FIN310 Class Web Page, Fall ' 24

Instructor: Maggie Foley

Jacksonville University

The Syllabus  Risk Tolerance Assessment

· Term Project 1 (option 1)

· Term Project 2 (option 2)

· Term Project 3 (option 3): Create a Stock Data Fetcher Using Google Sheets (Details can be found at the bottom of the website)

Weekly SCHEDULE, LINKS, FILES and Questions

Chapter

Coverage, HW, Supplements

- Required

References

Intro

Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1. URL for your game:
https://www.marketwatch.com/game/jufin310-24fall

2. Password for this private game: havefun

3. Click on the 'Join Now' button to get started.

4. If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5. Follow the instructions and start trading!

Discussion: How to pick stocks (finviz.com)

How To Win The MarketWatch Stock Market Game

Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar

IPO schedule: http://www.marketwatch.com/tools/ipo-calendar

Review of the Financial Market

U.S. Regional Banks Crisis in 2023 Video on youtube (fyi)

1. Background:

• In 2023, several U.S. regional banks faced significant financial distress due to a combination of rising interest rates and asset-liability mismatches. Banks like Silicon Valley Bank (SVB) and First Republic Bank were particularly affected. These banks had invested heavily in long-term securities when interest rates were low. As the Federal Reserve increased rates to combat inflation, the value of these securities plummeted, leading to massive unrealized losses on the banks' balance sheets.

2. The Trigger:

• When depositors, particularly those with large uninsured deposits, became aware of these losses, they began withdrawing their funds en masse, leading to a classic bank run. SVB, for instance, could not liquidate its assets quickly enough without incurring huge losses, leading to its collapse.

3. Contagion Effect:

• The crisis at SVB and other regional banks had a ripple effect across the financial system:
• Investment Banks: Many investment banks held significant exposure to the bonds and assets of these regional banks. As these banks' values plummeted, investment banks had to write down losses.
• Insurance Companies: Insurers that had invested in the bonds and stocks of these banks saw their portfolios lose value, affecting their solvency ratios and causing concerns about their ability to meet future claims.
• Pension Funds: Pension funds that had invested in these regional banks or in other financial products related to them faced significant losses. This situation put at risk the retirement savings of millions of individuals.
• Individuals: The crisis led to a loss of confidence among individual investors, who started pulling out their investments from related stocks, bonds, and mutual funds, further exacerbating the problem.

4. Government and Regulatory Response:

• To prevent the crisis from spreading further, the U.S. government and the Federal Reserve stepped in with emergency measures. This included backstopping deposits and providing emergency liquidity to other banks. The Federal Deposit Insurance Corporation (FDIC) also played a crucial role in managing the collapse of these banks to protect depositors.

5. Lessons Learned:

• The crisis underscored how interconnected the financial system is. The collapse of a single regional bank did not just affect its depositors; it had far-reaching consequences across the financial markets.
• Systemic Risk: This event highlighted the concept of systemic risk, where the failure of one institution can threaten the stability of the entire financial system. It showed that banks, investment banks, insurance companies, pension funds, and individual investors are all part of a larger ecosystem. When one part of this system fails, it can trigger a chain reaction affecting everyone.

Key Takeaways

• Interconnectedness: The financial market is like a web where every player is connected to others. A problem in one area can quickly spread to others, creating a systemic crisis.
• Role of Confidence: Confidence plays a crucial role in financial markets. When confidence erodes, even well-capitalized institutions can face difficulties.
• Importance of Diversification: The crisis showed the dangers of concentration risk—whether in a specific asset class, industry, or region.
• Regulatory Oversight: The role of regulators in maintaining stability in the financial markets is crucial, especially during times of crisis.

The U.S. economy in August 2024

· Economic Growth:

• U.S. real GDP growth is projected at approximately 0.7% for 2024, reflecting a slowdown due to the effects of tighter monetary policy.
• Consumer spending is expected to decelerate as savings diminish, wage growth slows, and student loan payments resume (J.P. Morgan | Official Website).

· Inflation and Monetary Policy:

• Inflation has moderated but remains a significant concern.
• The Federal Reserve has paused rate hikes, keeping the federal funds rate at 5.25%-5.50%.
• Ongoing debate on whether the Fed might be "behind the curve" with potential inflationary pressures persisting (Hancock Whitney).

· Financial Markets:

• Increased volatility in financial markets is driven by uncertainties around economic growth, inflation, and the Federal Reserve’s actions.
• Concerns about a possible recession have been amplified by disappointing employment reports (Hancock Whitney).

· Fiscal Policy:

• The fiscal deficit nearly doubled in 2023, providing a short-term economic boost.
• However, the fiscal stimulus is expected to taper off in 2024, potentially becoming a slight drag on growth as the government works to narrow the deficit (J.P. Morgan | Official Website) (Hancock Whitney).

· Election Uncertainty:

• The upcoming U.S. presidential election adds uncertainty, with potential shifts in economic policy based on the election outcome (Hancock Whitney).

Part I – The Feds: Steering Monetary Policy Quiz2

Fed Introduction Video by Invideo.ai (FYI)

1. The Federal Reserve System: Structure and Roles

· The Federal Reserve System:

• Overview: Established in 1913, the Federal Reserve (often referred to as "the Fed") is the central banking system of the United States. Its primary purpose is to ensure a stable and secure monetary and financial system.
• Public-Private Structure: The Fed is a blend of public and private elements. It operates independently within the government but is accountable to Congress.

· Board of Governors:

• Composition: The Board consists of seven members, including the Chair and Vice-Chair, each serving 14-year staggered terms. This long term is designed to insulate them from political pressures.
• Functions: The Board is responsible for guiding the overall monetary policy, supervising and regulating banks, and setting reserve requirements (the amount of funds that banks must hold against deposits).
• Key Roles:
• Chair of the Federal Reserve: The Chair (currently Jerome Powell) is the spokesperson for the Fed, leading the FOMC, and representing the Fed before Congress and the public. The Chair's influence is significant, guiding the direction of monetary policy.
• Vice-Chair: Assists the Chair and can represent the Fed in the Chair's absence. The Vice-Chair is also deeply involved in shaping monetary policy.

· 12 Regional Federal Reserve Banks:

• Function: These banks serve as the operational arms of the Fed in different regions. They gather economic data, conduct research, provide financial services to depository institutions, and play a key role in the implementation of monetary policy.
• Diversity of Perspective: Each regional bank provides unique insights into the economic conditions of its region, which is crucial for the FOMC’s decision-making process.

· Regional Bank Presidents:

• Role in the FOMC: While only five presidents vote on the FOMC at any time, all 12 contribute to discussions. This rotation ensures diverse regional perspectives are considered in monetary policy decisions.

2. The Federal Open Market Committee (FOMC): Decision-Making Body

· Composition of the FOMC:

• Voting Members: The FOMC comprises 12 voting members – the seven members of the Board of Governors and five of the 12 regional bank presidents.
• Non-Voting Members: The remaining regional bank presidents participate in discussions, providing input but not voting.

· Functions and Responsibilities:

• Monetary Policy: The FOMC is responsible for open market operations, which involve buying and selling government securities to influence the money supply and interest rates.
• Setting the Federal Funds Rate: This rate, determined by the FOMC, is the interest rate at which banks lend to each other overnight and serves as a benchmark for other interest rates.
• Economic Forecasts: The FOMC regularly reviews economic conditions and forecasts to make informed decisions about the direction of monetary policy.

3. The Interest Rate Decision-Making Process

· Data Analysis:

• Types of Data Reviewed: The FOMC examines a wide range of economic indicators, including:
• Inflation: Measured by the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index.
• Employment and Unemployment Rates: Critical for assessing the health of the labor market.
• Gross Domestic Product (GDP): Indicates the overall economic activity.
• Consumer Spending and Business Investment: Reflects the confidence of consumers and businesses in the economy.
• Global Economic Developments: Events and trends in other countries can impact the U.S. economy and are closely monitored.

· Discussion and Debate:

• Diverse Opinions: FOMC members often have differing views on the state of the economy and the appropriate policy response, which can lead to robust debates.
• Economic Theories: Members may rely on various economic theories and models to argue their positions. For example, Keynesian economics might suggest more intervention in times of economic downturn, while a more monetarist approach might emphasize controlling inflation through money supply management.
• Policy Tools Considered: The FOMC debates the use of tools such as adjusting the federal funds rate, engaging in quantitative easing, or altering the reserve requirement ratio.

· Voting:

• Majority Rule: The FOMC votes on monetary policy actions, with decisions typically requiring a majority vote. The Chair’s vote holds significant sway due to their role in shaping the discussion.
• Dissenting Votes: It’s not uncommon for some members to dissent if they disagree with the majority view, reflecting the complexity of economic conditions and the challenges of consensus-building.

· Public Communication:

• FOMC Statements: After each meeting, the FOMC releases a statement summarizing their economic assessment and the rationale for their policy decision. These statements are closely analyzed by financial markets and economists.
• Press Conferences: The Fed Chair holds a press conference after select FOMC meetings to explain the decisions in more detail and answer questions from the media, providing transparency and clarity to the public and markets.
• Meeting Minutes: Detailed minutes of the FOMC meetings are published three weeks after the meeting, offering deeper insights into the discussions and debates.

4. Key Concepts and Tools in Monetary Policy (Continued)

· Federal Funds Rate (Continued):

• Influence on Economy: A lower federal funds rate typically encourages borrowing and investing by businesses and consumers, which can stimulate economic growth. Conversely, a higher rate can help cool down an overheating economy and curb inflation.
• Transmission Mechanism: The changes in the federal funds rate influence other interest rates, such as those on mortgages, car loans, and savings accounts, thereby impacting consumer and business spending.

· Open Market Operations:

• Primary Tool of the FOMC: Open market operations (OMOs) are the most frequently used tool for controlling the money supply and influencing the federal funds rate.
• Buying Securities: When the Fed buys government securities from banks, it increases the reserves in the banking system, which typically lowers the federal funds rate. This is used to stimulate the economy.
• Selling Securities: Conversely, when the Fed sells government securities, it reduces the reserves in the banking system, which can increase the federal funds rate. This is used to cool down inflationary pressures.
• Daily Operations: The New York Federal Reserve Bank conducts these operations on behalf of the FOMC. They are closely monitored by financial markets as they signal the Fed’s stance on monetary policy.

· Discount Rate:

• Definition: The interest rate the Fed charges commercial banks for short-term loans from its discount window.
• Relation to Federal Funds Rate: The discount rate is usually set above the federal funds rate to encourage banks to borrow from each other rather than from the Fed. However, in times of financial stress, the Fed might lower the discount rate to ensure banks have access to necessary liquidity.
• Impact: Changes in the discount rate can signal the Fed’s intentions regarding monetary policy and influence banks’ willingness to lend.

· Reserve Requirements:

• Definition: The proportion of depositors' balances that commercial banks must hold in reserve and not lend out.
• Policy Tool: By increasing or decreasing the reserve requirements, the Fed can directly affect the amount of funds banks have available to lend, thereby influencing the money supply and interest rates.
• Rarely Used: This tool is less frequently adjusted because small changes can have large and sometimes unpredictable effects on the banking system.

· Quantitative Easing (QE):

• Definition: A non-traditional monetary policy tool used when the federal funds rate is near zero, and traditional policy tools are no longer effective.
• Mechanism: The Fed purchases long-term securities, such as government bonds and mortgage-backed securities, to inject liquidity directly into the economy, lower long-term interest rates, and encourage borrowing and investment.
• Usage: QE was used extensively during the 2008 financial crisis and the COVID-19 pandemic to support the economy when standard policy tools were insufficient.
• Controversy: QE can lead to asset bubbles or long-term inflationary pressures if not carefully managed.

· Dual Mandate:

• Goals of the Fed: The Federal Reserve operates under a dual mandate from Congress:
• Maximize Employment: The Fed aims to create conditions that foster job creation and low unemployment.
• Stabilize Prices: The Fed seeks to keep inflation low and stable, typically around a 2% annual increase in the PCE price index.
• Balancing Act: The Fed must often balance these two goals, as actions to reduce unemployment can sometimes increase inflation, and efforts to reduce inflation can lead to higher unemployment.

5. Critical Thinking Points

· Who Makes the Decisions?:

· FOMC Members: Understand the distinct roles of the Board of Governors and the regional Federal Reserve Bank Presidents in the decision-making process. Recognize the influence of each member, especially the Fed Chair, and how their backgrounds, economic philosophies, and regional concerns shape their decisions.

· Rotation System: Consider how the rotation of voting rights among regional bank presidents ensures a broad range of perspectives are considered in monetary policy.

· How Is Policy Decided?:

· Data-Driven Decisions: Reflect on the importance of data in shaping monetary policy. Explore how different economic indicators, like unemployment, inflation, and GDP growth, influence the FOMC’s decisions.

· Diverse Opinions: Examine how the diversity of opinions within the FOMC can lead to complex policy debates. Consider the impact of dissenting votes and what they reveal about the challenges of setting a single monetary policy in a diverse and dynamic economy.

· Communication Strategy: Analyze the importance of clear communication from the Fed, especially in managing market expectations and maintaining public confidence in the economy.

· What Tools Does the Fed Use?:

· Impact of Interest Rates: Delve into how changes in the federal funds rate ripple through the economy, affecting everything from mortgage rates to business investment decisions. Explore the effectiveness and limitations of this tool in different economic conditions.

· Role of Open Market Operations: Study how the Fed uses OMOs to manage the money supply and control short-term interest rates. Understand the strategic use of buying and selling securities and how these actions influence the broader economy.

· Use of Non-Traditional Tools: Investigate the circumstances under which the Fed might use tools like QE. Consider the potential risks and benefits of such interventions and how they differ from traditional monetary policy actions.

· Why Does the Fed Matter?:

• Economic Stability: Understand the crucial role the Fed plays in maintaining economic stability through its control of monetary policy. Reflect on how the Fed’s actions influence inflation, employment, and overall economic growth.
• Global Impact: Consider the global significance of the Fed’s decisions. As the U.S. dollar is a major reserve currency, Fed policies can have far-reaching effects on global financial markets and economies.

6. 12 Regional Federal Reserve Bank Presidents

Nomination Process:

1. Selection by the Regional Board of Directors: The president of each of the 12 regional Federal Reserve Banks is selected by the bank's board of directors. The board of directors consists of nine members, divided into three classes:

· Class A: Three members representing member banks.

· Class B: Three members representing the public, elected by member banks.

· Class C: Three members representing the public, appointed by the Board of Governors.

The Class B and Class C directors play a primary role in the selection process, with the final candidate needing to be approved by the Board of Governors in Washington, D.C.

2. Approval by the Board of Governors: Once the regional board of directors selects a candidate, the appointment must be approved by the Board of Governors of the Federal Reserve System.

Term Duration:

• Length of Term: The presidents of the regional Federal Reserve Banks serve 5-year terms.
• Start of Term: These terms start on March 1 of years ending in 1 or 6.
• Reappointment: Presidents can be reappointed for additional 5-year terms, pending approval from the Board of Governors.

7. Federal Reserve Chair and Vice Chair

Nomination Process:

· Nomination by the President: The Chair and Vice Chair of the Federal Reserve Board are nominated by the President of the United States from among the sitting members of the Board of Governors.

· Confirmation by the Senate: The nominations must be confirmed by the U.S. Senate through a majority vote.

Term Duration:

• Chair and Vice Chair Term: The Chair and Vice Chair serve 4-year terms.
• Reappointment: The Chair and Vice Chair may be reappointed for additional 4-year terms, as long as they remain members of the Board of Governors.
• Overall Service: While the Chair and Vice Chair serve 4-year terms, their overall service on the Board of Governors is subject to the standard 14-year term limit for Board members.

8. Board of Governor

Nomination Process:

• Nomination: The President of the United States nominates candidates for the Board of Governors.
• Confirmation: The U.S. Senate must confirm the nominees through a majority vote.

Term Duration:

• Length of Term: Each member of the Board of Governors serves a 14-year term.
• Staggered Terms: The terms are staggered so that one term expires on January 31 of every even-numbered year, ensuring continuity and stability within the Board.
• Reappointment: A member who has served a full 14-year term may not be reappointed. However, a member appointed to fill an unexpired term may be reappointed for a full 14-year term thereafter.
• Chair and Vice Chair: The President also designates one of the Board members as the Chair and another as the Vice Chair for a four-year term. These appointments are also subject to Senate confirmation and can be renewed.

Summary

• Regional Fed Bank Presidents: Appointed by their respective regional boards of directors, approved by the Board of Governors, and serve 5-year terms.
• Fed Board of Governors: Appointed by the U.S. President, confirmed by the Senate, and serve 14-year terms.
• Fed Chair and Vice Chair: Appointed from among the Board of Governors by the U.S. President, confirmed by the Senate, and serve 4-year terms.

9. Chair The Fed Simulation Game

Game 1: https://lewis500.github.io/macro/

Game 2: https://www.fedchairsim.com/

Homework 1-1: Understanding the Role of the Fed Chair (due with the first midterm exam)

Objective: Play the FOMC Simulation Game and analyze the challenges faced by the Federal Reserve Chair. Provide thoughtful advice based on your experience with the simulation and understanding of monetary policy.

Instructions:

1. Play the Simulation:

2. Reflection Questions:

o Challenges as Fed Chair:

• Based on your experience with the simulation, discuss why being a Fed Chair is a challenging job.
• Reflect on the complexities involved in making monetary policy decisions. How do the constraints and trade-offs affect the role of the Fed Chair?

o Advice to Fed Chair Jerome Powell:

• Given your insights from the simulation, what advice would you offer to Jerome Powell as he navigates his role as Fed Chair?
• Consider current economic challenges and uncertainties. What strategies or approaches would you recommend to address issues such as inflation, economic growth, or financial stability?

In Plain Enlgish Fed St. Louise (Cool video about Fed)

***** FRB – Federal Reserve Banks *******

Federal Reserve Bank of Atlanta

https://www.atlantafed.org/

Federal Reserve Bank of Atlanta's Boardroom Video (youtube)

https://www.atlantafed.org/about/atlantafed/directors

The Fed Explains Monetary Policy (video)

The Tools of Monetary Policy (video)

Segment 406: Open Market Operations(video of Philadelphia Fed)

********** Fed Funds Rate *********

Release date: July 1, 2024 https://fred.stlouisfed.org/series/FEDFUNDS

What is the Fed Fund rate (youtube)

Segment 406: Open Market Operations (youtube, by the Fed)

Part II – The Mechanics of Monetary Policy: Tools and Outcomes Quiz1 Quiz3

Introduction to Monetary Policy

Monetary policy involves the actions undertaken by a central bank, such as the Federal Reserve in the United States, to influence the availability and cost of money and credit to help promote national economic goals. It revolves around managing the economy's money supply and interest rates to control inflation, stabilize currency, and achieve a sustainable level of economic growth and employment.

Key Tools of Monetary Policy

1. Open Market Operations (OMOs):

• Purpose: These are the primary means of implementing monetary policy. The process involves the buying and selling of government securities in the open market to expand or contract the amount of money in the banking system.
• Impact: Purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite.

2. The Discount Rate:

• Purpose: This is the interest rate charged to commercial banks and other financial institutions for loans they receive from the Federal Reserve's discount window.
• Impact: A lower discount rate encourages borrowing and expanding economic activity, whereas a higher rate is used to curb excessive growth and inflation.

3. Reserve Requirements:

• Purpose: This tool requires banks to hold a specific percentage of their deposits in reserve either in their vaults or at the Federal Reserve.
• Impact: Changing these requirements can influence how much money banks have to lend, thereby affecting the money supply.

Goals of Monetary Policy

• Controlling Inflation: By manipulating interest rates and the money supply, central banks can control inflation to maintain the currency's buying power.
• Managing Employment Levels: Monetary policy aims to achieve a 'natural rate' of unemployment. Lower interest rates provide more jobs, but excessively low rates may lead to inflation.
• Stabilization of the Financial System: By adjusting the cost of credit, the central bank can stabilize the financial system, particularly during periods of economic turbulence.

Outcomes of Monetary Policy

• Economic Growth: Effective monetary policy supports economic growth by adjusting the cost of credit and ensuring adequate liquidity in the system.
• Currency Stability: By controlling inflation, monetary policy helps stabilize the currency's value, which is crucial for international trade relations.
• Interest Rates Stability: Predictable and stable interest rates encourage investment and saving, which are beneficial for overall economic health.

Challenges in Monetary Policy

• Timing and Lag: The effects of monetary policy decisions typically take time to manifest in the economy, making timing decisions challenging.
• Global Influence: In an interconnected global economy, external factors such as exchange rates and foreign economic policies can impact domestic monetary policy effectiveness.
• Balancing Act: Striking the right balance between stimulating economic growth and controlling inflation can be delicate and complex.

Homework 1-2: Monetary Policy (due with the first midterm exam)

1. Explore the interactive simulation at https://www.jufinance.com/fin310_24f/money_interest.html to understand the relationship between money supply and interest rates.

Question: Based on current economic indicators, do you support the Federal Reserve's decision to lower interest rates in September 2024? Provide reasons for your stance.

2. Velocity of Money Simulation

Engage with the simulation game at https://www.jufinance.com/fin310_24f/chair_fed.html to learn about the dynamics between money supply, interest rates, and the velocity of money.

Question: What is the concept of the velocity of money? How can changes in interest rates influence this monetary indicator? What is the current velocity of money according to the latest data? In your opinion, is this velocity too high, too low, or optimal for the current economic environment?

Nominal Interest Rates and the Market for Money

Beggs, Jodi. "How Money Supply and Demand Determine Nominal Interest Rates." ThoughtCo, Apr. 5, 2023, thoughtco.com/nominal-interest-rates-and-money-supply-and-demand-1147766.

Like many economic variables in a reasonably free-market economy, interest rates are determined by the forces of supply and demand. Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. 

There is more than one interest rate in an economy and even more than one interest rate on government-issued securities. These interest rates tend to move in tandem, so it is possible to analyze what happens to interest rates overall by looking at one representative interest rate.

What Is the Price of Money?

Like other supply and demand diagrams, the supply and demand for money is plotted with the price of money on the vertical axis and the quantity of money in the economy on the horizontal axis. But what is the "price" of money? 

As it turns out, the price of money is the opportunity cost of holding money. Since cash doesn't earn interest, people give up the interest that they would have earned on non-cash savings when they choose to keep their wealth in cash instead. Therefore, the opportunity cost of money, and, as a result, the price of money, is the nominal interest rate.

Graphing the Supply of Money

The supply of money is pretty easy to describe graphically. It is set at the discretion of the Federal Reserve, more colloquially called the Fed, and is thus not directly affected by interest rates. The Fed may choose to alter the money supply because it wants to change the nominal interest rate.

