protected Securities (TIPS)
Treasury Strips
6 Assignment 3:
Agency Bonds
Municipal Bonds Case Study of the
Corporate Bonds Enron Scandal
1.5. Types of Corporate Bonds Quiz 3
Zero Coupon Bonds
Coupon Bonds
1.6. Current Yield Calculation
1.7. Finding the Value of Coupon Bonds
Valuation of Semiannual Bonds
The Stock Market Mishkin & Eakins
1.1. Investing in Stocks Chapter 13
Common Stocks vs Preferred Stock
1.2. Computing the Price of Common Stock Assignment 4:
Dividend Discount Models Stock Trading in
The One-Period Valuation Model Pakistan: How can
7 The Generalized Dividend Valuation Model I Buy and Sell
The Gordon Growth Model Shares? What is the
The Price Earnings Valuation Model Central Depository
1.3. Problems with Valuation: System? Client
Problems with Estimating Growth Broker Relationship
Problems with Estimating Risk and Arbitration
Problems with Forecasting Dividends Procedure?
8 Mid Term Examination
9,10 The Foreign Exchange Market Mishkin & Eakins
1.1. What are the Foreign Exchange Rates? Chapter 15
1.2. Why are Exchange Rates Important?
1.3. Exchange Rates in the Long Run?
Law of One Price Quiz 4
Theory of Purchasing Power Parity
Why the Theory of Purchasing Power Parity Cannot Fully
Explain Exchange Rates
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 1.4. Exchange Rates in the Short Run: A Supply and Demand
Analysis
Supply Curve for Domestic Assets
Demand Curve for Domestic Assets
Equilibrium Changes in Exchange Rates
Shifts in the Demand for Domestic Assets
1.5. Factors that Change the Exchange Rates
Mishkin & Eakins
Chapter 9

Central Bank and the Federal Reserve System Assignment 5:

1.1. Origins of the Federal Reserve System Business Functions
1.2. Structure of the Federal Reserve System of State Bank of
11 1.3. Federal Reserve Banks Pakistan,
1.4. Federal Reserve Open Market Committee Governance
1.5. How Independent is the Fed? Structure of
1.6. The Trend Towards Greater Independence Pakistan, How
Independent is the
State Bank of
Pakistan
Conduct of Monetary Policy: Tools, Goals, Strategy, and
Tactics
1.1. The Federal Reserve’s Balance Sheet
Liabilities
Assets
Mishkin & Eakins
Open Market Operations
Chapter 10
Discount Lending
1.2. The Market for Reserves and the Federal Funds Rate
Demand and Supply in the Market for Reserves Assignment 6:
How Changes in the Tools of Monetary Policy Affect the Monetary policy in
Federal Funds Rate Pakistan, goals of
1.3. Tools of Monetary Policy monetary policy,
Open Market Operations conflict among
12,13 Lending to Banks policies, types of
Reserve Requirements monetary policy
1.4. Discount Policy targets, choosing
Operation of the Discount Window operating target,
Lender of Last Resort review of recent
1.5. The Price Stability Goal and the Nominal Anchor Fed reserve policy.
1.6. Other Goals of Monetary Policy (Oral discussion)
High Employment
Economic Growth
Quiz 5
Stability of Financial Market
1.7. Should Price Stability Be the Primary Goal of Monetary
Policy?
1.8. Inflation Targeting
Advantages of Inflation Targeting
14,15 Mortgage and Securitized Assets Market Fabozzi
1.1. What is Mortgage?
1.2. Hypothecation
1.3. Collateralization Quiz 6
1.4. Mortgage process
1.5. Risk transfer
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 1.6. Securitization
1.7. Mortgage Backed Securities (MBS)
1.8. Collateralized Debt Obligations (CDOs)
1.9. Role of MBS and CDOs in financial crisis 2007-09

Revision
16 Final Term Exams

Class/Term/Semester Project/Assignment Outline

Assignment/Project Marks (20% Weightage)

Assignment 1: The Role of State Bank of Pakistan in the Financial Regulation.

Assignment 2: Case: Pakistani Treasury Bills: Key features of the Market Treasury Bills, How to Invest in
MTBs. Primary Dealers of MTBs.
Assignment 3: Case Study of the Enron Scandal
Assignment 4: Stock Trading in Pakistan: How can I Buy and Sell Shares? What is the Central Depository
System? Client Broker Relationship and Arbitration Procedure?
Assignment 5: Business Functions of State Bank of Pakistan, Governance Structure of Pakistan, How
Independent is the State Bank of Pakistan
Assignment 6: Monetary policy in Pakistan, goals of monetary policy, conflict among policies, types of
monetary policy targets, choosing operating target, review of recent Fed reserve policy.