Therefore, the supply of money is represented by a vertical line at the quantity of money that the Fed decides to put out into the public realm. When the Fed increases the money supply this line shifts to the right. Similarly, when the Fed decreases the money supply, this line shifts to the left.

As a reminder, the Fed generally controls the supply of money by open-market operations where it buys and sells government bonds. When it buys bonds, the economy gets the cash that the Fed used for the purchase, and the money supply increases. When it sells bonds, it takes in money as payment, and the money supply decreases. Even quantitative easing is just a variant on this process.

Graphing the Demand for Money

The demand for money, on the other hand, is a bit more complicated. To understand it, it's helpful to think about why households and institutions hold money, i.e., cash.

Most importantly, households, businesses and so on use the money to purchase goods and services. Therefore, the higher the dollar value of aggregate output, meaning the nominal GDP, the more money the players in the economy want to hold to spend it on this output.

However, there's an opportunity cost of holding money since money doesn't earn interest. As the interest rate increases, this opportunity cost increases, and the quantity of money demanded decreases as a result. To visualize this process, imagine a world with a 1,000 percent interest rate where people make transfers to their checking accounts or go to the ATM every day rather than hold any more cash than they need to.

Since the demand for money is graphed as the relationship between the interest rate and quantity of money demanded, the negative relationship between the opportunity cost of money and the quantity of money that people and businesses want to hold explains why the demand for money slopes downward.

Just like with other demand curves, the demand for money shows the relationship between the nominal interest rate and the quantity of money with all other factors held constant, or ceteris paribus. Therefore, changes to other factors that affect the demand for money shift the entire demand curve. Since the demand for money changes when nominal GDP changes, the demand curve for money shifts when prices (P) or real GDP (Y) changes. When nominal GDP decreases, the demand for money shifts to the left, and, when nominal GDP increases, the demand for money shifts to the right.

Equilibrium in the Money Market

As in other markets, the equilibrium price and quantity are found at the intersection of the supply and demand curves. In this graph, the supply of and demand for money come together to determine the nominal interest rate in an economy.

Equilibrium in a market is found where the quantity supplied equals the quantity demanded because surpluses (situations where supply exceeds demand) pushes prices down and shortages (situations where demand exceeds supply) drive prices up. So, the stable price is the one where there is neither a shortage nor a surplus.

Regarding the money market, the interest rate must adjust such that people are willing to hold all of the money that the Federal Reserve is trying to put out into the economy and people aren't clamoring to hold more money than is available. 

Changes in the Supply of Money

When the Federal Reserve adjusts the supply of money in an economy, the nominal interest rate changes as a result. When the Fed increases the money supply, there is a surplus of money at the prevailing interest rate. To get players in the economy to be willing to hold the extra money, the interest rate must decrease. This is what is shown on the left-hand side of the diagram above.

When the Fed decreases the money supply, there is a shortage of money at the prevailing interest rate. Therefore, the interest rate must increase to dissuade some people from holding money. This is shown on the right-hand side of the diagram above.

This is what happens when the media says that the Federal Reserve raises or lowers interest rates—the Fed isn't directly mandating what interest rates are going to be but is instead adjusting the money supply to move the resulting equilibrium interest rate.

Changes in the Demand for Money

Changes in the demand for money can also affect the nominal interest rate in an economy. As shown in the left-hand panel of this diagram, an increase in the demand for money initially creates a shortage of money and ultimately increases the nominal interest rate. In practice, this means that interest rates increase when the dollar value of aggregate output and expenditure increases.

The right-hand panel of the diagram shows the effect of a decrease in demand for money. When not as much money is needed to purchase goods and services, a surplus of money results and interest rates must decrease to make players in the economy willing to hold the money.

Using Changes in the Money Supply to Stabilize the Economy

In a growing economy, having a money supply that increases over time can have a stabilizing effect on the economy. Growth in real output (i.e., real GDP) will increase the demand for money and will increase the nominal interest rate if the money supply is held constant.

On the other hand, if the supply of money increases in tandem with the demand for money, the Fed can help to stabilize nominal interest rates and related quantities (including inflation).

That said, increasing the money supply in response to a demand increase that is caused by an increase in prices rather than an increase in output is not advisable, since that would likely exacerbate the problem of inflation rather than have a stabilizing effect.

Key Takeaways:

1. Concept of Nominal Interest Rates:

• Definition: Nominal interest rates are the monetary returns on savings, driven by the supply and demand of money within an economy.
• Variability: Multiple interest rates exist, particularly for government securities, though they generally move together.

2. The Price of Money:

• Understanding Price: The "price" of money refers to its opportunity cost, represented by the nominal interest rate.
• Opportunity Cost: This is the foregone interest from not investing cash in interest-bearing options.

3. Supply and Demand Representation:

• Supply of Money: Controlled by the Federal Reserve and represented graphically by a vertical line. Changes in supply are enacted through policies like open-market operations.
• Demand for Money: Depicted as a downward-sloping curve reflecting the inverse relationship between the nominal interest rate and the quantity of money demanded. Shifts occur with changes in nominal GDP.

4. Market Equilibrium:

• Equilibrium Determination: Found where the supply and demand curves intersect, setting the nominal interest rate.
• Market Dynamics: Surpluses drive rates down, while shortages push them up.

5. Impact of Federal Reserve Actions:

• Increasing Supply: Lowers interest rates by creating a money surplus.
• Decreasing Supply: Raises interest rates by creating a money shortage.
• Indirect Control: The Fed influences rates not by decree but through adjusting money supply.

6. Influence of Demand Changes:

• Economic Activity: Increases in economic output or spending can heighten the demand for money, raising interest rates.
• Economic Downturns: Reductions in spending or output decrease money demand, lowering rates.

7. Stabilizing the Economy Through Monetary Policy:

• Money Supply Management: Proper adjustments in the money supply can help stabilize interest rates and economic conditions.
• Avoid Inflation Traps: Increasing the money supply in response to price-driven demand increases can worsen inflation.

Chapter 2 What is Money quiz4

Ppt

Part I What is Money?   Let’s start by Playing a game https://www.jufinance.com/game/money_supply.html

·         There is no single "correct" measure of the money supply: instead, there are several measures, classified along a spectrum or continuum between narrow and broad monetary aggregates.

•         Narrow measures include only the most liquid assets, the ones most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.)

Type of money	M0	MB	M1	M2	M3
Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) (currency)	✓	✓	✓	✓	✓
Notes and coins in bank vaults (Vault cash)		✓
Federal Reserve Bank credit (required reserves and excess reserves not physically present in banks)		✓
Traveler’s checks of non-bank issuers			✓	✓	✓
Demand deposits			✓	✓	✓
Other checkable deposits (OCDs)			✓	✓	✓
Savings deposits				✓	✓
Time deposits less than $100,000 and money market deposit accounts for individuals				✓	✓
Large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets					✓
All money market funds

·         M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.

·         MB: is referred to as the monetary base or total currency.  This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply.

·         M1: Bank reserves are not included in M1. (M1 and Components @ Fed St. Louise website)

·         M2: Represents M1 and "close substitutes" for M1. M2 is a broader classification of money than M1. M2 is a key economic indicator used to forecast inflation. (M2 and components @ Fed St. Louise website)

·         M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank. However, there are still estimates produced by various private institutions. (M3 and components at Fed St. Louise website)

Let’s watch this money supply video: Khan academy money supply M0, M1, M2 (video)

https://tradingeconomics.com/united-states/money-supply-m0

https://tradingeconomics.com/united-states/money-supply-m1

https://tradingeconomics.com/united-states/money-supply-m2

Key Takeaway: VIDO (FYI) by invideo.ai

• M0 (Base Money):

· Definition: M0 represents the most basic form of money, including physical currency (coins and paper money) in circulation and reserves held by banks at the central bank. It is the foundation of the money supply and the most liquid form of money.

· Role: M0 is crucial because it forms the base upon which the broader money supply (M1 and M2) is built. It reflects the amount of cash and bank reserves that can be quickly used by banks to meet withdrawal demands or create more money through lending.

• M1:

• Definition: M1 includes M0 (physical currency) along with demand deposits (checking accounts) and other checkable deposits. It represents the money immediately available for transactions and spending.
• Recent Changes: The reclassification of savings accounts into M1 in 2020 led to a sharp increase, reflecting the increased liquidity and accessibility of savings during the pandemic.

• M2:

• Definition: M2 includes M1 plus savings deposits, money market mutual funds, and small time deposits. It captures the broader money available in the economy, including both liquid assets and savings that can be quickly converted into cash.
• Recent Changes: M2 grew significantly during the COVID-19 pandemic due to increased savings, deposits, and fiscal stimulus, reflecting the economy’s response to uncertainty and economic support measures.

• Recent Trends and Major Changes:
• COVID-19 Impact:
• M0 Stability: While M0 remained relatively stable, reflecting the steady amount of physical currency in circulation, the broader measures of money supply (M1 and M2) saw significant increases.
• M1 Surge: The pandemic and associated monetary policy changes caused a surge in M1, primarily due to the reclassification of savings accounts and an increase in demand deposits as people prioritized liquidity.
• M2 Expansion: M2 expanded rapidly as households and businesses increased their savings amid economic uncertainty. This growth was further fueled by government stimulus payments and low-interest rates, which encouraged deposits.
• Role of Banks:

• Credit Creation: Banks play a key role in expanding M2 through credit creation. When banks issue loans, new deposits are created, increasing the money supply. This process is built on the foundation of M0 and expands through M1 and M2.
• Fractional Reserve Banking: Banks keep only a fraction of deposits as reserves (M0) and lend out the rest. This practice amplifies the growth of M2, as loans lead to more deposits in the banking system, thereby multiplying the money supply.

• Economic Impact:

· Stimulating Economic Activity: The growth in M1 and M2 during the pandemic helped stimulate economic activity by making more funds available for spending and investment, which was crucial for economic recovery.

· Inflationary Pressure: The significant increase in the money supply has also raised concerns about inflation, as more money in circulation can lead to rising prices if it outpaces economic growth.

· Central Bank Policy: The Federal Reserve closely monitors these trends and adjusts policies, such as interest rates, to balance economic growth with inflation control, ensuring that the expansion of M1 and M2 does not lead to excessive inflation.

Homework (due with the first midterm exam)

Imagine you're the Chair of the Federal Reserve during the COVID-19 pandemic. You have to make decisions that will affect M0, M1, and M2.

1. Define M0, M1, and M2 in your own words. How do they differ from each other?
2. Scenario: During the pandemic, people are saving more money, and banks are giving out lots of loans. Explain how these actions impact M1 and M2.
3. Decision Time: To keep the economy stable, you can either increase or decrease the money supply. Which would you choose and why? How might your choice affect inflation or interest rates?

Part II What is Fractional Reserve Banking System? Play the game!

The Money Multiplier (video)

Money creation in a fractional reserve system | Financial sector | AP Macroeconomics | Khan Academy

Fractional Reserve Banking

By JULIA KAGAN Updated August 10, 2022, Reviewed by SOMER ANDERSON

https://www.investopedia.com/terms/f/fractionalreservebanking.asp#:~:text=Fractional%20reserve%20banking%20is%20a,systems%20use%20fractional%20reserve%20banking.

What Is Fractional Reserve Banking?

Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending. Today, most economies' financial systems use fractional reserve banking.

KEY TAKEAWAYS

· Fractional reserve banking describes a system whereby banks can loan out a certain amount of the deposits that they have on their balance sheets.

· Banks are required to keep on hand a certain amount of the cash that depositors give them, but banks are not required to keep the entire amount on hand.

· Often, banks are required to keep some portion of deposits on hand, which is known as the bank's reserves.

· Some banks are exempt from holding reserves, but all banks are paid a rate of interest on reserves.

Understanding Fractional Reserve Banking

Banks are required to keep on hand and available for withdrawal a certain amount of the cash that depositors give them. If someone deposits $100, the bank can't lend out the entire amount. Nor are banks required to keep the entire amount on hand. Many central banks have historically required banks under their purview to keep 10% of the deposit, referred to as reserves. This requirement is set in the U.S. by the Federal Reserve and is one of the central bank's tools to implement monetary policy. Increasing the reserve requirement takes money out of the economy while decreasing the reserve requirement puts money into the economy.

Historically, the required reserve ratio on non-transaction accounts (such as CDs) is zero, while the requirement on transaction deposits (e.g., checking accounts) is 10 percent. Following recent efforts to stimulate economic growth, however, the Fed has reduced the reserve requirements to zero for transaction accounts as well.

Fractional Reserve Requirements

Depository institutions must report their transaction accounts, time and savings deposits, vault cash, and other reservable obligations to the Fed either weekly or quarterly. Some banks are exempt from holding reserves, but all banks are paid a rate of interest on reserves called the "interest rate on reserves" (IOR) or the "interest rate on excess reserves" (IOER). This rate acts as an incentive for banks to keep excess reserves.

Reserve requirements for banks under the Federal Reserve Act were set at 13%, 10%, and 7% (depending on what kind of bank) in 1917. In the 1950s and '60s, the Fed had set the reserve ratio as high as 17.5% for certain banks, and it remained between 8% to 10% throughout much of the 1970s through the 2010s.

During this period, banks with less than $16.3 million in assets were not required to hold reserves. Banks with assets of less than $124.2 million but more than $16.3 million had to have 3% reserves, and those banks with more than $124.2 million in assets had a 10% reserve requirement.

Beginning March 26, 2020, the 10% and 3% required reserve ratios against net transaction deposits was reduced to 0 percent for all banks, essentially removing the reserve requirements altogether.

Prior to the introduction of the Fed in the early 20th century, the National Bank Act of 1863 imposed 25% reserve requirements for U.S. banks under its charge.

Fractional Reserve Multiplier Effect

"Fractional reserve" refers to the fraction of deposits held in reserves. For example, if a bank has $500 million in assets, it must hold $50 million, or 10%, in reserve.

Analysts reference an equation referred to as the multiplier equation when estimating the impact of the reserve requirement on the economy as a whole. The equation provides an estimate for the amount of money created with the fractional reserve system and is calculated by multiplying the initial deposit by one divided by the reserve requirement. Using the example above, the calculation is $500 million multiplied by one divided by 10%, or $5 billion.

This is not how money is actually created but only a way to represent the possible impact of the fractional reserve system on the money supply. As such, while is useful for economics professors, it is generally regarded as an oversimplification by policymakers.

What Are the Pros of Fractional Reserve Banking?

Fractional reserve banking permits banks to use funds (i.e., the bulk of deposits) that would be otherwise unused and idle to generate returns in the form of interest rates on new loans—and to make more money available to grow the economy. It is thus able to better allocate capital to where it is most needed.

What Are the Cons of Fractional Reserve Banking?

Fractional reserve banking could catch a bank short of funds on hand in the self-perpetuating panic of a bank run. This occurs when too many depositors demand their cash at the same time, but the bank only has, say 10% of deposits in liquid cash available. Many U.S. banks were forced to shut down during the Great Depression because too many customers attempted to withdraw assets at the same time. Nevertheless, fractional reserve banking is an accepted business practice that is in use at banks worldwide.

Where Did Fractional Reserve Banking Originate?

Nobody knows for sure when fractional reserve banking originated, but it is certainly not a modern innovation. Goldsmiths during the Middle Ages were thought to issue demand receipts for gold on hand that exceeded the amount of physical gold they had under custody, knowing that on any given day only a small fraction of that gold would be demanded.

In 1668, Sweden's Riksbank introduced the first instance of modern fractional reserve banking.

Example: You deposited $1,000 in a local bank

Iteration #	Deposited by	Amount Held	Amount	Total Amount that	Total Amount that	Total Amount	Total Amount that
	Customer	in Reserve	Currently	“Can” be	Has Been	Held in Reserve	Customers Believe
		from Deposit	Available to	Lent Out	Lent Out		They Have
			Lend Out
			from Deposit
1	1,000.00	100	900	900	0	100	1,000.00
2	900	90	810	1,710.00	900	190	1,900.00
3	810	81	729	2,439.00	1,710.00	271	2,710.00
4	729	72.9	656.1	3,095.10	2,439.00	343.9	3,439.00
5	656.1	65.61	590.49	3,685.59	3,095.10	409.51	4,095.10
6	590.49	59.05	531.44	4,217.03	3,685.59	468.56	4,685.59
7	531.44	53.14	478.3	4,695.33	4,217.03	521.7	5,217.03
8	478.3	47.83	430.47	5,125.80	4,695.33	569.53	5,695.33
9	430.47	43.05	387.42	5,513.22	5,125.80	612.58	6,125.80
10	387.42	38.74	348.68	5,861.89	5,513.22	651.32	6,513.22
….

Homework of chapter 2 (due with the first mid term) Play the game at https://jufinance.com/game/money_multiplier.html

1. Imagine that you deposited $5,000 in Bank A. Reserve ratio is 0.1. Imagine that the fractional banking system is fully functioning. After Eight cycles, what is the amount that has been deposited and what is the total amount that has been lent out?

Chapter 11 - 14: Commercial Banking and Investment Banking

Ppt 1 commercial banking I

PPT2 Commercial banking II (Balance sheet)

Part I – Commercial Bank’s Financial Statement Analysis Quiz

Let’s Play a game on Banks’ Balance Sheet

Wells Fargo’s Balance Sheet https://www.nasdaq.com/market-activity/stocks/wfc/financials

Period Ending:	12/31/2023	12/31/2022	12/31/2021	12/31/2020
Current Assets
Cash and Cash Equivalents	$865,469,000	$788,415,000	$910,870,000	$891,499,000
Short-Term Investments	--	--	--	--
Net Receivables	--	--	--	--
Inventory	--	--	--	--
Other Current Assets	--	--	--	--
Total Current Assets	--	--	--	--
Long-Term Assets
Long-Term Investments	$1,501,537,000	$1,544,466,000	$1,546,605,000	$1,500,003,000
Fixed Assets	$9,266,000	$8,350,000	$8,571,000	$8,895,000
Goodwill	$25,175,000	$25,173,000	$25,180,000	$26,392,000
Intangible Assets	--	--	--	--
Other Assets	$78,815,000	$75,838,000	$67,259,000	$87,337,000
Deferred Asset Charges	--	--	--	--
Total Assets	$1,932,468,000	$1,881,020,000	$1,948,068,000	$1,952,911,000
Current Liabilities
Accounts Payable	$71,210,000	$68,740,000	$70,957,000	$74,360,000
Short-Term Debt / Current Portion of Long-Term Debt	$89,559,000	$51,145,000	$34,409,000	$58,999,000
Other Current Liabilities	$1,358,173,000	$1,383,985,000	$1,482,479,000	$1,404,381,000
Total Current Liabilities	--	--	--	--
Long-Term Debt	$18,495,000	$20,067,000	$9,424,000	$16,509,000
Other Liabilities	--	--	--	--
Deferred Liability Charges	--	--	--	--
Misc. Stocks	$1,708,000	$1,986,000	$2,504,000	$1,032,000
Minority Interest	--	--	--	--
Total Liabilities	$1,746,733,000	$1,700,793,000	$1,760,462,000	$1,768,231,000
Stock Holders Equity
Common Stocks	$9,136,000	$9,136,000	$9,136,000	$9,136,000
Capital Surplus	$201,136,000	$187,968,000	$180,322,000	$162,683,000
Retained Earnings	-$92,960,000	-$82,853,000	-$79,757,000	-$67,791,000
Treasury Stock	$60,555,000	$60,319,000	$60,196,000	$60,197,000
Other Equity	-$11,580,000	-$13,791,000	-$2,348,000	-$681,000
Total Equity	$185,735,000	$180,227,000	$187,606,000	$184,680,000
Total Liabilities & Equity	$1,932,468,000	$1,881,020,000	$1,948,068,000	$1,952,911,000

Wells Fargo’s Income Statement https://www.nasdaq.com/market-activity/stocks/wfc/financials

Period Ending:	12/31/2023	12/31/2022	12/31/2021	12/31/2020
Total Revenue	$115,340,000	$83,442,000	$83,081,000	$82,227,000
Cost of Revenue	$16,503,000	$2,349,000	$388,000	$2,804,000
Gross Profit	--	--	--	--
Operating Expenses
Research and Development	--	--	--	--
Sales, General and Admin.	$55,562,000	$57,205,000	$53,758,000	$56,131,000
Non-Recurring Items	--	--	--	$1,499,000
Other Operating Items	$5,399,000	$1,534,000	-$4,155,000	$14,129,000
Operating Income	--	--	--	--
Add'l income/expense items	--	--	--	--
Earnings Before Interest and Tax	$37,876,000	$22,354,000	$33,090,000	$7,664,000
Interest Expense	$16,240,000	$6,725,000	$3,527,000	$5,159,000
Earnings Before Tax	$21,636,000	$15,629,000	$29,563,000	$2,505,000
Income Tax	$2,607,000	$2,251,000	$5,764,000	-$1,157,000
Minority Interest	--	--	--	--
Equity Earnings/Loss Unconsolidated Subsidiary	$113,000	$299,000	-$1,690,000	-$285,000
Net Income-Cont. Operations	$19,142,000	$13,677,000	$22,109,000	$3,377,000
Net Income	$19,142,000	$13,677,000	$22,109,000	$3,377,000
Net Income Applicable to Common Shareholders	$17,982,000	$12,562,000	$20,818,000	$1,786,000

Understanding How Banks Operate: A Case Study on Wells Fargo (based on a prior study) Quiz

1. Introduction to Banking Operations

Banks are essential financial institutions that play a vital role in the economy. They manage money, facilitate transactions, provide credit, and offer various financial services to individuals, businesses, and governments. We'll use Wells Fargo's financial data as a case study to illustrate these concepts.

2. Core Functions of a Bank

Deposits and Loans:

• Deposits: Banks collect deposits from customers, which become the primary source of funds that banks use to lend to others. These deposits are a liability for the bank since they must be returned to customers upon demand.
• Loans: Banks lend money to individuals, businesses, and governments. The interest charged on these loans is a primary source of income for banks.

Interest Income and Net Interest Margin (NIM):

• Interest Income: The difference between the interest earned on loans and the interest paid on deposits is known as the Net Interest Margin (NIM). A higher NIM indicates that a bank is earning more from its loans than it is paying on its deposits, which is crucial for profitability.

Investments:

• Banks invest in various securities, including government bonds, corporate bonds, and mortgage-backed securities, to generate additional income.

Fee-Based Services:

• Banks offer services such as wealth management, underwriting, payment processing, and advisory services. These services generate fees, which contribute to the bank's overall revenue.

3. Understanding Key Financial Statements

Balance Sheet:

• The balance sheet provides a snapshot of the bank's financial position at a specific point in time, showing its assets, liabilities, and equity.
• Assets: What the bank owns, including loans, investments, and cash reserves.
• Liabilities: What the bank owes, including customer deposits and borrowed funds.
• Equity: The residual interest in the assets of the bank after deducting liabilities, representing the ownership interest of the shareholders.

Income Statement:

• The income statement summarizes the bank's revenue and expenses over a period, showing how the bank earns its income and incurs costs.
• Revenue: Includes interest income from loans and fees from services.
• Expenses: Includes interest paid on deposits, operating expenses, and loan losses.

4. Wells Fargo Case Study: Key Financial Metrics (2020-2023)

Using Wells Fargo's financial data, let's explore key metrics that indicate the bank's financial health:

Total Revenue:

• Wells Fargo’s total revenue increased from $82.2 billion in 2020 to $115.3 billion in 2023, reflecting strong income growth despite economic challenges.

Cost of Revenue:

• The cost of revenue rose from $2.8 billion in 2020 to $16.5 billion in 2023, indicating potential pressures from rising interest rates or increased costs associated with generating income.

Net Income:

• Wells Fargo’s net income grew significantly from $3.4 billion in 2020 to $19.1 billion in 2023, showing improved profitability and effective cost management.

Operating Income (EBIT):

• Operating income increased from $7.7 billion in 2020 to $37.9 billion in 2023, indicating enhanced operational efficiency.

Total Assets and Liabilities:

• Wells Fargo's total assets and liabilities have remained relatively stable, with assets totaling $1.93 trillion and liabilities totaling $1.75 trillion in 2023. The stability suggests strong balance sheet management.

5. Identifying Bank Vulnerabilities

Declining Net Interest Margin (NIM):

• A shrinking NIM can indicate that the bank is struggling to generate sufficient income from its lending activities. Continuous monitoring of NIM is essential to ensure profitability.

High Loan Defaults:

• A significant increase in loan defaults can lead to financial instability. Rising non-performing loans (NPLs) indicate that more borrowers are unable to repay their loans, which can strain the bank's capital reserves.

Increasing Cost of Revenue:

• A disproportionate increase in the cost of revenue relative to income can signal inefficiencies or higher borrowing costs. This could compress margins and affect overall profitability.

High Leverage:

• Excessive reliance on borrowed funds to finance operations can make a bank more vulnerable to market fluctuations. Monitoring the bank’s leverage ratio is crucial to maintaining financial stability.

Declining Liquidity:

• Insufficient liquid assets to meet short-term obligations can lead to a liquidity crisis. A bank must maintain adequate liquidity to ensure it can handle sudden demands for cash, such as during a bank run.

6. Safety Tips for Managing and Analyzing Banks

Diversify Assets:

• Banks should diversify their loan portfolios and investments to reduce risk exposure. A well-diversified bank is less likely to suffer severe losses from sector-specific downturns.

Maintain Adequate Reserves:

• Banks need sufficient capital reserves to absorb potential losses and meet regulatory requirements. Monitoring the Capital Adequacy Ratio (CAR) helps ensure the bank has a buffer against unexpected losses.

Monitor Loan Quality:

• Regular assessment of the loan portfolio is essential to identify early signs of trouble. Keeping track of the ratio of non-performing loans (NPLs) to total loans is a good indicator of loan quality.

Ensure Liquidity:

• Maintaining adequate liquidity is critical for meeting short-term obligations without selling long-term investments at a loss. The Liquidity Coverage Ratio (LCR) measures the bank’s ability to withstand short-term financial stress.

Stress Testing and Scenario Analysis:

• Conducting stress tests and scenario analyses can help banks prepare for economic downturns, interest rate changes, and other financial shocks. This proactive approach helps identify vulnerabilities and develop contingency plans.

Regulatory Compliance:

• Banks must comply with various regulations, including those related to capital adequacy, liquidity, and consumer protection. Staying updated on regulatory changes and ensuring compliance is crucial for long-term stability.

7. Practical Application: Analyzing Wells Fargo

Here’s how we can apply these concepts using Wells Fargo’s data:

• Examine the Income Statement: Assess trends in revenue, cost of revenue, and net income to evaluate profitability.
• Analyze the Balance Sheet: Review assets, liabilities, and equity to understand the bank’s financial position.
• Calculate Key Ratios:

• Net Interest Margin (NIM): To assess profitability from lending.
• Loan-to-Deposit Ratio (LDR): To evaluate how well the bank is using deposits to generate loans.
• Capital Adequacy Ratio (CAR): To determine if the bank has enough capital to cover potential losses.
• Identify Potential Risks: Use the data to identify any signs of vulnerability, such as declining liquidity or rising defaults.

8. Conclusion on Wells Fargo

Wells Fargo’s financial performance from 2020 to 2023 demonstrates a bank that has effectively managed its operations despite various economic challenges. The consistent growth in revenue and net income, coupled with stable asset management, reflects the bank’s strong financial position. However, the significant rise in the cost of revenue in 2023 could be a potential risk factor that needs to be monitored closely.

Part III: Governmental Regulations on Banking Industry (FYI)

A Brief History of U.S. Banking Regulation (FYI)

By MATTHEW JOHNSTON

Reviewed by MICHAEL J BOYLE on July 30, 2021

https://www.investopedia.com/articles/investing/011916/brief-history-us-banking-regulation.asp

As early as 1781, Alexander Hamilton recognized that “Most commercial nations have found it necessary to institute banks, and they have proved to be the happiest engines that ever were invented for advancing trade.” Since then, America has developed into the largest economy in the world, with some of the biggest financial markets in the world. But the path from then to now has been influenced by a variety of different factors and an ever-changing regulatory framework. The changing nature of that framework is best characterized by the swinging of a pendulum, oscillating between the two opposing poles of greater and lesser regulation. Forces, such as the desire for greater financial stability, more economic freedom, or fear of the concentration of too much power in too few hands, are what keep the pendulum swinging back and forth.

Early Attempts at Regulation in Antebellum America

From the establishment of the First Bank of the United States in 1791 to the National Banking Act of 1863, banking regulation in America was an experimental mix of federal and state legislation.1 2 The regulation was motivated, on the one hand, by the need for increased centralized control to maintain stability in finance and, by extension, the overall economy. While on the other hand, it was motivated by the fear of too much control being concentrated in too few hands.

Despite bringing a relative degree of financial and economic stability, the First Bank of the United States was opposed to being unconstitutional, with many fearing that it relegated undue powers to the federal government. Consequently, its charter was not renewed in 1811. With the government turning to state banks to finance the War of 1812 and the significant over-expansion of credit that followed, it became increasingly apparent that financial order needed to be reinstated. In 1816, the Second Bank of the United States would receive a charter, but it too would later succumb to political fears over the amount of control it gave the federal government and was dissolved in 1836.

Not only at the federal level, but also at the level of state banking, obtaining an official legislative charter was highly political. Far from being granted on the basis of proven competence in financial matters, successful acquisition of a charter depended more on political affiliations, and bribing the legislature was commonplace. By the time of the dissolution of the Second Bank, there was a growing sense of a need to escape the politically corrupt nature of legislative chartering. A new era of “free banking” emerged with a number of states passing laws in 1837 that abolished the requirement to obtain an officially legislated charter to operate a bank. By 1860, a majority of states had issued such laws.

In this environment of free banking, anyone could operate a bank on the condition, among others, that all notes issued were back by proper security. While this condition served to reinforce the credibility of note issuance, it did not guarantee immediate redemption in specie (gold or silver), which would serve to be a crucial point. The era of free banking suffered from financial instability with several banking crises occurring, and it made for a disorderly currency characterized by thousands of different banknotes circulating at varying discount rates. It is this instability and disorder that would renew the call for more regulation and central oversight in the 1860s.

Increasing Regulation from the Civil War to the New Deal

The free banking era, characterized as it was by a complete lack of federal control and regulation, would come to an end with the National Banking Act of 1863 (and its later revisions in 1864 and 1865), which aimed to replace the old state banks with nationally chartered ones. The Office of the Comptroller of the Currency (OCC) was created to issue these new bank charters as well as oversee that national banks maintained the requirement to back all note issuance with holdings of U.S. government securities.

While the new national banking system helped return the country to a more uniform and secure currency that it had not experienced since the years of the First and Second Banks, it was ultimately at the expense of an elastic currency that could expand and contract according to commercial and industrial needs. The growing complexity of the U.S. economy highlighted the inadequacy of an inelastic currency, which led to frequent financial panics occurring throughout the rest of the nineteenth century.

With the occurrence of the bank panic of 1907, it had become apparent that America’s banking system was out of date. Further, a committee gathered in 1912 to examine the control of the nation’s banking and financial system. It found that the money and credit of the nation were becoming increasingly concentrated in the hands of relatively few men. Consequently, under the presidency of Woodrow Wilson, the Federal Reserve Act of 1913 was approved to wrest control of the nation’s finances from banks while at the same time creating a mechanism that would enable a more elastic currency and greater supervision over the nation’s banking infrastructure.

Although the newly established Federal Reserve helped to improve the nation’s payments system and created a more flexible currency, it's a misunderstanding of the financial crisis following the 1929 stock market crash served to roil the nation in a severe economic crisis that would come to be known as the Great Depression. The Depression would lead to even more banking regulation instituted by President Franklin D. Roosevelt as part of the provisions under the New Deal. The Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), which implemented regulation of deposit interest rates, and separated commercial from investment banking. The Banking Act of 1935 served to strengthen and give the Federal Reserve more centralized power.

1980s Deregulation and Post-Crisis Re-Regulation

The period following the New Deal banking reforms up until around 1980 experienced a relative degree of banking stability and economic expansion. Still, it has been recognized that the regulation has also served to make American banks far less innovative and competitive than they had previously been. The heavily regulated commercial banks had been losing increasing market share to less-regulated and innovative financial institutions. For this reason, a wave of deregulation occurred throughout the last two decades of the twentieth century.

In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which served to deregulate financial institutions that accept deposits while strengthening the Federal Reserve’s control over monetary policy.6 Restrictions on the opening of bank branches in different states that had been in place since the McFadden Act of 1927 were removed under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Finally, the Gramm-Leach-Bliley Act of 1999 repealed significant aspects of the Glass-Steagall Act as well as the Bank Holding Act of 1956, both of which had served to sever investment banking and insurance services from commercial banking.7 From 1999 onwards, a bank could now offer commercial banking, securities, and insurance services under one roof.

All of this deregulation helped to accelerate a trend towards increasing the complexity of banking organizations as they moved to greater consolidation and conglomeration. Financial institution mergers increased with the total number of banking organizations consolidating to under 8000 in 2008 from a previous peak of nearly 15,000 in the early 1980s.8 While banks have gotten bigger, the conglomeration of different financial services under one organization has also served to increase the complexity of those services. Banks began offering new financial products like derivatives and began packaging traditional financial assets like mortgages together through a process of securitization.

At the same time that these new financial innovations were being praised for their ability to diversify risk, the sub-prime mortgage crisis of 2007 that transformed into a global financial crisis and the need for the bailout of U.S. banks that had become “too big to fail” has caused the government to rethink the financial regulatory framework. In response to the crisis, the Obama administration passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, aimed at many of the apparent weaknesses within the U.S. financial system.9 It may take some time to see how these new regulations affect the nature of banking within the U.S.

The Bottom Line

In antebellum America, numerous attempts at increased centralized control and regulation of the banking system were tried, but fears of concentrated power and political corruption served to undermine such attempts. Nevertheless, as the banking system grew, the need for ever-increasing regulation and centralized control, led to the creation of a nationalized banking system during the Civil War, the creation of the Federal Reserve in 1913, and the New Deal reforms under Roosevelt.4 While the increased regulation led to a period of financial stability, commercial banks began losing business to more innovative financial institutions, necessitating a call for deregulation. Once again, the deregulated banking system evolved to exhibit even greater complexities and precipitated the most severe economic crisis since the Great Depression. Dodd-Frank was the response, but if history is any guide, the story is far from over, or perhaps, the pendulum will continue to swing.

Why Are Banks Regulated? (FYI)

January 30, 2017

By Julie L Stackhouse

This post is the first in a series titled “Supervising Our Nation’s Financial Institutions.” Supervising Our Nation’s Financial Institutions The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, is expected to appear at least once each month throughout 2017.

The topic of financial deregulation is once again generating news stories. It raises a foundational question: “Why is the U.S. banking system so heavily regulated?”

Banking regulation has existed in some form since the chartering of banks and its goals have evolved over time. Today, banking regulation serves four main purposes.

Financial Stability

Instability in the financial system can have material ripple effects into other parts of the domestic and international financial sectors. Supervision that is focused on financial stability (often called macro-prudential supervision) looks at trends and analyzes the likelihood for financial contagion and the possible impacts across firms that pose systemic risks.

Protection of the Federal Deposit Insurance Fund

Since Jan. 1, 1934, the Federal Deposit Insurance Corp. has insured the deposits held in U.S. banks up to a defined amount (currently $250,000 per depositor per bank). The federal government serves as a backstop to the insurance fund.

In exchange for this insurance guarantee, banks pay an insurance premium and are also subject to safety and soundness examinations by state and/or federal regulators. Oversight of individual financial institutions by banking regulators is called micro-prudential supervision.

While the insurance fund protects depositors, it does not protect shareholders of banks. When inappropriate risks are taken and prove unsuccessful, banks will fail and be liquidated.

Consumer Protection

Since the creation of the Federal Trade Commission in 1914, the federal government has had a formal obligation to protect consumers across industries. Since that time, numerous laws and regulations have been crafted by various agencies to protect bank customers and promote fair and equal access to credit.

Banks conduct financial transactions with consumers either directly (lending to consumers and taking consumer deposits) or indirectly (through financial technology on the front end, for example). Banking regulators enforce consumer protection regulations by conducting comprehensive reviews of bank lending and deposit operations and investigating consumer complaints.

Competition

A competitive banking system is a healthy banking system. Banking regulators actively monitor U.S. banking markets for competitiveness and can deny bank mergers that would negatively affect the availability and pricing of banking services.

Although fewer than 40 banks account for more than 70 percent of all U.S. banking assets, as shown in the table below, there are nearly 6,000 institutions of all sizes operating in communities across the country.

US BankSystem

While all banks are regulated, not all regulations apply to every bank. We’ll discuss some of these differences in future posts. In my next post, I’ll discuss how the banking system has changed over time—especially over the past 25 years—adding to the complexity and scope of banking regulation in the U.S.

For discussion: As compared with small banks, do big banks are relatively more burdened by regulations? Or vice versa?

Part II –Bank Run and Bank Failure

1. What is bank run? It is rare. Why?

Bank Run Explained | History of Bank Runs (youtube)

2. How can you tell that banks are getting bigger and bigger? Who need big banks?

What is too big to fail (Bloomberg university) video

Table of Key Financial Metrics: (The data are collected for late 2022 and early 2023 based on available public data)

Bank Name	NIM (%)	DLP (%)	CAR (%)
Chase Bank	2.5	80	14.5
Bank of America	2.8	85	13.8
Wells Fargo	2.7	82	15.2
DLP Bank (Jacksonville)	3.1	70	14
Fidelity Bank	3	75	13.5
VyStar Credit Union	2.9	65	12.5
Atlantic Union Bank	3.3	68	12.8
Silicon Valley Bank	2.2	87	11
Signature Bank	2.1	84	10.5
First Republic Bank	2.7	90	8
Silvergate Bank	Not available	72	10

Definitions and Explanations:

1. Net Interest Margin (NIM):

• Definition: NIM measures the profitability of a bank's lending activities by comparing the interest earned on loans and the interest paid to depositors, relative to the bank's total assets.
• Explanation: All four banks had relatively low NIMs, indicating less profitability from their lending operations. For example, Silicon Valley Bank (SVB) had a NIM of 2.2%, which was on the lower side compared to healthier banks. This low profitability, combined with other risk factors, weakened their financial position.

2. Deposit Loan Ratio (DLP):

· Definition: DLP shows the proportion of a bank's deposits that have been lent out. A higher ratio suggests more aggressive lending.

· Explanation: First Republic Bank had a very high DLP of 90%, meaning it had lent out a large portion of its deposits, leaving it vulnerable to liquidity issues. Similarly, SVB had a DLP of 87%, making it susceptible to liquidity risks during a sudden bank run, as they lacked sufficient liquid reserves to meet withdrawal demands.

3. Capital Adequacy Ratio (CAR):

• Definition: CAR measures the bank's capital relative to its risk-weighted assets. A higher CAR indicates more robust capital buffers to absorb financial shocks.
• Explanation: First Republic Bank had the lowest CAR at 8.0%, indicating insufficient capital reserves. This made it more vulnerable to financial stress, especially as interest rates rose. SVB had a CAR of 11%, which was slightly better but still inadequate given its exposure to market and liquidity risks.

Why These Banks Failed:

1. High DLPs: Banks like First Republic and SVB had high DLPs, which meant they aggressively loaned out deposits, leaving them with limited liquidity. When depositors began to withdraw funds en masse, these banks struggled to meet the demand, leading to bank runs.

2. Low CARs: With relatively low CARs, these banks had insufficient capital to absorb losses. First Republic was particularly vulnerable, with a CAR of 8.0%. This low capital buffer made it difficult for the bank to weather shocks, particularly as interest rates increased and asset values dropped.

3. Interest Rate Risk: Rising interest rates played a crucial role in the collapse of these banks. First Republic and SVB had significant exposure to long-term assets like mortgages and bonds, which lost value as interest rates rose. Their failure to manage this interest rate risk caused substantial losses.

4. Loss of Depositor Confidence: In each case, a loss of depositor confidence led to rapid withdrawals. Signature Bank and SVB were particularly affected, as large portions of their deposits were uninsured, making depositors more likely to withdraw when uncertainty arose.

Key Takeaway:

· Lessons from SVB and First Republic: These banks failed largely due to their high DLPs and low CARs, which left them vulnerable to liquidity crises and market fluctuations. Understanding these metrics helps us see how poor risk management, especially under rising interest rates, can lead to financial collapse.

· Choosing Banks: By comparing banks with higher CARs and more conservative DLPs, we can better assess the safety of their banking options, focusing on banks that maintain strong capital reserves and prudent lending practices.

Bank Failure

· Definition of Bank Failure: A bank failure occurs when a bank is closed by federal or state regulators because it cannot meet its financial obligations to depositors and creditors.

· Causes of Bank Failure:

• Insolvency or lack of liquid assets to meet payment obligations.
• When the value of a bank's assets falls below its liabilities, often due to investment losses.

· FDIC’s Role:

• The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 and takes over failed banks, either by selling them to a solvent bank or operating them temporarily.
• Insured depositors generally maintain access to their funds and banking services during the takeover.

· Bank Runs: A bank run may occur if depositors fear they won't be able to withdraw their money, further depleting the bank's liquid assets.

· Uninsured Deposits: It can take months or even years for depositors to reclaim uninsured deposits from a failed bank.

· Historical Examples:

• The 2007-2008 financial crisis saw the largest bank failure in U.S. history when Washington Mutual collapsed with $307 billion in assets.
• In 1933 alone, about 4,000 American banks failed during the Great Depression, leading to the creation of the FDIC.

· FDIC Creation: The FDIC was established in 1933 following the mass bank failures during the Great Depression to protect depositors and prevent future bank panics.

https://www.fdic.gov/bank/historical/bank/

Why SVB Failed? Key Factors Behind the Collapse Quiz Play a game here

How Silicon Valley Bank Collapsed in 36 Hours | WSJ What Went Wrong (youtube)

1. Liquidity and Deposit Loan Ratio (DLP)

• DLP: 87%
  SVB loaned out a significant portion of its deposits, leaving the bank with limited liquidity. This made it highly vulnerable when a surge of withdrawals occurred.

2. Net Interest Margin (NIM) & Profitability

• NIM: 2.2%
  SVB's profitability from lending was low, weakening its ability to withstand financial stress compared to banks with higher margins.

3. Capital Adequacy Ratio (CAR)

• CAR: 11%
  With insufficient capital buffers, SVB lacked the resilience to absorb financial shocks, making it vulnerable to economic fluctuations.

4. Bank Run & Depositor Behavior

• Trigger: Negative Financial Statements & Rumors
  After the release of negative financial news and spreading rumors, large business depositors began a bank run, quickly withdrawing funds and worsening liquidity problems.

5. Uninsured Deposits

• High Percentage of Uninsured Deposits
  Many of SVB's depositors held uninsured accounts, which heightened the panic when depositors feared their funds might not be recoverable.

6. Interest Rate Risk

• Rising Rates Devalued Long-Term Bonds
  SVB was heavily invested in long-term bonds. As interest rates rose, the value of these bonds dropped, causing substantial losses when SVB had to sell them to meet withdrawal demands.

7. Risk Management Failures

• No Proper Hedging Against Interest Rate Risks
  SVB failed to hedge against rising interest rates, leading to large losses. The lack of sound risk management played a major role in the collapse.

8. Depositor Base

• Big Business Clients During COVID-19
  SVB’s depositors were primarily large businesses that had parked cash reserves during the pandemic. When the rumors spread, they rushed to withdraw, accelerating the liquidity crisis.

9. Bond Sales at a Loss

• Liquidation of Bonds at a Loss
  In a desperate attempt to raise liquidity, SVB had to sell a significant portion of its bond portfolio at a loss, further damaging its financial position.

What Is a Bank Failure? Definition, Causes, Results, and Examples

By JULIA KAGAN Updated November 17, 2021, Reviewed by SOMER ANDERSON, Fact checked by SUZANNE KVILHAUG

https://www.investopedia.com/terms/b/bank-failure.asp

What Is Bank Failure?

A bank failure is the closing of an insolvent bank by a federal or state regulator. The comptroller of the currency has the power to close national banks; banking commissioners in the respective states close state-chartered banks. Banks close when they are unable to meet their obligations to depositors and others. When a bank fails, the Federal Deposit Insurance Corporation (FDIC) covers the insured portion of a depositor's balance, including money market accounts.

Understanding Bank Failures

A bank fails when it can’t meet its financial obligations to creditors and depositors. This could occur because the bank in question has become insolvent, or because it no longer has enough liquid assets to fulfill its payment obligations.

KEY TAKEAWAYS

· When a bank fails, assuming the FDIC insures its deposits and finds a bank to take it over, its customers will likely be able to continue using their accounts, debit cards, and online banking tools.

· Bank failures are often difficult to predict and the FDIC does not announce when a bank is set to be sold or is going under.

· It may take months or years to reclaim uninsured deposits from a failed bank.

· The most common cause of bank failure occurs when the value of the bank’s assets falls to below the market value of the bank’s liabilities, which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments. It’s not always possible to predict when a bank will fail.

What Happens When a Bank Fails?

When a bank fails, it may try to borrow money from other solvent banks in order to pay its depositors. If the failing bank cannot pay its depositors, a bank panic might ensue in which depositors run on the bank in an attempt to get their money back. This can make the situation worse for the failing bank, by shrinking its liquid assets as depositors withdraw cash from the bank. Since the creation of the FDIC, the federal government has insured bank deposits up to $250,000 in the U.S.