Grading and General Course Policies

Grades
(The grade you earn during the semester will come from the following work.)
Midterm 35 Marks (2 Hrs duration)
Project/Quizzes/Assignment/Discipline 20 Marks
Final Exam 45 Marks (duration 3 Hrs)

Grading Criteria:

Relative Grading System will be employed

Instructor Responsibilities
First, the lecturer is responsible for creating a learning environment that is stimulating and interesting, and that
encourages collaboration, knowledge sharing, and co-creation by all participants. The learning environment
includes both the physical and virtual spaces where learning and teaching activities take place. The aim is to
develop an atmosphere of cooperation and a spirit of learning, inquiring, and innovating in all activities
underpinned by a sense of responsibility for our individual and collective learning.
Student Responsibilities /Requirements
Students as active participants are expected to take responsibility for their individual and collective learning.
While this course is designed to foster students’ active participation and contribution to knowledge co-creation,
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this will not happen unless students take seriously their roles and responsibilities. As active contributors’
students are expected to be prepared for each class and take an active role in discussions and other learning
activities. Students must ensure their…
 Timeliness in the class
 Professional/prescribed dress code
 Attendance
Eating, sleeping, reading, texting, listening to or working on unrelated materials, sidebar conversations, or
“multi‐tasking” using a computer or other electronic device is not permitted. Laptops (and similar devices) may
be used in class for course-related activities such as taking notes. Students may bring drinks such as water.
I am always willing to see my students and will go out of my way to schedule meetings. Please make sure that if
you make an appointment that you keep it. Finally, as will quickly become apparent, e-mail is by far the easiest
and most reliable method to reach me.
Other Requirements
In terms of performance in this class, I have very high expectations and anticipate outstanding work from each
of you. I hope for a very positive experience for us all. Keep in mind that if you do not deliver outstanding work
then you will be graded to reflect this. I ask that you contact me directly and immediately if you ever have any
questions or concerns regarding the class, and assignments, or your grade(s). I am always willing to help.
I do ask that all students be respectful and courteous to other class members as well as the professor. This
includes turning off cell phones and other electronic devices before class begins and arriving to class on time, as
walking in late is disruptive to other classmates and the professor. Those who walk in late will likely not receive
attendance credit for that day.
Academic Integrity
Integrity is a cornerstone of academia and permeates every aspect of academic discipline. AU Instruction 36-
2609, Academic Integrity defines academic integrity as “uncompromising adherence to a code of ethics,
morality, conduct, scholarship, and other values related to academic activity.” Every student enrolled in the
university is responsible for adhering to this standard. Students are warned that having knowledge of a violation
and failing to report it is also a violation of academic integrity.
Students found guilty of academic integrity violations are subject to sanctions imposed by AU. These sanctions
can affect student credit for completed work as well as a student’s eligibility for academic opportunities.
Collaboration and discussion in the online environment among students in the same seminar are highly
encouraged, but each student is expected to do his/her work. It is a breach of integrity to use, receive, or give
work to another student outside of the work course.
Original Work
Student work submitted for a grade must be composed solely by the student (or identified group of students for
a group assignment) except where documented following citation requirements, and it must be composed
specifically for the current assignment. No work previously submitted in any course, or elsewhere, will be
resubmitted or reformatted, in whole or in part, for submission in a current assignment without the prior written
approval of the course instructor. Additionally, students are prohibited from using the work of other students
(current or former) in any way, including the formulation of ideas or outlines, to complete assignments. The act
of appropriating, or stealing, the literary composition of another, or parts or passages of another’s writings,
ideas, or language, and passing them off as one’s
work constitutes plagiarism. Every student must ensure quotations or paraphrased passages are properly cited
within any written work submitted.
Cheating
The act of giving or receiving improper assistance such as, but not limited to:
- Uploading and/or downloading study aids or notes (also known as “dirty purples,” “gouge,” or “the
pony”) to or from websites; or providing or receiving such notes via any other method
- Copying material from another’s assessment(test/paper/etc.)
- Using notes and issued materials, or other references not authorized for use during an assessment, or
other assigned work.
- Knowingly permitting another to copy work or presentation materials, or excerpts/ideas/answers from
an assessment.
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 - Collaborating with other persons on individual assignments, except as permitted
- Sharing study materials or any assessment information after completing an assessment. This is to
preserve the integrity of the assessment and ensure that all students have an equal opportunity at success
in the program.
Cheating is a violation of academic integrity standards. Individuals who violate the academic integrity policy
are subject to adverse administrative and or disciplinary actions as described in AUI 36-2602.

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