When a bank fails, the FDIC takes the reins and will either sell the failed bank to a more solvent bank or take over the operation of the bank itself. Ideally, depositors who have money in the failed bank will experience no change in their experience of using the bank; they’ll still have access to their money and should be able to use their debit cards and checks as normal. In the event that a failed bank is sold to another bank, account holders automatically become customers of that bank and may receive new checks and debit cards.

When necessary, the FDIC has taken over failing banks in the U.S. in order to ensure that depositors maintain access to their funds, and prevent a bank panic.

Examples of Bank Failures

During the 2007-2008 financial crisis, the biggest bank failure in U.S. history occurred when Washington Mutual, with $307 billion in assets, closed its doors. Another large bank failure had occurred just a few months earlier when IndyMac was seized.

Special Considerations

The FDIC was created in 1933 by the Banking Act (often referred to as the Glass-Steagall Act). In the years immediately prior, which marked the beginning of the Great Depression, one-third of American banks had failed. During the 1920s, before the Black Tuesday crash of 1929, an average of about 70 banks had failed each year nationwide. During the first 10 months of the Great Depression, 744 banks failed, and during 1933 alone, about 4,000 American banks failed. By the time the FDIC was created, American depositors had lost $140 billion due to bank failures, and without federal deposit insurance protecting these deposits, bank customers had no way of getting their money back.

Part III: The Impact of Lower Interest Rates on Bank Stability

How to prepare personal finances for Fed interest rate cuts (youtube)

When Interest Rates Rise: refer to https://www.investopedia.com/ask/answers/041015/how-do-interest-rate-changes-affect-profitability-banking-sector.asp

1. Increased Profitability:

• Higher interest rates widen the spread between the interest paid to depositors and the income earned on loans, increasing bank profits.
• Banks borrow at short-term rates and lend at long-term rates, benefiting from the increased spread between these rates.

2. Strong Loan Demand:

• Rising rates often signal a healthy economy, leading to more demand for loans from businesses and consumers, further boosting bank profitability.

3. Example of Profit:

• If a bank pays 1% interest on $1 billion in deposits but earns 2% by lending or investing, it makes $20 million. If interest rates rise to 3%, the bank’s income increases to $30 million while still paying out $10 million.

4. Risk of Overly High Rates:

• Higher rates can reduce demand for loans as borrowing becomes more expensive, potentially hurting banks if rates rise too high.

5. Bank Stocks:

• Bank stocks tend to perform well when rates rise because the higher interest spreads increase profitability.

When Interest Rates Drop:

1. Reduced Profit Margins:

• Lower interest rates reduce the spread between what the bank earns from loans and what it pays to depositors, shrinking Net Interest Margins (NIM).
• Banks make less profit as the returns from lending and investing in short-term securities decrease.

2. Increased Loan Demand:

• Lower rates encourage businesses and consumers to borrow more, increasing loan volume for banks.
• While the profit per loan is lower, the rising demand for loans can offset some of the lost profitability from lower interest margins.

3. Example of Profit:

• If rates fall from 2% to 1%, a bank that was earning $20 million now earns only $10 million on the same $1 billion in deposits, making the bank less profitable.

4. Pressure on Savings:

• Lower rates also reduce returns on savings accounts, making them less attractive for depositors, potentially leading to fewer deposits or deposit outflows.

In summary:

• When rates rise: Banks benefit from wider interest spreads and increased profitability but face the risk of reduced loan demand if rates rise too high.
• When rates drop: Banks face reduced profit margins but may benefit from increased demand for loans, helping to balance the reduced income from lower rates.

How Interest Rate Changes Affect the Profitability of Banking

By Mary Hall Updated March 08, 2024 Reviewed by Thomas Brock

Banks make money by accepting cash deposits from their customers in return for interest payments and then investing that money elsewhere. The bank's profit is the difference between the interest they pay their depositors and the yield they make through investing.

Higher interest rates increase the yield on their investments. Interest rates can go too high. If they reach a level that makes businesses and consumers hesitate to borrow, the lending side of banking starts to suffer.

Key Takeaways

· Interest rates and bank profitability are connected, with banks benefiting from higher interest rates.

· When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing.

· A bank can earn a full percentage point more than it pays in interest simply by lending out the money at short-term interest rates.

· Moreover, higher interest rates tend to reflect a healthy economy. Demand for loans to businesses and consumers should be high, with the bank making better returns on those loans.

· There's the risk that interest rates will go too high, discouraging borrowers.

The Federal Reserve reduces interest rates in order to encourage businesses and consumers to borrow more money, adding fuel to the economy. The banks will benefit by the rising demand for loans. But the profit from each loan will be lower, as will the amount the bank makes by investing in short-term debt securities.

How the Banking Sector Makes a Profit

The banking industry encompasses not only corner banks but investment banks, insurance companies, and brokerages. All have massive cash holdings. They hold onto a small portion of that cash to ensure liquidity. The rest is invested. Some of it is invested in loans to businesses and consumers. Much of it is invested in short-term Treasury securities. This is the wave of cash that originates with the U.S. Treasury and flows constantly through the banking system. Even the very low interest rates that short-term Treasury notes yield are greater than the interest the banks pay to their customers.

It's similar to the way that an increase in oil prices benefits oil drillers. They make more money for the same expenditure of resources.

Example of Interest Rate Impact on Bank Earnings

Consider a bank that has $1 billion on deposit. The bank pays its customers an annual percentage rate of 1% interest, but the bank earns 2% on that cash by investing it in short-term notes. The bank is earning $20 million on its customers' accounts but returning only $10 million to its customers. If the central bank then raises rates by 1%, the federal funds rate will rise from 2% to 3%. The bank will then be yielding $30 million on customer accounts. The payout to customers will still be $10 million.

The bank may be forced to raise the interest rates it pays on deposits if higher interest rates persist. But the vast majority of its customers won't go in search of a better return for their savings. This is a powerful effect. Whenever economic data or comments from central bank officials hint at rate hikes, bank stocks rally first.

When interest rates rise, so does the spread between long-term and short-term rates. This is a boon to the banks since they borrow on a short-term basis and lend on a long-term basis.

Another Way Interest-Rate Hikes Help

Interest rate increases tend to occur when economic growth is strong. Businesses are expanding, and consumers are spending. That means a greater demand for loans.

As interest rates rise, profitability on loans increases, as there is a greater spread between the federal funds rate that the bank earns on its short-term loans and the interest rate that it pays to its customers.

In fact, long-term rates tend to rise faster than short-term rates. This has been true for every rate hike since the Federal Reserve was established early in the 20th century.

It is a reflection of the strong underlying conditions and inflationary pressures that tend to prompt the Federal Reserve to increase the interest rates it charges.

It's also an optimal confluence of events for banks, as they borrow on a short-term basis and lend on a long-term basis.

Note that if interest rates rise too high, it can start to hurt bank profits as demand from borrowers for new loans suffers and refinancings decline.

Are Higher Interest Rates Good for Stocks?

Generally, higher interest rates are bad for most stocks. A big exception is bank stocks, which thrive when rates rise. For everybody else, it's a delicate balancing act. Interest rates rise because the economy is booming. But increasing interest rates make businesses and consumers more cautious about borrowing money.

This is why the Federal Reserve acts as it does. It's raising or lowering the interest rates it charges to the banks in order to cool the economy or rev it up.

Are Higher Interest Rates Good for Bonds?

When interest rates increase, new bonds that are issued now have to carry a higher rate of return in order to be attractive to buyers.

However, the owners of older bonds are stuck with their lower rates of return. On the secondary market where bonds are resold, their value will decrease to compensate for the lower return. The investor who holds bonds in an investment portfolio doesn't lose money but does lose the opportunity to invest in higher-yield bonds.

Are Higher Interest Rates Good for the U.S. Dollar?

Higher interest rates are good for the U.S. dollar. When the Federal Reserve tweaks its short-term interest rates, the change ripples through all other types of loans, including the loans that are represented by U.S. Treasury bonds and, indeed, all other dollar-denominated investments.

When U.S. rates are high in comparison with those of other nations, money pours out of foreign investments and into U.S. investments. That tends to make the U.S. dollar rise in value against other currencies.

The Bottom Line

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates. At the same time, the bank's costs of doing business are unaffected. Their customers are unlikely to pull their cash out of their savings accounts in order to chase a slightly higher-yielding savings account. Thus, the spread widens between the interest the bank pays its customers and the interest it earns by lending it out.

Part IV: The Role of Regulation in Bank Stability Quiz Game

A Brief History of Banking and Regulations (Lessons from Hoover Boot Camp) (youtube video)

Video summary

Summary: The speaker provides an overview of the history and rationale behind banking regulation in the U.S., highlighting how financial crises have shaped regulatory responses. The talk is structured in three parts:

1. Why Banking Regulation Exists:
• The speaker explains that banking regulation arises from the need to address financial panics, which have occurred throughout history. Using the example of bank runs, they illustrate how depositors rushing to withdraw funds can cause banks to fail, leading to regulatory measures such as the creation of the FDIC (Federal Deposit Insurance Corporation) in the 1930s to guarantee deposits and prevent such panics.
2. The Impact of Financial Crises:
• The speaker traces key events, from early panics to the Savings and Loan crisis of the 1980s, and the wave of deregulation in the 1990s. Deregulation was aimed at making U.S. banks more competitive globally, but it ultimately led to the 2008 Great Recession, during which around 450 banks failed. In response, the Dodd-Frank Act was introduced to reimpose regulations and prevent future crises.
3. Challenges and Misconceptions of Regulation:
• The speaker highlights the difficulty of predicting how regulations will work in practice, pointing out that policymakers often believe that passing a regulation will immediately lead to desired outcomes. However, data shows that the effects may be slower or different than anticipated.
• They also explain the justifications for regulation in banking: preventing negative externalities, curbing monopolistic behaviors, and addressing information asymmetry between bankers and consumers.

4. The 5% Trigger: How Small Asset Declines Lead to Bank Failures

· One key point discussed is how banks' balance sheets are highly leveraged, meaning even a small shock—such as a 5% decline in asset value—can wipe out their equity, leading to insolvency and potential failure.

· This fragility in the banking system was a significant factor during the 2008 financial crisis when many banks went under due to deteriorating asset values.

· The speaker emphasizes that this 5% trigger is a threshold at which the balance sheet collapses, causing the bank to be unable to pay back its debt holders, leading to bankruptcy.

Key Takeaways:

• Financial crises, especially bank panics, have driven the evolution of banking regulation.
• Major regulatory shifts occurred after crises, such as the creation of FDIC after the Great Depression and the introduction of Dodd-Frank after the 2008 recession.
• There are three main reasons for regulating banks: preventing externalities, addressing monopolies, and managing information asymmetry.
• Despite the challenges, there is hope for improving the system through careful and well-informed policymaking.

Key Takeaways from https://www.investopedia.com/articles/investing/011916/brief-history-us-banking-regulation.asp

• Evolution of Banking Regulation: U.S. banking regulation has evolved alongside the economy, swinging between more regulation for financial stability and less regulation for economic freedom.
• Early Banks: The First and Second Banks of the U.S. (1791, 1816) were dissolved due to concerns over concentrated federal power.
• Free Banking Era: In the mid-1800s, states allowed banks to operate without legislative charters, leading to financial instability and banking crises.
• National Banking Act (1863): Created nationally chartered banks and the Office of the Comptroller of the Currency (OCC), providing more stable currency but limited flexibility.
• Federal Reserve (1913): Established to centralize financial control and create a more elastic currency after the 1907 panic.
• Great Depression Reforms (1930s): Led to the creation of the FDIC (1933), the Glass-Steagall Act, and gave the Federal Reserve more power.
• Deregulation (1980s-1990s): Reduced restrictions, leading to bank mergers and innovations like derivatives. The Gramm-Leach-Bliley Act (1999) allowed banks to combine commercial, investment, and insurance services.
• Global Financial Crisis (2008): Resulted in the Dodd-Frank Act (2010), imposing stricter regulations on banks and speculative trading. Some rules were rolled back under the Trump administration, with intentions to restore oversight under the Biden administration.

Major Laws and Acts:

• National Banking Act (1863): Created a uniform national currency.
• Federal Reserve Act (1913): Established the Federal Reserve to manage monetary policy.
• Glass-Steagall Act (1933): Separated commercial and investment banking.
• Gramm-Leach-Bliley Act (1999): Repealed parts of Glass-Steagall, allowing banks to offer a wider range of services.
• Dodd-Frank Act (2010): Imposed regulations following the 2008 financial crisis to limit speculative trading and increase oversight.

Conclusion:

• U.S. banking regulation has swung between more centralized control and deregulation in response to economic crises. The pendulum of regulation will likely continue to swing based on economic conditions and political pressures.

Homework (Due with the first midterm Exam)

Is Your Bank Safe?

Research the following key metrics for your bank:

• Net Interest Margin (NIM)
• Deposit Loan Ratio (DLP)
• Capital Adequacy Ratio (CAR)

1. Compare these metrics with the figures listed in the table provided (Chase, VyStar, SVB, etc.).

2. Discuss: Based on these comparisons, do you think your bank is safe? Why or why not?

3. As a banker: Do you believe that lower interest rates would help your bank survive or even thrive? Why or why not?

A Brief History of U.S. Banking Regulation

By Matthew Johnston Updated August 12, 2024 Reviewed by Michael J Boyle Fact checked by Suzanne Kvilhaug

https://www.investopedia.com/articles/investing/011916/brief-history-us-banking-regulation.asp

Alexander Hamilton once observed, "Most commercial nations have found it necessary to institute banks, and they have proved to be the happiest engines that ever were invented for advancing trade." Since Hamilton's day, the United States has grown into the largest economy in the world. That growth has been accompanied by ever-evolving banking regulation, which has swung like a pendulum over the past three centuries between greater and lesser control. Competing forces like the desire for financial stability versus more economic freedom, or the fear that too much power is concentrated in too few hands, have kept the pendulum swinging back and forth.

Here is a brief history of banking regulation in the U.S.

Key Takeaways

· As the U.S. evolved into the world's largest economy, its regulatory framework has evolved as well.

· Early regulations aimed to foster economic financial stability through centralized control of the banking system. Opponents, however, maintained that such regulatory authority gave the federal government too much power in comparison to the states.

· In the years following the Civil War, an assortment of financial crises and bank panics led to new regulations. The Great Depression of the 1930s also gave rise to significant reforms.

· The 1980s saw a move toward deregulation, soon followed by re-regulation in the wake of the subprime mortgage crisis and the Great Recession of the early 2000s.

The First and Second Banks of the United States

The First Bank of the United States was established in 1791. Although it helped bring a degree of economic stability to the young nation, many feared that it gave undue powers to the federal government and considered it unconstitutional. As a result, its charter was not renewed in 1811. The U.S. government turned to state banks to finance the War of 1812, but with the significant over-expansion of credit that followed, it became apparent that financial order needed to be restored. In response, the Second Bank of the United States was chartered in 1816. It, too, would succumb to political fears over the amount of control it gave the federal government and it was dissolved in 1836.

The End of Charters, the Rise of Free Banking

Obtaining an official legislative charter was highly political at both the federal and state levels, depending more on political connections than proven competence in financial matters. The bribing of legislators was fairly common.

By the time the Second Bank dissolved, a new era of free banking was emerging, with a number of states passing laws in 1837 that abolished the requirement that banks obtain an officially legislated charter to operate. By 1860, a majority of states had passed such laws.

During this time of free banking, anyone could operate a bank on the condition that all the notes it issued were backed by proper security. While that helped reinforce the credibility of banknotes, it did not guarantee immediate redemption in specie (gold or silver), which would serve to be a crucial point.

The era of free banking suffered from financial instability, including several banking crises. It also made for a chaotic currency market, characterized by thousands of different banknotes circulating at varying discount rates. This instability and disorder led to a renewed call for more regulation and central oversight in the 1860s.

From the Civil War to the New Deal

The free banking era, characterized as it was by a complete lack of federal control and regulation, ended with the National Banking Act of 1863 (and its later revisions in 1864 and 1865), which aimed to replace the old state banks with nationally chartered ones. The Office of the Comptroller of the Currency (OCC) was created to issue these new bank charters as well as see to it that national banks maintained the requirement to back all their notes with holdings of U.S. government securities.

The new national banking system helped return the country to a more uniform and secure currency but ultimately at the expense of an elastic currency that could expand and contract according to commercial and industrial needs. The growing complexity of the U.S. economy highlighted the inadequacy of an inelastic currency, which helped fuel frequent financial panics throughout the rest of the nineteenth century.

It became apparent during the bank panic of 1907 that America's banking system was out of date. A committee gathered in 1912 to examine the situation and found that the nation's money and credit were becoming increasingly concentrated in the hands of relatively few men. The Federal Reserve Act of 1913 was approved during the presidency of Woodrow Wilson to wrest control of the nation's finances from banks while creating a mechanism to enable a more elastic currency and greater supervision over the banking infrastructure.

Although the newly established Federal Reserve improved the nation's payments system and created a more flexible currency, the country soon faced another financial crisis, exacerbated by the 1929 stock market crash and banking panics in 1930 and 1931.

The Great Depression, which began in 1929 and continued, by some measures, until 1941, led to new regulations instituted by President Franklin D. Roosevelt as part of his administration's New Deal. The Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), which implemented the regulation of deposit interest rates while separating commercial banking and investment banking. The Banking Act of 1935 served to give the Federal Reserve, also called the Fed, more centralized power.

1980s Banking Deregulation

The period following the banking reforms of the New Deal up until about 1980 was marked by a relative degree of banking stability and economic expansion. Still, critics argued that regulation also made American banks less innovative and competitive than they were previously. The heavily regulated commercial banks were losing increasing market share to less-regulated and more innovative institutions. This led to a wave of deregulation throughout the last two decades of the 20th century. Those changes included:

Congress passed the Depository Institutions Deregulation and Monetary Control Act in 1980, which served to deregulate financial institutions that accept deposits while strengthening the Fed's control over monetary policy.

estrictions on the opening of bank branches in different states that had been in place since the McFadden Act of 1927 were removed under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.

The Gramm-Leach-Bliley Act of 1999 repealed significant aspects of the Glass-Steagall Act as well as the Bank Holding Act of 1956, both of which had served to sever investment banking and insurance services from commercial banking.

From 1999 onward, banks could now offer commercial banking, securities, and insurance services under one roof.

These moves helped to accelerate a trend toward greater consolidation and conglomeration in the banking sector, with more than 4,300 bank mergers in the 1980s and more than 6,000 in the 1990s.

As banks became bigger, their financial services and products became more complex. Banks started to offer new products like derivatives. They also started packaging traditional financial assets like mortgages and selling them to investors through the process of securitization.

Banking Regulation Following the Global Financial Crisis of 2008

The subprime mortgage meltdown beginning in 2007, the ensuing global financial crisis, and the need to bail out banks deemed "too big to fail" caused the government to rethink the financial regulatory framework. In response to the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.

Some of Dodd-Frank's protections were rolled back under the Trump administration in 2018. In particular, the new rules loosened restrictions on institutions with under $250 billion in assets and eliminated the need for them to pass stress tests.

Then, in 2021, the newly arrived Biden administration signaled its intention to tighten the government's oversight of banks. A July 2021 executive order on promoting competition in the American economy called for greater scrutiny of bank mergers by the Department of Justice and federal banking regulators. "Excessive consolidation," the order explained, "raises costs for consumers, restricts credit for small businesses, and harms low-income communities."

What Is a Central Bank?

A central bank is a public financial institution responsible for overseeing a nation's monetary system. The central bank of the United States is the Federal Reserve System, which describes its mission as carrying out "the nation's monetary policy guided by the goals set forth in the Federal Reserve Act, namely 'to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.'"

What Is a National Bank?

National banks in the United States are financial institutions that are chartered by the U.S. Treasury and members of the Federal Reserve System. Examples include Bank of America, Chase Bank, Citibank, PNC Bank, U.S. Bank, and Wells Fargo.

What Is the Dodd-Frank Act?

The Dodd-Frank Act of 2010, more formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, is a major set of financial reforms enacted in the wake of the Great Recession of 2007 to 2009. Among other provisions, it clamped down on speculative trading by banks, increased government oversight of the banking sector, and gave the government the power to liquidate ailing banks. It also created the Consumer Financial Protection Bureau.

The Bottom Line

Since the founding of the United States, there have been numerous attempts to centralize the control and regulation of the country's banking system. Prior to the Civil War of the 1860s, fears of concentrated power and political corruption served to undermine such attempts. But as the banking system grew, the need for greater regulation and federal control became more widely accepted. That led to the creation of a nationalized banking system during the Civil War, the creation of the Federal Reserve in 1913, and the New Deal reforms of the 1930s and 1940s.

While more regulation led to a long period of financial stability, banks began losing business to more innovative financial institutions, resulting in a move toward deregulation in the 1980s and 1990s. But it wasn't long before the mortgage meltdown of 2007 and the most severe economic crisis since the Great Depression led to a call for re-regulation and to the passage of the Dodd-Frank financial reforms of 2010. The Trump administration rolled back some of those rules, but much of Dodd-Frank remains in place and the Biden administration has indicated its desire to restore and tighten bank regulations, particularly with regard to mergers.

If history is any guide, the story is far from over and the regulation pendulum will continue to swing.

How AI and FinTech Are Shaping the Future of Banking Quiz

Based on the article by Mr. Kreger posted at https://www.forbes.com/councils/forbesbusinesscouncil/2023/03/20/the-future-of-ai-in-banking/

· AI’s Role in Personalization: AI can analyze customer data to provide personalized services like financial advice, targeted product recommendations, fraud detection, and faster customer support. It helps improve customer engagement and retention by creating tailored experiences.

· Automation and Efficiency: AI can automate routine tasks such as account balance inquiries, password resets, and loan applications, allowing human representatives to handle more complex issues. This increases efficiency, reduces costs, and offers 24/7 support.

· Conversational Banking: AI-powered chatbots can offer a seamless user experience by handling money transfers, financial advice, and credit score monitoring through chat or voice interfaces, making banking operations simpler for customers, including nonnative speakers.

· Use Cases: AI can enhance the banking experience by handling tasks like fraud prevention, financial planning, and customer service while improving account management and insurance claims processes.

· Challenges: Banks face challenges in ensuring data security and privacy, training AI models to understand banking-specific terminology, and ensuring customer adoption of AI tools. Ensuring a secure and user-friendly interface is critical for success.

How Banks Are Utilizing Artificial Intelligence (Bloomberg youtube video)

The Application of Blockchain in the Banking Industry

JPMorgan Chase – Financial Services with Quorum

· Overview: JPMorgan Chase developed Quorum, an enterprise-focused version of Ethereum, to facilitate secure and efficient financial transactions. Quorum is used for various applications, including payment processing, interbank transfers, and blockchain-based financial instruments.

· Blockchain Platform: Quorum (a fork of Ethereum developed by JPMorgan Chase) https://phemex.com/academy/what-is-quorum-jp-morgan

· Website: Quorum by ConsenSys https://consensys.io/blog/what-is-consensys-quorum

· Additional Information: Quorum enhances Ethereum's capabilities by adding privacy features and improving performance, making it suitable for enterprise use cases in the financial sector.

JP Morgan’s Blockchain: Tokenizing Money Market Funds (youtube video)

Summary of the above video

JP Morgan Chase is pioneering the use of blockchain technology in the financial sector by tokenizing money market funds, which invest in short-term debt securities like Treasury bills and commercial paper. Through its Onyx blockchain platform, the bank converts these fund shares into digital tokens, allowing investors to keep their assets invested while using the shares as collateral for other financial obligations. This process reduces costs, avoids liquidating the assets, and improves the client experience.

Blockchain technology brings three core benefits in this context:

• Detailed Traceability and Verification: Blockchain ensures that every transaction involving the tokenized shares is meticulously recorded, providing transparency and trust.
• Immutable Recordkeeping: The blockchain’s permanent, unalterable records prevent disputes over collateral and offer a reliable transaction history.
• Robust Security: Decentralized recordkeeping makes it difficult for unauthorized parties to manipulate data, enhancing asset security and reducing the risk of fraud.

Takeaway:

By leveraging blockchain for money market funds, JP Morgan Chase is transforming financial operations, allowing for seamless collateral management, reducing costs, and enhancing transparency. This innovative approach is a key example of how blockchain can streamline asset management and improve the efficiency of the financial sector.

Comment:

This technology marks a significant shift in finance, offering a clear demonstration of blockchain’s potential to revolutionize the handling of assets. It's exciting to see JP Morgan at the forefront of this transformation, and it’ll be interesting to watch how blockchain continues to reshape the financial landscape. What other financial products do you think will be tokenized next?

The Future Of AI In Banking

Alex Kreger Forbes Councils Member Mar 20, 2023,09:45am EDT

https://www.forbes.com/councils/forbesbusinesscouncil/2023/03/20/the-future-of-ai-in-banking/

In just two months after its launch, GPT-3-powered ChatGPT reached 100 million monthly active users, becoming the fastest-growing app in history, according to a UBS report (via Reuters). ChatGPT is a language model that uses natural language processing and artificial intelligence (AI) machine learning techniques to understand and generate human-like responses to user queries.

I compare GPT's appearance with the launch of the internet in terms of its impact on the future of humanity. It enables machines to understand and generate language interactions in a revolutionary way. GPT (generative pre-trained transformer) AI could disrupt how we engage with technology much like the internet did.

It's only been about two months since the launch (as of the time of this writing), but we can already see how much ChatGPT impacts our experience. The internet is full of examples of crazy prompts to which ChatGPT and other large language models (LLMs) often provide accurate and competent answers. People are rapidly adopting ChatGPT and similar models for uses such as content creation, programming, teaching, sales, education and so on.

The main question for me, as a financial UX strategist and founder of a company with services including conversational banking, is how such technology will impact the banking and financial customer experience: because customer experience is key to business success in the digital age.

According to a North Highland survey (via Consulting.us), 87% of leaders surveyed perceived CX as a top growth engine. Emplify research found that 86% of consumers would leave a brand they were previously loyal to if they had just two or three bad customer service experiences. An Accenture study from 2018 found that 91% of consumers are more likely to buy from brands that recognize, recall and provide relevant offers and recommendations.

To secure a primary competitive advantage, the customer experience should be contextual, personalized and tailored. And this is where I think AI will become the breakthrough technology that supports this goal. According to a survey from The Economist Intelligence Unit, 77% of bankers believe that the ability to unlock the value of AI will be the difference between the success or failure of banks. In a 2021 McKinsey survey, 56% of respondents report AI usage in at least one function of their organizations.

I forecast that LLMs and AI will impact the user experience in the banking industry in multiple ways.

First, they can analyze customer data to understand their preferences and needs and use this information to provide personalized customer service and support to users by addressing their queries and concerns in real-time. Banks could also use AI models to provide customized financial advice, targeted product recommendations, proactive fraud detection and short support wait times. AI can guide customers through onboarding, verifying their identity, setting up accounts and providing guidance on available products.

Second, AI can automate many routine tasks, such as account balance inquiries and password resets, freeing customer service representatives up to focus on complex issues. It could increase efficiency and reduce costs for banks while providing faster and more accurate customer support. And all of this would be available 24/7, making it easy for customers to get help by answering questions, resolving issues and providing financial education outside of regular business hours.

Third, companies could leverage AI to provide a conversational banking experience by integrating models with banking applications to provide a single point of contact for users to make transactions, view account information and receive alerts through the chat or voice interface in multiple languages. It could simplify the user experience and reduce the complexity of banking operations, making it easier for even nonnative speakers to use banking and financial services worldwide.

So, what are the obvious use cases for AI and LLMs in banking?

1. Account Inquiries

Banking users can employ chatbots to monitor their account balances, transaction history and other account-related information.

2. Money Transfers

Users could potentially make fund transfers to other accounts or to pay merchants through a chatbot.

3. Loan Applications

Banks can deploy chatbots to assist users in applying for loans and to guide them through the application procedure.

4. Credit Score Monitoring

Companies can develop chatbots to assist users in checking their credit ratings and provide advice on how to improve them.

5. Financial Advice

Banks could train chatbots to provide investment information and assist users in making informed investment decisions.

6. Fraud Prevention

Banks could explore ways to use AI to prevent fraud by monitoring user transactions and spotting unusual activity.

7. Customer Service

Banks could train chatbots to provide rapid and effective customer care by answering common questions and fixing simple issues.

8. Account Management

Banks could train AI models to assist users in managing their accounts by arranging automatic payments, changing personal information and more.

9. Insurance Claims

Banks could also create chatbots with the capability to submit insurance claims and get information about the claims procedure.

10. Financial Planning

Chatbots could assist users with financial planning tasks, such as budgeting and setting financial objectives.

Challenges And Considerations For Banks

Despite the inspiring prospects that AI technology opens up for improving the customer experience in banking, implementing it into banking products can pose some challenges. One of the main challenges is safeguarding the security and privacy of customer data. Banks should ensure that their chat interface is secure and that sensitive data is protected from unauthorized access or disclosure.

Another challenge is training an AI model to understand the language and terminology specific to the banking industry. Banks should provide relevant training data and integrate the model with their existing systems to ensure that it can provide accurate and appropriate responses to user queries.

And one more challenge is customer adoption. Banks should ensure that customers are aware of the chat interface and its benefits and that they are comfortable using it. This will require them to make additional product UX design considerations and invest in education efforts to provide an easy-to-use chat interface.

Natural language-processing capabilities and an understanding of customer data mean AI could become an excellent solution to provide a more personalized, efficient and convenient user experience in banking and financial services.

Let’s build a trading App! (FYI only)

Stock Trading App How to Build a Stock Trading App: Step-by-Step Video Guide (newly added)

Prep: Fetch, Copy, and Use S&P 500 Symbols in Google Sheets

1. Fetch S&P 500 Symbols:

· First, you'll pull the stock symbols for the S&P 500 companies from Wikipedia using the following formula:

=IMPORTHTML("https://en.wikipedia.org/wiki/List_of_S%26P_500_companies", "table", 1)

· This will retrieve a table with the S&P 500 companies, including stock symbols, company names, and other details, into your Google Sheet.

2. Copy the Stock Symbols:

· After the table has been imported, locate the column with the stock symbols (usually the first column).

· Select the entire stock symbol column, copy the data, Paste values only" into a new sheet.

· Delete the sheet where you originally fetched the data from Wikipedia (e.g., Sheet1).

· Right-click the tab of the new sheet and select "Rename", then type Sheet1.

Now, your Google Sheet will have a static list of S&P 500 stock symbols in Sheet1, ready to be used in the app script code for pulling live data, calculating buy/sell/hold decisions, and more.

Step 1: Set Up Google Sheets with Google Finance Data

1. Create a new Google Sheet:

· Open Google Sheets by going to sheets.google.com.

· Click on Blank to create a new sheet.

· Rename the sheet to something like Stock Data by clicking on the name in the top-left corner.

2. Set up columns for stock data: In the first row of your sheet, set up the headers like this:

· A1: Symbol

· B1: Price

· C1: Volume

· D1: Price Change

· E1: Change Percentage

· F1: High 52 Weeks

· G1: Low 52 Weeks

· H1: Market Cap

· I1: PE Ratio

Your sheet will look like this:

Symbol	Price	Volume	Price Change	Change Percentage	High 52 Weeks	Low 52 Weeks	Market Cap	PE Ratio
(empty for now)	(empty)	(empty)	(empty)	(empty)	(empty)	(empty)	(empty)	(empty)

3. Use Google Finance formulas to get stock data: You’ll now populate the sheet using Google Finance functions. Below are the formulas you can use in each row starting from A2:

· A2 (Symbol): Enter the stock symbol (e.g., ="GOOGL" for Alphabet).

· B2 (Price): =GOOGLEFINANCE(A2, "price")

· C2 (Volume): =GOOGLEFINANCE(A2, "volume")

· D2 (Price Change): =GOOGLEFINANCE(A2, "changepct")

· E2 (Change Percentage): =GOOGLEFINANCE(A2, "change")

· F2 (High 52 Weeks): =GOOGLEFINANCE(A2, "high52")

· G2 (Low 52 Weeks): =GOOGLEFINANCE(A2, "low52")

· H2 (Market Cap): Use this formula to estimate Market Cap: =GOOGLEFINANCE(A2, "shares")*GOOGLEFINANCE(A2, "price")

· I2 (PE Ratio): =GOOGLEFINANCE(A2, "pe")

Your sheet will now pull live data from Google Finance for the stock symbol you enter in A2. If you want multiple stocks, you can enter more symbols in A3, A4, etc., and the formulas will automatically fetch the data for each stock.

Example:

Symbol	Price	Volume	Price Change	Change Percentage	High 52 Weeks	Low 52 Weeks	Market Cap	PE Ratio
GOOGL	2800.50	1234567	1.2	0.5	2950.00	2300.00	1963450000000	34.12

Step 2: Create the Web App in Google Apps Script

1. Open Google Apps Script:

· Go to Extensions > Apps Script from your Google Sheet.

2. Create the main function to fetch data and calculate Buy/Sell/Hold:

Paste the following code into the script editor:

function doGet() {

return HtmlService.createHtmlOutputFromFile('index')

      .setTitle('Stock Trading App');

}

function getStockData() {

try {

const sheet = SpreadsheetApp.getActiveSpreadsheet().getSheetByName('Sheet1');

const lastRow = sheet.getLastRow();

const data = sheet.getRange(`A2:I${lastRow}`).getValues();

const updatedData = data.map(row => {

const price = row[1];

const high52 = row[5];

const low52 = row[6];

const upperLimit = high52 * 0.95;

const lowerLimit = low52 * 1.05;

let decision = 'HOLD';

if (price <= lowerLimit) {

decision = 'BUY';

      } else if (price >= upperLimit) {

decision = 'SELL';

      }

return [...row, decision];

    });

Logger.log(updatedData.slice(0, 10)); // Log only first 10 rows to avoid output being truncated

return updatedData;

  } catch (error) {

Logger.log('Error fetching stock data: ' + error.message);

return [];

  }

}

function refreshStockData() {

getStockData(); // This calls your existing function that fetches and updates stock data

}

This script will calculate whether to Buy, Sell, or Hold the stock based on a 5% deviation from the 52-week high and low prices.

Step 3: Create the HTML Interface

1. Add an HTML file:

· Click on the + icon next to "Files" in the Apps Script editor and select HTML.

· Name the file index.html.

2. Paste the following code into the index.html file:

<!DOCTYPE html>

<html>

<head>

<title>Stock Trading App</title>

<style>

body { font-family: Arial, sans-serif; }

table { width: 100%; border-collapse: collapse; margin-top: 20px; }

th, td { border: 1px solid black; padding: 8px; text-align: left; }

th { background-color: #f2f2f2; }

.buy { color: green; }

.sell { color: red; }

.hold { color: black; }

</style>

</head>

<body>

<h2>Stock Trading App</h2>

<!-- Add the brief description here -->

<p>This app dynamically calculates trading decisions based on the stock's current price compared to its 52-week high and low prices.</p>

<ul>

<li><strong>Buy:</strong> The price is within 5% above the 52-week low, suggesting a buying opportunity.</li>

<li><strong>Sell:</strong> The price is within 5% below the 52-week high, indicating a good time to sell.</li>

<li><strong>Hold:</strong> The price is in between these levels, suggesting you should hold for now.</li>

</ul>

<button onclick="fetchStockData()">Get Stock Data</button>

<div id="stock-data">

<!-- Stock data will be displayed here -->

</div>

<script>

function fetchStockData() {

google.script.run.withSuccessHandler(displayStockData).getStockData();

      }

function displayStockData(data) {

const container = document.getElementById("stock-data");

let html = "<table><tr><th>Symbol</th><th>Price</th><th>Volume</th><th>Price Change</th><th>Change Percentage</th><th>High 52 weeks</th><th>Low 52 weeks</th><th>Market Cap</th><th>PE</th><th>Decision</th></tr>";

data.forEach(row => {

const symbol = row[0];

const price = row[1];

const volume = row[2];

const priceChange = row[3];

const changePercentage = row[4];

const high52 = row[5];

const low52 = row[6];

const marketCap = row[7];

const pe = row[8];

const decision = row[9];

// Apply color coding based on the decision

let decisionClass = '';

if (decision === 'BUY') {

decisionClass = 'buy';

          } else if (decision === 'SELL') {

decisionClass = 'sell';

          } else if (decision === 'HOLD') {

decisionClass = 'hold';

          }

html += `<tr>

                    <td>${symbol}</td>

                    <td>${price}</td>

                    <td>${volume}</td>

                    <td>${priceChange}</td>

                    <td>${changePercentage}</td>

                    <td>${high52}</td>

                    <td>${low52}</td>

                    <td>${marketCap}</td>

                    <td>${pe}</td>

                    <td class="${decisionClass}">${decision}</td>

                   </tr>`;

        });

html += "</table>";

container.innerHTML = html;

      }

</script>

</body>

</html>

Step 4: Deploy the Web App

1. Click on Deploy > New deployments in the Apps Script editor.
2. Select Deploy as Web App:
• Execute as: Choose Me.
• Who has access: Choose Anyone or limit access based on your needs.
3. Deploy the app and get the Web App URL.

Step 5: Test the Web App

1. Open the Web App URL you got from deployment.
2. Click the Get Stock Data button, and the stock data with the dynamically calculated decisions will be displayed.

Summary

You have now successfully created a Stock Trading Web App using Google Sheets to pull live data from Google Finance and Google Apps Script to calculate dynamic Buy, Sell, and Hold decisions based on 52-week high/low prices.

This is Web2.0

Frontend: The website for this app: https://script.google.com/macros/s/AKfycbxJMOQYuGBer2CPceo8NjN7bkee8uaLl9O_GtkmidA4UBJkKjV0AKUUJ2GMP-833vLdWg/exec

Backend: The code.gs script used in Google Apps Script for the app
Database: The Google Sheet file that automatically updates stock market data every twenty minutes

First Midterm Exam – 9/17, in class, closed book, closed notes

First Midterm Exam Study Guide First Midterm Exam Answers

1. Introduction to the Federal Reserve System:

· Purpose of the Fed: Central banking, monetary policy, and regulating financial institutions.

· Structure: Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee (FOMC).

· Tools of the Fed: Open market operations, discount rate, and reserve requirements.

· Goals of the Fed: Maximum employment, stable prices, and moderate long-term interest rates.

2. Monetary Policy:

· Expansionary vs. contractionary policy.

· How the Fed influences interest rates and inflation.

· Role of money supply in the economy.

3. Banking Basics:

· Types of banks: Commercial banks, credit unions, investment banks.

· Role of banks in the economy: Facilitating loans, deposits, and managing payments.

· Deposit insurance and the FDIC (Federal Deposit Insurance Corporation).

4. Bank Regulation:

· Key regulatory agencies: FDIC

· Major banking regulations: Dodd-Frank Act, Glass-Steagall Act

5. Interest Rates and their Effect:

· Relationship between the Fed's policy rate and consumer interest rates.

· Impact on loans, savings, and overall economic activity.

6. Banking Crises and Failures:

· Historical examples: The Great Depression, the 2008 Financial Crisis.

· Lessons learned from these crises.

· Role of the Fed during economic downturns.

Test Structure:

1. True/False Questions (Sample Questions – total 50 t/f questions):

1. The Federal Reserve is responsible for printing money in the United States. (False)

2. The Federal Open Market Committee sets fiscal policy. (False)

3. Commercial banks are not allowed to invest in the stock market. (True)

2. Short Answer Questions (Sample Questions – 3 questions will be selected):

• Explain how the Federal Reserve uses open market operations to influence the money supply and interest rates.
• Describe the role of the Federal Open Market Committee (FOMC) in shaping U.S. monetary policy.
• How does the Federal Reserve’s decision to raise or lower the federal funds rate impact consumers, businesses, and the broader economy?
• What is the function of reserve requirements, and how do changes in reserve requirements affect the lending capacity of commercial banks?
• Discuss the importance of the FDIC and how it protects depositors in the event of a bank failure. Include an example of how deposit insurance works.
• Compare and contrast expansionary and contractionary monetary policies, including their goals and how they affect inflation and unemployment.

Chapter 3 Financial Instruments, Financial Markets, and Financial Institutions

Part I: Order types Play this game Watch this Video Quiz

Understanding order types by wall street survivor (youtube)

Order Type	Current Price	Limit/Stop Price	Future Price (Drops to $165)	Result (Price Drops)	Future Price (Rises to $210)	Result (Price Rises)
Limit Buy	$183	$183	$165	Bought at $165. No gain/loss.	$210	No trade triggered.
Market Buy	$183	-	$165	Bought at $183. Lost $18.	$210	Bought at $183. Gained $27.
Limit Sell	$183	$190	$165	No sale triggered.	$210	Sold at $190. Gained $7, but missed $20 extra gain.
Market Sell	$183	-	$165	Sold at $183. Avoided $18 loss.	$210	Sold at $183. Missed $27 gain.
Stop Buy	$183	$190	$165	No trade. Price never hit $190.	$210	No trade. Price never hit $190.
Stop Sell	$183	$170	$165	Sold at $170. Avoided $5 more loss.	$210	No trade. Price never hit $170.
Short Sell	$183	-	$165	Shorted at $183. Gained $18.	$210	Shorted at $183. Lost $27.

1) Why Use a Limit Sell Order?

A Limit Sell order is used when you want to sell your stock only if the price reaches a certain level or higher. This order allows you to lock in a target profit or avoid selling at a price lower than what you want.

Scenario 1: Price Drops to $165

• Current Price: $183
• Limit Sell Price: $190
• Future Price: $165

Explanation:

• You placed a Limit Sell order at $190, meaning you want to sell your stock if the price goes up to $190 or higher.
• Since the price dropped to $165, the order was not triggered.
• Result: You still hold the stock because it never reached your limit price of $190.

Scenario 2: Price Rises to $210

• Current Price: $183
• Limit Sell Price: $190
• Future Price: $210

Explanation:

• In this scenario, the price rose to $210, which is above your limit sell price of $190.
• Your order was triggered at $190, and you sold the stock for $190.
• Result: You made a profit of $190 - $183 = $7 per share. However, because the price continued rising to $210, you missed out on an additional $20 gain.

Why Use a Limit Sell Order?

• Protect Profits: A Limit Sell helps you set a target selling price. You’ll sell the stock only if it reaches your desired price or higher, ensuring you make a profit.
• Avoid Undesired Prices: If the stock price rises to your target, the order is executed, and you avoid holding on too long if the price starts falling after hitting your limit.
• Price Control: With a Limit Sell, you have full control over the minimum price at which you’re willing to sell, meaning you won’t sell the stock for anything less than the limit price.

Drawback:

• If the price doesn’t reach your limit, the order won’t be executed, and you could miss out on selling the stock if it later drops in price.
• In Scenario 2, you made a profit but missed out on additional gains. This highlights the main trade-off with Limit Sell orders: while they protect your profit, they can prevent you from benefiting from further price increases beyond the limit.

2) Why Use a Limit Buy Order?

Use a Limit Buy when you want to buy a stock at a specific price or lower. You’re saying, “I only want to buy if the price drops to this level”. It gives you price control and can help you avoid paying too much.

• Current Price: $183
• Limit/Stop Price: $183
• Future Price (Drops to $165): You placed a Limit Buy at $183. The price dropped to $165, so your order was triggered at $165. This means you bought the stock at $165, which is lower than your limit price of $183.
• Result: No gain or loss yet; you now own the stock at $165. Whether you gain or lose will depend on what the price does next.
• Future Price (Rises to $210): You placed a Limit Buy at $183, but since the price increased to $210, your order was not triggered. Limit buys only trigger when the price is equal to or lower than the limit price.
• Result: No trade was made, and you missed the opportunity to buy the stock before it went up.

3) Why use a Market Buy Order?

A Market Buy is used when you want to buy a stock immediately, regardless of the price. It’s fast and guarantees you get the stock, but you don’t control the price and could pay more if the price is rising quickly.

· Current Price: $183

· Limit/Stop Price: N/A (Market Buy doesn’t have a limit price)

· Future Price (Drops to $165): You placed a Market Buy, which means you bought the stock immediately at $183. The price then dropped to $165.

• Result: You bought the stock at $183, and now it’s worth $165. This means you have an unrealized loss of $18 ($183 - $165). If you sell now, you will lose $18 per share.

· Future Price (Rises to $210): You placed a Market Buy at $183, so you bought the stock immediately at that price. The price then rose to $210.

• Result: You now have an unrealized gain of $27 ($210 - $183). If you sell now, you will make $27 per share.

4) Why use a Market Sell Order?

A Market Sell is used when you want to sell your stock immediately. It guarantees a sale but doesn’t control the price. If the price is falling quickly, this helps you get out before the losses get worse, but you could miss out on gains if the price rebounds.

· Current Price: $183

· Limit/Stop Price: N/A (Market Sell doesn’t have a limit price)

· Future Price (Drops to $165): You placed a Market Sell, which means you sold the stock immediately at $183. The price then dropped to $165.

• Result: You sold at $183, avoiding a potential $18 loss ($183 - $165). You successfully got out before the price dropped further.

· Future Price (Rises to $210): You placed a Market Sell at $183, so you sold immediately at that price. The price then rose to $210.

• Result: You missed out on a potential $27 gain ($210 - $183) because you sold too early.

5) Why use a Stop Buy Order?

A Stop Buy is used when you want to buy a stock only after it reaches a certain higher price, indicating that the stock might be trending upward. It’s useful if you want to wait for the stock to start moving up before buying.

· Current Price: $183

· Limit/Stop Price: $190

· Future Price (Drops to $165): You placed a Stop Buy at $190. The price dropped to $165, so your order was not triggered because the stock never reached your stop price.

• Result: No trade occurred because the stock never went up to your stop price.

· Future Price (Rises to $210): You placed a Stop Buy at $190. The price rose to $210, so your order was triggered at $190 and you bought the stock.

• Result: You bought at $190, and now the stock is worth $210, giving you an unrealized gain of $20 per share ($210 - $190).

6) Why use a Stop Sell Order?

A Stop Sell is used to limit losses by selling the stock if the price falls below a certain point. It helps you avoid large losses, but if the stock rebounds after hitting your stop price, you might miss out on potential gains.

· Current Price: $183

· Limit/Stop Price: $170

· Future Price (Drops to $165): You placed a Stop Sell at $170. The price dropped to $165, so your order was triggered at $170 and you sold the stock.

• Result: You sold at $170, avoiding a further $5 loss because the price kept dropping to $165.

· Future Price (Rises to $210): You placed a Stop Sell at $170, but since the price rose to $210, your stop price was never hit, so no trade occurred.

• Result: You didn’t sell the stock, so you could still profit if you sold it later.

Why Use A Short Sell? Game Quiz Rich dork loses 6.8 Billion dollars because of Reddit | Dumb Money | CLIP (short squeeze)

A Short Sell is used when you expect the price of a stock to drop. You borrow the stock, sell it immediately, and plan to buy it back at a lower price, making a profit. However, it’s risky because if the price goes up, you’ll lose money when buying it back.

· Current Price: $183

· Limit/Stop Price: N/A (Short Sell doesn’t use a limit price)

· Future Price (Drops to $165): You placed a Short Sell at $183, meaning you borrowed stock and sold it immediately, hoping the price would drop. The price then dropped to $165.

• Result: You made a profit of $18 per share ($183 - $165) because you can now buy the stock back at a lower price and return it.

· Future Price (Rises to $210): You placed a Short Sell at $183, meaning you borrowed stock and sold it immediately. The price then rose to $210.

• Result: You lost $27 per share ($210 - $183) because now you must buy the stock back at a higher price to return it.

Simple Short-Selling Strategy for Day Traders

https://www.jufinance.com/game/finviz_short_trading.html

· Step 1: Go to finviz.com and click on “Screener”.

· Step 2: Find Top Gainers

In the **Screener**, choose **"Signal" = Top Gainers** to filter for stocks that have risen the most.

· Step 3: Use RSI to Find Overbought Stocks

Set **RSI (14)** to **Overbought (70)** to find stocks that are likely to fall.

· Step 4: Identify Resistance Levels

· Step 5: Place the Short Trade

Short the stock when it starts falling from the resistance point.

· Step 6: Set Stop Loss and Target

Set a **Stop Loss** just above the resistance level and aim for a 1-2% price drop as your target.

Explanation:

· You **short at $49** (selling borrowed shares), expecting the price to fall.

· But if the stock rises to $51, your **Stop Loss** will trigger, and you’ll buy back the stock at **$51**, taking a **$2 loss per share**.

· For example, if you shorted 10 shares, your total loss would be $2 × 10 = **$20**.

· Note: A **Stop Loss** protects you from losing more as the stock rises further. Without it, your losses could be unlimited if the stock price keeps rising.

Note: Trading volume needs to be high as well. While RSI might signal a potential short opportunity, combining it with high trading volume can improve the timing of your trades.

Summary

• Limit Orders give you price control but may not execute if the market doesn’t reach your set price.
• Market Orders execute immediately but offer no price control, leading to gains or losses depending on the market’s movement.
• Stop Orders help limit losses (Stop Sell) or trigger buys (Stop Buy) when prices hit specific levels.
• Short Selling allows you to profit when stock prices drop but comes with significant risks if prices rise.

In class Exercise, Quiz, and game: https://www.jufinance.com/game/order_type_exercise.html

Homework:

• Market Orders: Quick Execution for Short-Term Opportunities
  A market order buys or sells NVIDIA stock immediately at the current best available price. This order is ideal when you want to enter or exit a position quickly, regardless of slight price fluctuations. It is typically used when time is more important than price accuracy, especially during sudden market movements.
• Limit Orders: Setting Specific Price Targets for Better Control
  A limit order lets you buy or sell NVIDIA stock at a specified price or better. For a buy limit order, you set the maximum price you are willing to pay, and for a sell limit order, you set the minimum price at which you're willing to sell. This order ensures that you only trade if the price hits your target, allowing for greater control over entry and exit points.
• Stop Orders: Safeguard Profits or Minimize Losses
  A stop order becomes a market order once NVIDIA stock hits a specified price, called the stop price. A stop-loss order can protect your investment by automatically selling the stock if its price drops to your stop price, while a stop-buy order triggers a purchase if the stock rises to a certain level, ensuring you catch an upward trend.
• Short Selling: Capitalizing on Falling Prices
  Short selling allows you to profit when NVIDIA stock declines in value. You borrow shares and sell them at the current price, with the intention of buying them back later at a lower price. This strategy can generate profits in a bearish market but carries high risk if the stock price rises instead.

Which type of order strategy would maximize profits when trading NVIDIA stock in the current market conditions, and why?

2 Refer to this clip (Rich Dork Loses 6.8 Billion Dollars Because of Reddit | Dumb Money | CLIP) and explain how the short squeeze occurred.

Visit to the Federal Reserve Jacksonville Branch ( counted as a CEO event)

Date: September 24th
Time: 1:30 PM - 2:30 PM
Location: 800 Water Street
Dress Code: Business Casual

Part II: Call and Put Options Game Quiz Self-produced Video

Understanding Call and Put Option Payoff:

• Call Option Payoff: The payoff is the amount you make when the stock's current price is higher than the strike price (the price agreed upon in the option contract). If the stock’s price is above the strike price, you profit from the difference. payoff = max(0, price - strike)
• Put Option Payoff: The payoff happens when the stock's current price is lower than the strike price. If the stock’s price is below the strike price, you profit from the difference.

payoff = max(0, strike - price)

Call Options (By James Royal, at Bankrate, https://www.bankrate.com/investing/what-are-call-options-learn-basics-buying-selling)

• Definition: A call option gives the buyer the right, but not the obligation, to buy a stock at a specific price (strike price) by a specific date (expiration).
• Main Traits:
• Strike Price: The price at which the buyer can purchase the stock.
• Premium: The cost of the option paid by the buyer to the seller.
• Expiration: The date the option contract ends.
• Contract: Represents 100 shares of the stock, quoted per share.
• How it works:
• In the money: If the stock price is higher than the strike price at expiration, the call is "in the money." The owner can either buy the stock at the strike price or sell the option for a profit.
• Out of the money: If the stock price is below the strike price, the option expires worthless.
• Why buy a call option?: It allows investors to benefit from a stock's rise without owning the stock, requiring less capital.

Call Options vs. Put Options:

• Call Option: Gains value if the stock price rises.
• Put Option: Gains value if the stock price falls.

Put Options (Investopedia, https://www.investopedia.com/terms/p/putoption.asp)

· Definition: A put option gives the buyer the right, but not the obligation, to sell a stock at a predetermined price (strike price) within a set timeframe.

· Key Features:

• Strike Price: The price at which the buyer can sell the stock.
• Underlying Assets: Traded on stocks, bonds, indexes, and other assets.
• Time Decay: The value decreases as the option approaches expiration.
• Volatility Impact: The value of put options increases as the underlying asset's volatility increases and decreases with falling volatility.
• Interest Rates: As interest rates rise, the value of put options decreases.

· Why buy a put option?: It allows traders to profit from a stock's decline or to hedge against potential losses.

Homework 1 (Optional): Play Call and Put Option Games at https://www.jufinance.com/game/

Explore and understand call and put options by playing through various simulation games from basic to advanced levels. These simulations cover strategies like covered calls, protective puts, and spreads. Try the following levels:

1. Basic Level:

• Call and Put Option Game: Simulate different market conditions.
• Covered Call Strategy: Generate income from your stock holdings.
• Protective Put Strategy: Protect your downside risk while holding a stock.

2. Intermediate Level:

• Bear Put Strategy: Profit from moderate stock price decreases.
• Bull Call Strategy: Benefit from stock price increases.
• Collar Strategy: Limit both upside and downside risk.

3. Advanced Level:

• Straddle Strategy:
• Profit from volatility by purchasing both a call and a put option at the same strike price and expiration date. This strategy is effective when you expect significant price movement in either direction but are uncertain which way the market will go.
• Iron Condor Strategy:
• Benefit from low volatility by combining four different options: selling a lower strike put, buying a higher strike put, selling a lower strike call, and buying a higher strike call. This strategy profits when the stock price remains stable, between the two middle strike prices.
• Butterfly Spread Strategy:
• Profit with limited risk by combining options with three strike prices. This involves buying one lower strike call, selling two middle strike calls, and buying one higher strike call, creating a scenario where you profit from low to moderate price movement while capping your losses.
• Iron Butterfly Strategy:
• Maximize returns from minimal stock price movement by selling an at-the-money straddle (one call and one put at the same strike price) while buying an out-of-the-money call and put for protection. This strategy works best in low volatility conditions, where you profit from the stock staying near the middle strike price.
• Ratio Call Write Strategy:
• Generate additional income by selling more call options than the stock you own. This strategy involves selling calls against a stock position but carries the risk of having to provide more shares than you own if the stock price rises sharply.
• Ratio Put Spread Strategy:
• Profit from moderate stock declines by purchasing one put option while selling more than one lower strike put. This strategy profits in a slowly declining market but can result in significant losses if the stock falls too quickly.
• Diagonal Spread Strategy:
• Combine different strike prices and expiration dates by buying a longer-term option and selling a shorter-term option at a different strike price. This strategy allows you to profit from moderate stock movements while managing time decay risk.

Optional Task: Try to find free websites or simulators that offer these option trading games to practice.

Homework 2 (Optional):

Create trading strategies using short selling and options trading based on Nvidia. For additional ideas, you can explore the interactive game available at www.jufinance.com/fin310_24f/nvidia.html

Call options: Learn the basics of buying and selling

By James Royal, 11/1/2021

https://www.bankrate.com/investing/what-are-call-options-learn-basics-buying-selling

Call options are a type of option that increases in value when a stock rises. They’re the best-known kind of option, and they allow the owner to lock in a price to buy a specific stock by a specific date. Call options are appealing because they can appreciate quickly on a small move up in the stock price. So that makes them a favorite with traders who are looking for a big gain.

What is a call option?

A call option gives you the right, but not the requirement, to purchase a stock at a specific price (known as the strike price) by a specific date, at the option’s expiration. For this right, the call buyer will pay an amount of money called a premium, which the call seller will receive. Unlike stocks, which can live in perpetuity, an option will cease to exist after expiration, ending up either worthless or with some value.

The following components comprise the major traits of an option:

Strike price: The price at which you can buy the underlying stock

Premium: The price of the option, for either buyer or seller

Expiration: When the option expires and is settled

One option is called a contract, and each contract represents 100 shares of the underlying stock. Exchanges quote options prices in terms of the per-share price, not the total price you must pay to own the contract. For example, an option may be quoted at $0.75 on the exchange. So to purchase one contract it will cost (100 shares * 1 contract * $0.75), or $75.

How a call option works

Call options are “in the money” when the stock price is above the strike price at expiration. The call owner can exercise the option, putting up cash to buy the stock at the strike price. Or the owner can simply sell the option at its fair market value to another buyer before it expires.

A call owner profits when the premium paid is less than the difference between the stock price and the strike price. For example, imagine a trader bought a call for $0.50 with a strike price of $20, and the stock is $23 at expiration. The option is worth $3 (the $23 stock price minus the $20 strike price) and the trader has made a profit of $2.50 ($3 minus the cost of $0.50).

If the stock price is below the strike price at expiration, then the call is “out of the money” and expires worthless. The call seller keeps any premium received for the option.

Why buy a call option?

The biggest advantage of buying a call option is that it magnifies the gains in a stock’s price. For a relatively small upfront cost, you can enjoy a stock’s gains above the strike price until the option expires. So if you’re buying a call, you usually expect the stock to rise before expiration.

Call options vs. put options

The other major kind of option is called a put option, and its value increases as the stock price goes down. So traders can wager on a stock’s decline by buying put options. In this sense, puts act like the opposite of call options, though they have many similar risks and rewards:

Like buying a call option, buying a put option allows you the opportunity to earn back many times your investment.

Like buying a call option, the risk of buying a put option is that you could lose all your investment if the put expires worthless.

Like selling a call option, selling a put option earns a premium, but then the seller takes on all the risks if the stock moves in an unfavorable direction.

Unlike selling a call option, selling a put option exposes you to capped losses (since a stock cannot fall below $0). Still, you could lose many times more money than the premium received.

What Is a Put Option?

A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame. This predetermined price at which the buyer of the put option can sell the underlying security is called the strike price.

Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. A put option can be contrasted with a call option, which gives the holder the right to buy the underlying security at a specified price, either on or before the expiration date of the option contract.

KEY TAKEAWAYS

· Put options give holders of the option the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.

· Put options are available on a wide range of assets, including stocks, indexes, commodities, and currencies.

· Put option prices are impacted by changes in the price of the underlying asset, the option strike price, time decay, interest rates, and volatility.

· Put options increase in value as the underlying asset falls in price, as volatility of the underlying asset price increases, and as interest rates decline.

· Put options lose value as the underlying asset increases in price, as volatility of the underlying asset price decreases, as interest rates rise, and as the time to expiration nears.

https://www.investopedia.com/terms/p/putoption.asp

Part III: Diversification Game1 Game2 Quiz

Why Diversify?

• Lower Risk: Just like in a balanced diet, you reduce your risk. If one investment loses value (say, tech stocks), your other investments (maybe energy or healthcare stocks) might still do well.
• Steady Returns: By diversifying, you smooth out the bumps. Some investments might be up while others are down, giving you more consistent returns over time.
• Protection from Market Shocks: Different assets react differently to market changes. If there’s a financial crisis or a big event, diversification helps you avoid losing all your money in one sector.

What Kind of Results Can You Expect?

• Without Diversification: You could make a lot of money fast, but you could also lose everything just as fast if you bet on the wrong stock or sector.
• With Diversification: You lower the chance of big losses, and while you might not make quick money, you’re more likely to see steady growth over time. Your overall portfolio might grow slower, but it will be more secure.

How to Diversify? Play this game here

• Different Sectors: Don’t just buy tech stocks like Apple or Tesla. Also, invest in healthcare, utilities, and consumer goods.
• Mix of Assets: Consider adding bonds, real estate, or even gold. These assets tend to move differently from stocks. If the stock market crashes, bonds or real estate might go up.
• Global Diversification: U.S. stocks aren’t the only option. You can invest in companies in Europe, Asia, or emerging markets to spread your risk globally.

Investment Type	Low-Interest-Rate Environment	High-Interest-Rate Environment
Bonds	· Long-term bonds are attractive because lower rates make them more valuable. Bond prices generally rise.	· Short-term bonds are better as they are less sensitive to rate changes. Long-term bonds lose value as rates rise.
	· Investors seek higher yields from longer durations.	· Shorter durations and floating-rate bonds offer protection from rising rates.
Dividend Stocks	· Dividend stocks (like utilities or consumer staples) are favored because bond yields are low, making dividends more attractive.	· Dividend stocks still provide income, but sectors like utilities may struggle as borrowing costs increase.
	· Investors are drawn to reliable cash flows in a low-yield environment.	· Dividends from stable companies (consumer staples) can still offer reliable returns.
Growth Stocks	· Growth stocks (like tech) flourish as borrowing is cheap, allowing companies to expand and invest in future growth.	· Growth stocks suffer as higher rates make borrowing expensive, reducing the value of future earnings.
	· Companies that promise high future returns do well when borrowing is inexpensive.	· Rising rates reduce the present value of future cash flows, making growth stocks less attractive.
Real Estate	· Real estate benefits as low rates reduce borrowing costs for mortgages and property investment.	· Real estate is hit as higher mortgage rates reduce demand, but rental income from commercial properties (REITs) can still provide stable returns.
	· Real estate tends to boom when borrowing is cheap, leading to higher property values.	· Higher borrowing costs limit property purchases, but some REITs may still thrive by generating steady rental income.
Commodities & Gold	· Commodities and gold don’t typically perform as well, as inflation is often lower in a low-rate environment.	· Commodities like oil and gold tend to do better as they hedge against inflation and uncertainty caused by high rates.
	· Low interest reduces the appeal of commodities as a hedge, and inflation tends to be under control.	· Higher inflation and uncertainty push investors towards commodities like gold, oil, and other tangible assets.
Cash & Cash Equivalents	· Cash and equivalents (like money market funds or CDs) yield very little due to low rates, making them unattractive for returns.	· Cash equivalents become more attractive as they offer higher returns in a high-rate environment, providing liquidity and security.
	· Investors tend to avoid cash during low rates, seeking higher-yielding assets.	· Cash provides safety and earns better interest during high rates, making it a useful part of a diversified portfolio.
Sector Diversification	· Tech and growth sectors do well, benefiting from low borrowing costs and high potential future earnings.	· Financials perform well as banks can charge higher interest on loans, and consumer staples provide stability during uncertainty.
	· Borrowing is cheap, so sectors like tech, healthcare, and consumer discretionary thrive.	· Higher rates allow financial institutions to increase margins, while consumer staples remain in demand despite the economy.
Real Estate Investment Trusts (REITs)	· REITs benefit from low borrowing costs, making it easier to invest in real estate, leading to rising property values.	· REITs that focus on rental income properties (like apartments or commercial spaces) may still perform well, as they generate income even as rates rise.
	· Lower interest makes property development and mortgages more affordable, boosting the real estate sector.	· Higher rates reduce property affordability, but REITs that focus on rental properties can still provide steady cash flow.

Stock  returns from 1995-2015 - Apple and S&P 500

“Members of a Yale class entering their prime giving years had decided to set up a private fund, manage the money themselves, and give it to the University 25 years later. The worrisome part for Yale was that it would have no control over the fund, which was going to be invested in high-risk securities. What if all the money was blown by these “amateurs"? And what if the scheme siphoned off other potential donations?

Happily, everything turned out for the best. Despite Yale’s initial efforts to discourage the Class of 1954 from its plan, the class persisted. And last October, its leaders announced that their original collective investment of $380,000 had grown to $70 million, earning unalloyed gratitude from the University and the right to name two new Science Hill buildings after their class.” ----- What is your opinion? Apple is one of the stocks in their portfolio. So shall you pick stocks individually or buy S&P500?

Shall you diversify or not? Let’s compare AAPL with S&P500.

Joe McNay Investment Story - Financial Markets by Yale University #6 (youtube)

Part IV: S&P500 Quiz

S&P 500 Companies by Weight

The S&P 500 component weights are listed from largest to smallest. Data for each company in the list is updated after each trading day. The S&P 500 index consists of most but not all of the largest companies in the United States. The S&P market cap is 70 to 80% of the total US stock market capitalization. It is a commonly used benchmark for stock portfolio performance in America and abroad. Beating the performance of the S&P with less risk is the goal of nearly every portfolio manager, hedge fund and private investor.

List shows the holdings of the SPDR S&P 500 ETF Trust (SPY). 9/24/2024

	Company	Symbol	Weight	Price	Chg	% Chg
1	Apple Inc.	AAPL	7.12%	227.79	0.27	(0.12%)
2	Microsoft Corp	MSFT	6.60%	428.02	-3.29	(-0.76%)
3	Nvidia Corp	NVDA	6.28%	121.4	-2.64	(-2.13%)
4	Amazon.com Inc	AMZN	3.68%	187.97	-3.19	(-1.67%)
5	Meta Platforms, Inc. Class A	META	2.56%	567.36	-0.48	(-0.08%)
6	Alphabet Inc. Class A	GOOGL	1.96%	163.95	1.22	(0.75%)
7	Berkshire Hathaway Class B	BRK.B	1.71%	457.47	3.29	(0.72%)
8	Broadcom Inc.	AVGO	1.71%	172.69	-5.4	(-3.03%)
9	Alphabet Inc. Class C	GOOG	1.62%	165.29	1.46	(0.89%)
10	Eli Lilly & Co.	LLY	1.48%	877.79	-31.53	(-3.47%)
11	Tesla, Inc.	TSLA	1.45%	260.46	6.24	(2.45%)
12	Jpmorgan Chase & Co.	JPM	1.23%	210.5	0.72	(0.34%)
13	Unitedhealth Group Incorporated	UNH	1.09%	581.85	7.04	(1.22%)
14	Exxon Mobil Corporation	XOM	1.03%	115.82	3.02	(2.68%)
15	Visa Inc.	V	0.93%	275.17	3.48	(1.28%)
16	Procter & Gamble Company	PG	0.84%	173.55	0.34	(0.20%)
17	Mastercard Incorporated	MA	0.83%	493.64	2.37	(0.48%)
18	Costco Wholesale Corp	COST	0.82%	885.62	-15.82	(-1.75%)
19	Home Depot, Inc.	HD	0.81%	399.53	2.83	(0.71%)
20	Johnson & Johnson	JNJ	0.80%	161.4	0.01	(0.01%)

	Company	Symbol	Weight	Price	Chg	% Chg
493	Borgwarner Inc.	BWA	0.02%	36.75	0.94	(2.62%)
494	Paycom Software, Inc.	PAYC	0.02%	167.8	0.34	(0.20%)
495	Invesco Ltd	IVZ	0.02%	17.64	-0.1	(-0.56%)
496	Ralph Lauren Corporation	RL	0.02%	196.53	-1.08	(-0.55%)
497	Davita Inc.	DVA	0.02%	163.08	0.82	(0.51%)
498	Bath & Body Works, Inc.	BBWI	0.01%	32.39	0.65	(2.05%)
499	Franklin Resources, Inc.	BEN	0.01%	20.79	0.14	(0.68%)
500	Paramount Global Class B	PARA	0.01%	10.79	0.13	(1.22%)
501	Walgreens Boots Alliance, Inc	WBA	0.01%	9.06	0.54	(6.34%)
502	Fox Corporation Class B	FOX	0.01%	38.84	0.17	(0.44%)
503	News Corporation Class B	NWS	0.01%	27.87	0.12	(0.43%)

https://www.slickcharts.com/sp500

Company	2020	2021	2022	2023	2024
Apple Inc. (AAPL)(%)	6.5	6.8	6.9	7	7.12
Microsoft Corp. (MSFT)(%)	5	5.1	5.3	6	6.49
Amazon.com Inc. (AMZN)(%)	3.8	3.9	3.95	3.1	3.21
Meta Platforms Inc. (META)(%)	2.5	2.6	2.75	2.8	1.73
Alphabet Inc. (GOOGL)(%)	2	2.05	2.15	3.8	3.92
Berkshire Hathaway (BRK.B)(%)	1.75	1.77	1.79	1.7	1.71
NVIDIA (NVDA)(%)	1.5	2.1	2.3	3	3.18

http://siblisresearch.com/data/weights-sp-500-companies/

This graph shows the changes in the influence (weight) of top S&P 500 companies over the past five years. Each line represents a company's weight in the index, and how their importance has shifted during that period:

• Apple consistently increased its weight, staying the largest in the S&P 500.
• Microsoft grew significantly, especially between 2022 and 2023.
• Amazon stayed stable but showed a dip in 2023.
• Meta (Facebook) saw a decrease in 2024 after strong growth.
• Alphabet (Google) spiked in 2023 and continues growing.
• Berkshire Hathaway remained fairly stable, with minor fluctuations.
• NVIDIA grew rapidly, nearly doubling its weight from 2020 to 2024.

https://www.statmuse.com/money/ask/worst-performing-stocks-in-the-sandp-500-in-2024

Summary Based on the Two Graphs Quiz

1. S&P 500 Company Growth (2014-2024):

• The first graph highlights significant growth by companies like NVIDIA (32,230%), Broadcom (4,182%), and Advanced Micro Devices (4,168%) over the past decade. These stocks have delivered extraordinary returns, emphasizing the impact of technology and innovation-driven companies in the market.
• This graph demonstrates how investing in high-growth sectors like tech can lead to massive gains over time. However, this kind of explosive growth can also come with high volatility.

2. S&P 500 Company Negative Returns (2024):

• The second graph showcases companies like Walgreens Boots Alliance (-63.51%), Intel (-50.75%), and Dollar Tree (-48.59%), which have faced substantial losses in 2024. These declines are a reminder that even established companies can experience sharp downturns.
• This should serve as a warning to us that not all companies in the S&P 500 are winners every year. Economic challenges, changing market dynamics, or company-specific issues can lead to big losses.

3. What Should We Learn?

• Diversification: The key takeaway from these two graphs is that while some companies experience enormous growth, others can suffer significant losses. Diversifying your portfolio across different sectors, industries, and companies helps mitigate the risk of any single company dragging down the overall performance.
• Risk and Reward: High-growth companies come with high risks. Diversification is your best defense against the unpredictable nature of the market. By spreading investments, we can protect themselves from heavy losses while still capturing the potential upside from top-performing stocks.

In essence, diversification remains a crucial strategy, allowing us to manage risk while aiming for steady, long-term growth.

~ FYI only: SPXL, UPRO, SPXS ~ Quiz

Aspect	S&P 500	S&P 500 3x ETF: SPXL, UPRO, SPXS
Composition	500 large U.S. companies	Uses financial tools to enhance the impact of changes in 500 large U.S. companies’ stock prices.
Risk Level	Relatively low, stable over time	High risk, daily magnified by 3x
Potential Reward	7-10% annual returns on average	Potentially 3 times daily return of S&P 500
Volatility	Moderate	Very High, swings are 3x larger
Best Use Case	Long-term investors seeking steady growth	Short-term traders looking for fast gains
Example of Right Bet	5% gain in a year -> 5% return	5% gain in a day -> 15% return
Example of Wrong Bet	5% drop in a year -> 5% loss	5% drop in a day -> 15% loss

To find S&P 500 3x ETFs and compare them with regular S&P 500 funds, here are a few websites that provide detailed information, performance tracking, and comparisons:

Website	Features	Key Functions
Yahoo Finance	Search for ETFs by ticker (e.g., SPXL, UPRO, SPXS). Provides detailed stock charts, historical data, and comparison tools.	Real-time data, user-friendly interface, customizable charts and comparisons.
ETF.com	Search for S&P 500 ETFs and leveraged ETFs. Offers insights into fund composition, expense ratios, and performance.	Fund screener, expense ratio comparison, fund-specific insights and risks.
Morningstar.com	Search for S&P 500 ETFs. Compare historical performance, ratings, risk assessments. Detailed analysis for regular and leveraged ETFs.	Extensive research tools, risk rating system, in-depth fund analysis with user-friendly data export.

· SPXL (Direxion Daily S&P 500 Bull 3X Shares):

• Type: Bullish (Leverages 3x the daily performance of the S&P 500).
• Objective: Seeks to deliver 300% of the daily gain of the S&P 500.
• Provider: Direxion.
• Use: Suitable for short-term traders who expect the S&P 500 to rise in the near term.

· UPRO (ProShares UltraPro S&P 500):

• Type: Bullish (Leverages 3x the daily performance of the S&P 500).
• Objective: Seeks to deliver 300% of the daily gain of the S&P 500.
• Provider: ProShares.
• Use: Similar to SPXL, for short-term traders betting on a rise in the S&P 500.

· SPXS (Direxion Daily S&P 500 Bear 3X Shares):

• Type: Bearish (Leverages 3x the inverse of the daily performance of the S&P 500).
• Objective: Seeks to deliver 300% of the daily loss of the S&P 500.
• Provider: Direxion.
• Use: Suitable for short-term traders who expect the S&P 500 to fall in the near term.

What Is the Weighting of the S&P 500? --- Understanding the Sectors and Market Caps in the Index

BY TIM LEMKE

REVIEWED BY DORETHA CLEMON on June 18, 2021

https://www.thebalance.com/what-is-the-sector-weighting-of-the-s-and-p-500-4579847

If you’ve ever dipped so much as a toe into investing, you’ve probably heard about the Standard & Poor’s 500 Index.

The S&P 500 is the most common index used to track the performance of the U.S. stock market. It is based on the stock prices of 500 of the largest companies that trade on the New York Stock Exchange or the NASDAQ.

The S&P 500 is often hailed as a representation of the entire U.S. stock market and American business as a whole, but that is not entirely accurate. While it does give you exposure to a broad swath of the economy, it is heavily weighted toward specific market capitalizations, sectors, and industries, which is important to know if you are seeking to build a diversified equity portfolio.

S&P 500 Market Capitalizations

By design, the S&P 500 includes only large companies. Only the biggest companies with massive market capitalizations ($9.8 billion or more) are included-think of large firms such as Apple, Microsoft, Amazon.com, Facebook, and Alphabet, the parent company of Google. One could argue that the S&P 500 is 100% weighted toward large-cap firms, though many of the biggest firms would technically be considered mega-cap.

It's important for investors to know that while investing in the S&P 500 can give great returns, they may be missing out on returns from medium-sized and small companies. Those who are looking for exposure to smaller firms should consider investments that track the S&P 400, consisting of the top mid-cap companies, or the Russell 2000, which features mostly smaller companies.

Those who are looking for exposure to smaller firms should consider investments that track the S&P 400, consisting of the top mid-cap companies, or the Russell 2000, which features mostly smaller companies.

S&P 500 Sector and Industry Weighting

Any attempt to diversify your stock portfolio should include some attempt at diversification according to sector and industry. In fact, some investment strategies suggest a perfect balance of sectors, because any sector can be the best-performing group in any given year.

In recent years, certain sectors and industries have performed better than others, and that is now reflected in the makeup of the S&P 500. It also means that many sectors won't be as represented in the index.

As of December 22, 2020, the breakdown of sectors in the S&P 500 was as follows, according to State Street Advisors (the creator of the SPDR S&P 500 ETF Trust, an exchange-traded fund that seeks to track the performance of the S&P 500):

Information technology: 27.60%

Health care: 13.44%

Consumer discretionary: 12.70%

Communication services: 10.79%

Financials: 10.34%

Industrials: 8.47%

Consumer staples: 6.55%

Utilities: 2.73%

Materials: 2.64%

Real estate: 2.41%

Energy: 2.33%

As you can see, the S&P is heavily weighted toward tech, health care, and consumer discretionary stocks. Meanwhile, there aren't as many utilities, real estate companies, or firms involved in producing and selling raw materials.

This weighting has changed greatly over the years. Look back 25 years, and you’ll likely see far fewer tech companies and more emphasis on consumer discretionary and communications companies. Go back 50 years, and the mix will look even more different.

Why It Matters

The weighting of the S&P 500 should be important to you, because the index is not always a representation of the types of companies performing the best in any given year. For example, while consumer discretionary may have been the top-performing sector in 2015, it ranked third in 2017 and seventh in 2019. The communications services sector was last in performance in 2017 but had ranked second just one year earlier. The financials sector was dead last in 2007 and 2008, in the midst of the financial crisis, but it claimed the top spot in 2012 and performed third-best in 2019.4

Predicting which sectors will perform best in any given year is very difficult, which is why diversification is key.

How To Supplement the S&P 500

Investing in the S&P 500 through a low-cost index fund can provide a very strong base for most stock portfolios. But to get broad diversification among market caps and sectors, it may help to expand your reach.

Fortunately, there are mutual funds and exchange-traded funds (ETFs) that provide exposure to whatever you may be seeking. An investor who is looking to boost their portfolio by purchasing small-cap stocks can buy shares of an index fund designed to mirror the Russell 2000. If you want to invest more in financial stocks, you can access funds comprising a wide range of banks and financial services firms.

There are also mutual funds and ETFs that offer broad exposure to the entire stock market, including all market caps and sectors. Vanguard’s Total Stock Market ETF and the S&P Total Stock Market ETF from iShares are two popular examples.

Part V: Mutual Funds and ETF (SPY, QQQ) Game Quiz

Mutual fund  ppt

Want to improve your personal finances? Start by taking this quiz to get an idea of your investment risk tolerance – one of the fundamental issues to consider when planning your investment strategy, either alone or in consultation with a financial services professional. 

Investment risk tolerant test: https://jufinance.com/risk_tolerance.html

Example: Optimally diversified portfolio

1.     

3.     

Stock Category	Description	Example Stocks	Investor Type	Risk Level	Reward Potential
U.S. Large Market (Large-Cap)	Large companies with market capitalization over $10 billion.	Apple (AAPL), Microsoft (MSFT), Johnson & Johnson (JNJ)	Conservative to Moderate; looking for stability and long-term growth	Low to Moderate Risk	Stable returns with moderate growth
U.S. Large Value	Large-cap companies considered undervalued, often paying dividends.	Berkshire Hathaway (BRK.B), JPMorgan Chase (JPM), Procter & Gamble (PG)	Conservative; seeking dividends and undervalued opportunities	Moderate Risk	Moderate returns with dividends and value growth
U.S. Mid Cap Market	Mid-sized companies with market capitalization between $2 billion and $10 billion.	First Solar (FSLR), Zebra Technologies (ZBRA), Bio-Techne (TECH)	Moderate; seeking growth with a balance of risk	Moderate Risk	Higher growth potential than large caps, moderate volatility
U.S. Mid Value	Mid-cap companies considered undervalued, often paying moderate dividends.	Masco Corporation (MAS), Eastman Chemical (EMN), Targa Resources (TRGP)	Moderate; looking for growth in undervalued, mid-sized companies	Moderate Risk	Potential for moderate growth with some income from dividends
U.S. Small Cap Market (Small-Cap)	Small companies with market capitalization between $300 million and $2 billion.	AMC Entertainment (AMC), Tupperware Brands (TUP), TrueCar (TRUE)	Aggressive; seeking higher growth potential in smaller companies	High Risk	High growth potential, but very volatile
U.S. Small Value	Small-cap companies considered undervalued or have lower price-to-earnings ratios.	Tutor Perini (TPC), G-III Apparel Group (GIII)	Aggressive; seeking value in smaller, underpriced companies	High Risk	High potential rewards, but very volatile

Exchange traded funds (ETFs) (Khan academy)

Ponzi schemes (Khan academy)

Examples of ETF: Powershares (QQQ) – NASDAQ 100 Index (Large-cap growth stocks)

QQQ is rebalanced quarterly and reconstituted annually

Average Volume: 36.1 million

Expenses: 0.20%

12-Month Yield: 1.00%

Sector Weightings (top 5):

Information Technology 54.47%; Healthcare 14.62%; Consumer Cyclical: 13.26%; Consumer Defensive: 6.89%; Communication Services: 6.62%

Market-Cap Allocations:

Large-cap growth: 62.86%; large-cap blend: 20.53%; large-cap value: 7.38%; mid-cap growth: 4.57%; mid-cap blend: 2.98%; mid-cap value: 1.69%

Top 5 Holdings:

Apple Inc. (AAPL): 14.53%

Microsoft Corp. (MSFT): 6.79%

Google Inc. (GOOG): 3.80%

Facebook Inc. (FB): 3.73%

Amazon.com, Inc. (AMZN): 3.73%

Performance:

1-Year: 21.63%

3-Year: 17.10%

5-Year: 18.29%

10-Year: 12.07%

15-Year: -0.19%

Dividend yield

0.74% dividend on yearly basis

https://www.investopedia.com/ask/answers/061715/what-qqq-etf.asp

~ In Class Group Exercise ~ Step-by-Step Guide for Screening Mutual Funds:

1. Open the Mutual Fund Screener:

• Go to FINRA Mutual Fund Screener: https://finra-markets.morningstar.com/MutualFund/AdvScreener/Screen.jsp
• This tool allows you to screen (search) for mutual funds based on specific characteristics that fit your investment goals.

2. Choose Basic Search Criteria:

• Start by simplifying the search.

Key Criteria to Focus On:

• Fund Family: This is the company managing the mutual fund (e.g., Vanguard, Fidelity).
• Morningstar Rating: This is a star-based rating (from 1 to 5 stars). The more stars, the better the fund has performed relative to its risk level.
• Category: You can select a category of funds, such as "Large Growth", "Bond Funds", or "Balanced Funds" to meet specific needs.

3. Set Up a Simple Screen:

Step-by-Step Filters for the screener:

1. Fund Family:
• You can select well-known fund families like Vanguard or Fidelity to screen for trusted, low-cost funds.
2. Category:
• Pick a category based on what you’re looking for, such as:
• Large Growth: Focuses on big companies expected to grow fast.
• Bond Funds: Safer investments for income.
• Balanced Funds: Mix of stocks and bonds for moderate risk.
3. Morningstar Rating:
• Choose a Morningstar Rating of 4 or 5 stars to focus on higher-rated funds.
4. Expense Ratio:
• The expense ratio is the annual fee mutual funds charge. Select Low to filter funds with low fees (less than 1%).

4. Run the Search:

• After selecting your criteria, click Search.
• The screener will provide a list of mutual funds that match your search filters.

5. Analyze the Results:

After you run the screen, a list of funds will appear. Here's how to interpret the most important columns:

• Fund Name: This is the name of the mutual fund.
• Morningstar Rating: The star rating (1 to 5 stars).
• Expense Ratio: The annual fee expressed as a percentage (the lower, the better).
• 1 Year Return / 5 Year Return: The performance of the fund over the past 1 or 5 years.

6. Key Points:

• Morningstar Rating: Aim for 4-5 stars.
• Expense Ratio: Look for expense ratios below 1% for cost efficiency.
• Fund Returns: Compare the 1-year and 5-year returns to see how well the fund has performed.

Example:

Let’s say you want to find a low-cost, well-rated balanced fund:

• Fund Family: Select Vanguard or Fidelity.
• Category: Choose Balanced Funds.
• Morningstar Rating: Select 4 or 5 stars.
• Expense Ratio: Select Low (below 1%).

Now, click Search, and the results will show a list of funds that match this criteria.

7. Choosing a Fund:

After the search, click on a fund’s name for more detailed information. You’ll see details like:

• Top Holdings: What the fund is invested in.
• Risk: How risky the fund is compared to others in its category.
• Fees: A breakdown of the total fees and expenses.

Additional Tips:

· Start Simple: Focus on categories and ratings to avoid getting overwhelmed by too many options.

· Expense Ratio: Always look at the fees! They can significantly impact long-term returns.

· Performance: A fund’s historical performance isn’t a guarantee of future returns, but it’s a useful indicator.

HW (Due with the second mid-term exam)

1. Work on this investment risk tolerance test (https://jufinance.com/risk_tolerance.html) and report your score. Make a self-evaluation about yourself in terms of your risk tolerance level. Based on your risk level, set up a investment strategy! Please provide a rationale.

2. Compare ETF with mutual fund

3. Compare QQQ with SPY

4. Visit https://finra-markets.morningstar.com/MutualFund/AdvScreener/Screen.jsp. Based on group exercise, write a brief explanation (a few sentences) about why your group chose this mutual fund.

Focus on:

· Fund name and type (e.g., growth or balanced).

· What is special about this fund? (e.g., good performance, low fees, strong rating).

• Risk: Is it low, moderate, or high-risk?

SPY vs. QQQ: Which ETF Wins in 2022?

Since the bull-market friendly QQQ has beat SPY more often than not over the last 20 years, it should never be counted out.

By MarketBeat Staff, September 6, 2022

https://www.entrepreneur.com/finance/spy-vs-qqq-which-etf-wins-in-2022/434753

Barring a miraculous late year run, the major indices will finish in the red for the first time since 2018. That means the ETFs that track them, will drag down many investment account values after three years of double-digit gains.

Over the next four months, two of the most popular ETFs, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Invesco QQQ Trust (NASDAQ:QQQ) will be battling it out for the dubious honor of 2022 ‘winner’. Together the funds hold more than $500 billion in investor assets.

Last year’s race came down to the wire with SPY sticking its nose out for a 28.7% to 27.4% victory. It ended a four-year winning streak for QQQ including 2020’s 48.4% to 18.3% drubbing.

Despite their potential to produce dramatically different returns, SPY and QQQ do have a lot in common. Since 2000, the correlation of their annual returns is a remarkably high 0.92. That makes sense considering more than three-fourths of QQQ’s holdings are also in SPY—and the top holdings are very similar.

Yet there also some subtle differences that can account for major performance disparities. It is these differences that will determine if SPY (down 17.4% year-to-date) holds its lead on QQQ (down 25.8%) and notch its first back-to-back title since 2005-2006.

#1 Risk-On or Risk-Off?

If the economy fends off recessionary pressures and inflation shows signs of cooling this would likely be a welcomed development for equity investors. In turn, a less hawkish Fed would be icing on the cake. This could lead to improved consumer confidence and market sentiment. The opposite scenario of persistent inflation, deep recession, and aggressive Fed policy could make things worse.

In the bullish case, stocks would return to “risk-on” mode. The advantage would go to QQQ. Why? The Nasdaq-100 index tends to do better when markets head higher. This reflects the higher risk nature of its components and its 1.29 beta relative to the broad U.S. market. Under the bearish scenario, the less risky S&P 500 tracked by the SPY would probably outperform.

#2 Sector Performance

We often hear the Nasdaq called the ‘tech-heavy’ index and indeed it is. Almost half of its weight is in the technology sector. In the S&P 500, technology names account for around one-fourth of the benchmark.

In both cases technology is the largest sector weighting, but it is the double weighting in QQQ that accounts for much of its day-to-day return differences with SPY. Tech has been the worst performing sector so far this year and a big reason why QQQ is lagging. More of the same would all but clinch a W for SPY, while a fourth quarter tech rally is QQQ’s best hope for a dramatic comeback win.

The energy sector could also be a factor. By far the best performing economic group year-to-date, even SPY’s 4% energy weighting could contribute to outperformance. There are no energy names in QQQ.

Then there are financials. They are the third largest sector in SPY at a 13% weighting but represent less than 1% of QQQ. Strong bank earnings reports boosted by higher interest rates could really help SPY distance itself from QQQ.

#3 Big Stock Influencers

At the individual stock level, SPY and QQQ appear to be close cousins when comparing their respective top holdings. In fact, the top five are identical—Apple, Microsoft, Amazon, Tesla, and Alphabet. What isn’t identical though is how much the big five are weighted in each fund. They command more than 40% of the QQQ portfolio. In SPY their combined weighting is a more diluted 22%.

This means that the relative weighting of these lead horses can create some major return differences. Apple is the prime example. It has a 13.7% weight in QQQ and a 7.3% weight in SPY, a difference of 6.4%. So, when Apple shares outperform the S&P 500, the Nasdaq, and thereby QQQ, has a good chance to outperform.

The same goes for stocks like Microsoft, Amazon, and Tesla which have significantly larger weights in QQQ. Unfortunately for QQQ investors, all three have underperformed SPY year-to-date offsetting Apple’s modest outperformance.

Putting weights aside, 62 of QQQ’s 102 holdings are lagging SPY year-to-date. This in addition to the risk-off trade, tough year for tech, and certain mega cap underperformers has made it virtually impossible for QQQ to gain ground on SPY.

A summer run did help QQQ briefly close the gap on SPY before Fed Chairman Powell’s hawkish tone relinquished about half of its gains. Since the bull-market friendly QQQ has beat SPY more often than not over the last 20 years, it should never be counted out. But a lot will have to fall into place for the tech-dominated fund to win in 2022.

ETF Battles: QQQ Vs. SPY, Who Wins?

https://seekingalpha.com/instablog/18416022-etfguide/5418872-etf-battles-qqq-vs-spy-who-wins

Mar. 10, 2020 7:38 PM ETInvesco QQQ ETF (QQQ), SPY

This is an excerpt from the video titled, ETF Battles: QQQ vs. SPY with Ron DeLegge at ETF guide.

During normal markets, daily trading volume for QQQ averages around 75 million shares while SPY averages 173 million shares.

During the latest market correction, daily volume skyrocketed to record levels with QQQ topping 149,247,100 shares traded in a single session while SPY booked 385,764,000 shares. (Both trading volume peaks occurred on Feb. 28, 2020)

Cost

The first category for comparing QQQ vs. SPY is cost. Who wins? SPY charges annual expenses of just 0.09% compared to 0.20% for QQQ. Put another way, QQQ is more than double the cost of SPY! While SPY isn't necessarily the cheapest S&P 500 ETF, compared to QQQ it's a bargain. Bid ask spreads are another element of an ETF costs. And ETFs with tight bid ask spreads reduce the frictional trading costs associated with buying and selling funds. In this regard, QQQ and SPY are evenly matched with both funds having very narrow bid ask spreads that hover around 0.01%.

Dividends

First, both funds distribute dividends from their equity holdings every quarter. SPY has a 12-month trailing yield of 1.90% while QQQ is at 0.77%. Clearly, SPY wins but there's more behind the reason why. SPY, unlike QQQ, contains significant exposure to key dividend paying industry sectors like financials, real estate, and utilities. On the other hand, QQQ is overweight technology (63.91% of its portfolio is committed to this sector at the time of publication) and the tech sector is a historically low dividend yielding industry group. SPY beats QQQ by having a higher dividend. Also the fact that SPY obtains its dividends across a far more diversified base of 11 industry groups compared to the technology heavy QQQ makes it a winner.

Diversification

Almost 65% of QQQ's sector exposure is to technology companies, which isn't very diversified at all and if you blindfolded me and asked me to guess what type of ETF that QQQ is, I would immediately describe it as an industry sector fund. In contrast, SPY beats QQQ on diversification because not only does it have more stocks - 500 - but the stocks it owns are scattered across 11 different industry groups which include technology along with a whole bunch of other important industry sectors like healthcare, materials, and industrials.

Performance

Excluding dividends, QQQ has gained around 20% over the past year while SPY has gained around 7%. So QQQ wins the short-term performance race. What about longer time frames? QQQ outperformed SPY over the past 10 and 15 year period too. But if we go back 20 years, SPY wins because it gained around 197% not including dividends while QQQ gained just 101%. At the end of the day, QQQ's lights out performance during the past 1, 10, and 15 years is largely due to its concentrated portfolio in technology. SPY's less concentrated exposure to tech during this time frame resulted in a lower return. Nevertheless, over 20 years SPY did manage to outperform QQQ by a not so small 96%. This is a split decision with QQQ winning the shorter term performance race while SPY wins the longer-term race.

Final Winner of ETF Battles

Who wins the ETF battle between QQQ vs. SPY? The final winner of today's hard fought battle between QQQ and SPY is...the SPDR S&P 500 ETF (SPY). It's got lower cost, better diversification, a higher dividend yield, and better long-term performance.

How to tell the performance of a fund?

Discussion:  Return only? The higher the better? Or alpha?

Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index used as a benchmark, since they are often considered to represent the market’s movement as a whole. The excess returns of a fund relative to the return of a benchmark index is the fund's alpha.

Alpha is most often used for mutual funds and other similar investment types. It is often represented as a single number (like 3 or -5), but this refers to a percentage measuring how the portfolio or fund performed compared to the benchmark index (i.e. 3% better or 5% worse).

Alpha is often used with beta, which measures volatility or risk, and is also often referred to as “excess return” or “abnormal rate of return”. (Investorpedia)  

What is alpha? video

Value or Growth Stocks: Which Is Better?

By MARK P. CUSSEN Updated March 18, 2022, Reviewed by MARGUERITA CHENG, Fact checked by RYAN EICHLER

https://www.investopedia.com/articles/professionals/072415/value-or-growth-stocks-which-best.asp

Growth stocks are those companies that are considered to have the potential to outperform the overall market over time because of their future potential. Value stocks are classified as companies that are currently trading below what they are really worth and will thus provide a superior return. Which category is better? The comparative historical performance of these two sub-sectors yields some surprising results.

KEY TAKEAWAYS

· Growth stocks are expected to outperform the overall market over time because of their future potential.

· Value stocks are thought to trade below what they are really worth.

· The question of whether a growth or value stock strategy is better must be evaluated in the context of the investor's time horizon and risk.

What is Value Investing?

Growth Stocks vs. Value Stocks

The concept of a growth stock versus one that is considered to be undervalued generally comes from the fundamental stock analysis.

Growth

Growth stocks are considered by analysts to have the potential to outperform either the overall markets or else a specific subsegment of them for a period of time.

Growth stocks can be found in small-, mid-, and large-cap sectors and can only retain this status until analysts feel that they have achieved their potential. Growth companies are considered to have a good chance for considerable expansion over the next few years, either because they have a product or line of products that are expected to sell well or because they appear to be run better than many of their competitors and are thus predicted to gain an edge on them in their market.

Value

Value stocks are usually larger, more well-established companies that are trading below the price that analysts feel the stock is worth, depending upon the financial ratio or benchmark that it is being compared to. For example, the book value of a company’s stock may be $25 a share, based on the number of shares outstanding divided by the company’s capitalization. Therefore, if it is trading for $20 a share at the moment, then many analysts would consider this to be a good value play.

Stocks can become undervalued for many reasons. In some cases, public perception will push the price down, such as if a major figure in the company is caught in a personal scandal or the company is caught doing something unethical. But if the company’s financials are still relatively solid, then value-seekers may see this as an ideal entry point, because they figure that the public will soon forget about whatever happened and the price will rise to where it should be.

Value stocks will typically trade at a discount to either the price to earnings, book value, or cash flow ratios. Of course, neither outlook is always correct, and some stocks can be classified as a blend of these two categories, where they are considered to be undervalued but also have some potential above and beyond this. Morningstar Inc., therefore, classifies all of the equities and equity funds that it ranks into either a growth, value, or blended category.

Growth vs. Value: Performance

When it comes to comparing the historical performances of the two respective sub-sectors of stocks, any results that can be seen must be evaluated in terms of time horizon and the amount of volatility, and thus risk that was endured in order to achieve them.

Value stocks are at least theoretically considered to have a lower level of risk and volatility associated with them because they are usually found among larger, more established companies. And even if they don’t return to the target price that analysts or the investor predict, they may still offer some capital growth, and these stocks also often pay dividends as well.

Growth stocks, meanwhile, will usually refrain from paying out dividends and will instead reinvest retained earnings back into the company to expand. Growth stocks' probability of loss for investors can also be greater, particularly if the company is unable to keep up with growth expectations.

For example, a company with a highly touted new product may indeed see its stock price plummet if the product is a dud or if it has some design flaws that keep it from working properly. Growth stocks, in general, possess the highest potential reward, as well as risk, for investors.

Studies

Although the above paragraph suggests that growth stocks would post the best numbers over longer periods, the opposite has actually been true. Many studies point to value having outperformed growth style over long-term periods. However, looking at more recent data, value did outperform for the first 10 years of the 2000s, but growth has outperformed over the last 10 years. Take note that dividends likely play a key role in helping value outperform over longer-periods.

Going back to 1926, value has had numerous periods of outperformance relative to growth. Again, despite the long-term outperformance, growth has reigned supreme over the last decade. With that, the S&P 500 is made up of roughly 40% technology stocks.

What Percent of the S&P 500 Is Growth vs. Value?

The S&P 500 is not broken down into growth and value stocks. However, the two sectors that are often considered growth are technology and consumer discretionary, which make up 40% of the index. Meanwhile, value sectors—financials, industrials, energy, and consumer staples—make up roughly 29% of the index.

What Is an Example of a Value Stock vs. Growth Stock?

· An example of a value stock would be a bank, such as JPMorgan Chase (JPM). While key growth is often found in the technology space, such as Google (GOOG).

Are Growth or Value Funds Better for the Long-Term?

· Value has outperformed growth stocks over the longer-term, however, growth has been outperforming for the last 10 years.

The Bottom Line

The decision to invest in growth vs. value stocks is ultimately left to an individual investor’s preference, as well as their personal risk tolerance, investment goals, and time horizon. It should be noted that over shorter periods, the performance of either growth or value will also depend in large part upon the point in the cycle that the market happens to be in.

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.

For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.

Part VI: Behavior Finance Quiz

Anchoring Game Self-produced Video

• Test yourself first:

A stock price jumps to $40 from $20 but it suddenly dropped back to $20. Shall you buy the stock or not?

• The concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand.

• Avoiding Anchoring

– Be especially careful about which figures you use to evaluate a stock's potential.

– Don't base decisions on benchmarks

– Evaluate each company from a variety of perspectives to derive the truest picture of the investment landscape.

Mental Accounting Self-produced Video

• Test yourself

– Shall you payoff your credit card debt or start saving for a vocation?

– How do you spend your tax refund?

• Mental Accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account.

Example: People have a special "money jar" set aside for a vacation while still carrying credit card debt.

Confirmation Bias Self-produced video

• Confirmation bias: First impression can be hard to shake

– people selectively filter information that supports their opinion

– People ignore the rest opinions.

– In investing, people look for information that supports original idea

• Generate faulty decision making because of the bias

Example: investor finds all sorts of green flags about the investment (such as growing cash flow or a low debt/equity ratio), while glossing over financially disastrous red flags, such as loss of critical customers or dwindling markets.

Herding Game Self-produced video

– Example: Dotcom herd

– The tendency for individuals to mimic the actions of a larger group.

• Social pressure of conformity is one of the causes.

– This is because most people are very sociable and have a natural desire to be accepted by a group

• The second reason is the common rationale that a large group could not be wrong.

– This is especially prevalent when an individual has very little experience.

Overconfidence:

• Confidence implies realistically trusting in one's abilities

• Overconfidence implies an overly optimistic assessment of one's knowledge or control over a situation.

Disposition effect Game Self-produced Video

– which is the tendency for investors to hold on to losing stocks for too long and sell winning stocks too soon.

» The most logical course of action would be to hold on to winning stocks to further gains and to sell losing stocks to prevent escalating losses.

» investors are willing to assume a higher level of risk in order to avoid the negative utility of a prospective loss.

» Unfortunately, many of the losing stocks never recover, and the losses incurred continued to mount .

Avoiding the Disposition Effect

• When you have a choice of thinking of one large gain or a number of smaller gains (such as finding $100 versus finding a $50 bill from two places), thinking of the latter can maximize the amount of positive utility.

• When you have a choice of thinking of one large loss or a number of smaller losses (losing $100 versus losing $50 twice), think of one large loss would create less negative utility.

• When you can think of one large gain with a smaller loss or a situation where you net the two to create a smaller gain ($100 and -$55, versus +$45), you would receive more positive utility from the smaller gain.

• When you can think of one large loss with a smaller gain or a smaller loss (-$100 and +$55, versus -$45), try to separate losses from gains.

Gambler’s fallacy Game Self-produced Video

– An individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events.

Example:
Consider a series of 20 coin flips that have all landed with the "heads". A person might predict that the next coin flip is more likely to land with the "tails“.
Slot machines: Every losing pull will bring them that much closer to the jackpot. But that is wrong. All pulls are independent.

• Example:

– You liquidate a position after it has gone up in several days.

– You hold on to a stock that has fallen in several days because you view further declines as "improbable".

• Avoiding Gambler's Fallacy

– Investors should base decisions on fundamental or technical analysis before determining what will happen.

It is irrational to buy a stock because you believe it is likely to reverse.

12 Cognitive Biases Explained - How to Think Better and More Logically Removing Bias (video, FYI)

0:18 Anchoring Bias 1:22 Availability Bias 2:22 Bandwagon Effect 3:09 Choice Supportive Bias 3:50 Confirmation Bias 4:30 Ostrich Bias 5:20 Outcome Bias 6:12 Overconfidence 6:52 Placebo Effect 7:44 Survivorship Bias 8:32 Selective Perception 9:08 Blindspot Bias

Homework: (due with the second mid-term exam) 

1. Gambler's Fallacy

If you were investing in a stock that had been declining for several days, would you believe that a rebound is more likely because the stock "must" recover soon? Why or why not?

2. Mental Accounting

If you receive $500 as a gift, how might you treat this money differently than your regular income? What are the consequences of this behavior?

3. Disposition Effect

Why might investors hold onto losing stocks longer than they should? What psychological factors contribute to this behavior?

4. Which bias do you think affects you the most in your personal finances, and why? Give an example of how it has impacted your decision-making.

How can you avoid these biases in the future when making investment or financial decisions? Provide specific strategies you could implement to counteract these biases.

Chapter 6 Bond Market

1. Cash flow of bonds Quiz

The above graph shows the cash flow of a five year 5% coupon bond. The bond has a duration of 4.49 years.

What is Duration?

• Duration is a measure of how long it takes, in years, for the price of a bond to be repaid by its internal cash flows (coupon payments and the principal).
• It’s also used to assess how sensitive a bond is to changes in interest rates. A higher duration means the bond's price will drop more when interest rates rise.

In the image:

• Each year there’s a cash flow of $50, and in the final year (Year 5), there's a final payment of $1050 (including $50 interest and $1000 principal).
• Duration tells you how much time, on average, it takes to get those cash flows.

If the bond has a duration of 4.49 years, this means that the average time to receive the bond's payments (weighted by their value) is about 4.49 years. This also means that for every 1% increase in interest rates, the bond's price would drop by approximately 4.49%.

In Excel: to get duration, use duration function, such as “=DURATION(DATE(2024, 10, 17), DATE(2029, 10, 17), 5%, 5%, 2, 1)=4.49”

Or visit https://www.jufinance.com/bond_chatgpt/ to get both duration and convexity (FYI only).

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Watch this video, How Bonds Work (video) and work on the Quiz

Where can you find bond information?

· All types of bonds: https://www.finra.org/finra-data/fixed-income

· Treasury Bond Auction and Market information

http://www.treasurydirect.gov/

Are bonds Risky? Self-produced video Quiz

Bond risk – credit risk (video)

Bond risk – interest rate risk (video)

Bond Type	Risk	Return	Potential Investors	Website for Info
Government Bonds	Low (for developed countries)	Low	Conservative, risk-averse investors	https://www.treasurydirect.gov
Corporate Bonds	Moderate to High	Moderate to High	Investors seeking higher returns	https://www.finra.org
Convertible Bonds	Moderate to High	Moderate with potential for high (if stock rises)	Investors willing to take risk for potential stock upside	https://www.investopedia.com
Zero-coupon Bonds	Moderate	Moderate	Investors seeking tax advantages or fixed returns	https://www.investor.gov
Floating-rate Bonds	Moderate	Variable (depends on rates)	Investors seeking protection against interest rate changes	https://www.investopedia.com
Callable Bonds	Moderate to High	Moderate (with potential for early redemption)	Investors betting on lower interest rates	https://www.finra.org
Puttable Bonds	Low to Moderate	Low	Conservative investors seeking flexibility	https://www.investopedia.com
Inflation-linked Bonds (TIPs)	Low	Moderate (inflation-adjusted)	Investors seeking protection against inflation	https://www.treasurydirect.gov
Foreign Bonds	Moderate (depends on issuer)	Moderate	Investors seeking international exposure	https://www.investopedia.com
Savings Bonds	Very Low	Low	Individual, conservative investors	https://www.treasurydirect.gov

Quiz Bond-Selection Game

Junk Bond Vs. S&P500

Year	S&P 500 Return (%)	ICE BofA Junk Bond Return (%)
2003	28.68	28.97
2004	10.88	11.15
2005	4.91	2.74
2006	15.79	11.85
2007	5.49	1.87
2008	-37	-26.39
2009	26.46	58.21
2010	15.06	15.24
2011	2.11	4.98
2012	16	15.58
2013	32.39	7.44
2014	13.69	2.45
2015	1.38	-4.64
2016	11.96	17.13
2017	21.83	7.5
2018	-4.38	-2.27
2019	31.49	14.32
2020	18.4	7
2021	28.71	5.34
2022	-18.11	-11.22
2023	26.29	6.2

Key Insights:

• Junk Bonds: These bonds performed well in years of high-interest environments or following market crashes, such as 2009 with a remarkable 58.21% return, indicating that junk bonds can outperform during periods of market recovery.
• S&P 500: The stock market, while generally more volatile, has shown stronger long-term growth, particularly in bull markets like 2013 and 2021.
• Risk-Reward Balance: Junk bonds offer higher returns than safer bonds but typically trail the S&P 500 in strong market years. However, they do better than stocks in some cases of market downturns due to their high-interest payouts.

Data source: The blue line represents the S&P 500 returns, and the orange line represents the Junk Bond (ICE BofA U.S. High Yield Index) returns.

https://fred.stlouisfed.org/series/BAMLH0A0HYM2EY

Thinking About Investing in Junk Bonds? Here's a Simple Strategy for You:

1. Start Small

Don't put all your money into junk bonds. Junk bonds are risky, so just put a small part of your money into them—around 5-10% of your portfolio. The rest of your money should go into safer investments like stocks (especially index funds) that grow well over time.

2. Lower Your Risk

• Check Credit Ratings: Not all junk bonds are the same. Look for bonds that have a higher rating (closer to BB). These are less risky than lower-rated ones like CCC.
• Watch the Economy: Junk bonds can lose value if the economy goes bad. Pay attention to what’s happening in the world to help you decide if you should keep or sell them.

Example of a Simple Investment Plan for a 20-Year-Old:

• 70% in stocks (like an S&P 500 index fund).
• 15% in safer bonds (like U.S. Treasury bonds).
• 5-10% in junk bonds for higher returns.

Home Work chapter 6 (due with the second mid term exam):

1. Compare municipal bond, TIPS, corporate bond and Treasury bond in terms of issuers, pro and cons (risk).

2. Do you recommend TIPS to your grandparents? Why or why not? Please refer to both articles on TIPS posted in this chapter.

For information on TIPS, please refer to https://www.forbes.com/advisor/investing/treasury-inflation-protected-securities-tips/

3. As a bond investor, do you plan to invest in junk bond? Why or why not? For information on junk bonds, please refer to https://www.investopedia.com/articles/02/052202.asp

Treasury Inflation Protected Securities (TIPS)

Brian O'Connell, reviewed By Benjamin Curry, May 24, 2022

https://www.forbes.com/advisor/investing/treasury-inflation-protected-securities-tips/

Treasury Inflation Protected Securities (TIPS) are bonds issued by the U.S. government that offer protection against inflation, in addition to modest interest payments.

“For investors who prioritize preserving the purchasing power of their cash, TIPS can help mitigate the impact of unexpectedly high inflation,” says Wes Crill, head of investment strategists at Dimensional Fund Advisors in Austin, Texas.

How Do TIPS Work?

TIPS are fixed income securities that work similarly to other treasury bonds. When you buy TIPS, you’re purchasing debt issued by the U.S. government. You get regular interest payments on the par value of the securities, and you get your principal back when the TIPS reach maturity.

What’s special is that TIPS include a special mechanism that provides inflation protection. Each year, the U.S. Treasury adjusts the par value of TIPS based on the Consumer Price Index (CPI), a measure of inflation.

This TIPS feature helps preserve the purchasing power of your investment. The value of ordinary bonds, which typically feature fixed par values, may be eroded over time by gains in inflation.

“Indexing the bond’s value to inflation helps protect investors from an erosion in purchasing power,” says Crill. Regardless of how much prices change over the term of your TIPS investment, you maintain the purchasing power of the cash you invested—plus interest payments.

What’s more, interest payments are also adjusted for inflation each year. While the interest rate remains constant over the duration of your TIPS, the interest payment you receive every six months is based on your TIPS’ current par value, meaning they effectively increase with CPI inflation.

Note that deflation will reduce the par value of TIPS. It’s a very rare phenomenon, but the value and interest payments of your TIPS could be adjusted downward to reflect negative CPI rates. That said, you never receive less than the original par value of the TIPS upon maturity.

TIPS and Taxes

As with most investments, TIPS earnings are subject to taxes, at least on the federal level. Earnings are generally exempt from state and local taxes. However, you have to be careful with TIPS because their earnings encompass their interest payments and any inflation adjustments that increase their par value.

“In any year when the principal value of a TIPS bond increases due to the inflation adjustment, that gain is considered reportable income for the year, even though the investor won’t receive the inflation-adjusted principal until the security matures,” says Robert Johnson, professor of finance at Heider College of Business at Creighton University.

If you don’t plan for this in advance, this may create a small unexpected tax burden, as you won’t have received the updated par value back yet but are still expected to pay income taxes on it.

In the event that deflation occurs, reducing the par value of TIPS, you may be able to use it to offset other income gains. You generally will only be able to do this if the adjustment exceeds the amount of TIPS interest you earned that year. Speak with a tax professional to determine how TIPS may affect your taxes.

Advantages of TIPS

For inflation-conscious investors, TIPS have some big advantages.

Easy Inflation Insurance

TIPS can provide an easy way to engineer an inflation hedge in your portfolio. “This is particularly important for more conservative or income-focused investors,” like those in retirement often are, says Matt Dmytryszyn, director of investments at Telemus, an investment advisory firm in Southfield, Mich.

In high-inflation environments, TIPS performance may greatly exceed that of traditional government bonds, whose fixed interest payments effectively become smaller over time.

Backed by the Full Faith and Credit of Uncle Sam

While many investments may outperform inflation over time, TIPS are the only one guaranteed to do this that also have all of the benefits of standard Treasury bonds.

“They’re supported by the full faith and credit of the U.S. government and are traded in a deep and very liquid market,” says Frederick Miller, founder of Sensible Financial Planning and Management, LLC, in Waltham, Mass.

In other words, it’s highly unlikely the U.S. government will fail to pay you back—that hasn’t happened yet in U.S. history—and, should you need to sell your TIPS before their term ends, you should be able to do so relatively easily. This makes TIPS great low-risk investments.

Disadvantages of TIPS

TIPS aren’t without their disadvantages. Here are a few of the risks you might encounter if you invest in TIPS.

Poor performance during deflation or low inflation.

While TIPS have an edge over traditional bonds when inflation runs hot, they perform poorly when deflation strikes or there is low inflations. That’s because deflation or low inflation drags down their par value, shrinking interest payments. In these conditions, TIPS fail to keep up with market interest rates.

Unpredictable cash flow.
Because their payments are dependent on inflation, it’s hard to estimate in advance what your income might be. This may not be a huge deal if payments end up being more than expected, but during periods of lower inflation or deflation, you could end up with less money coming in than you need.

Anticipatory taxes.

Because you must pay income taxes on any increases to par value, you could end up owing “phantom taxes” on money you haven’t actually earned until your TIPS mature. You can combat this by holding your TIPS in tax-advantaged retirement accounts.

Liquidity.

In general, it’s pretty easy to cash out or resell your U.S. Treasuries before their maturity date. TIPS don’t trade as much as other bonds in secondary markets, which may make it harder to sell yours quickly. During periods of unstable inflation, you also may end up selling your TIPS at a loss, especially if their par value has been adjusted to lower than what you paid.

CPI may not match your personal inflation rate.

TIPS are tied to CPI, and if your spending habits don’t completely align with the averages used to measure CPI, inflation adjustments may not compensate you for your spending patterns. “The CPI is a basket of goods and the composition of each of our baskets of goods will vary in some way from the composition CPI basket,” says Dmytryszyn. TIPS may not keep up with your personal rate of inflation.

How to Buy TIPS

You can buy TIPS through your online brokerage account or directly from the U.S. Treasury at TreasuryDirect.

If you choose to buy TIPS on the secondary market, be sure to compare how much the current inflation-adjusted par value differs from the original par value. Remember: You are only guaranteed to receive payment up to the original face value of a TIPS. If its price is above the issue price, you could lose money if deflation drags the par value to less than you paid.

That means you’ll probably only want to buy TIPS on a secondary market if the current par value is less than the issued par value. Otherwise, your safest bet may be purchasing TIPS directly from the Treasury.

You can also buy shares of mutual funds and exchange-traded funds (ETFs) that contain diversified mixes of TIPS. While buying into a TIPS fund may make certain aspects of TIPS ownership easier, such as allowing you to reinvest earnings or buy odd-dollar amounts of shares, keep in mind you’ll be paying expense ratio fees, which can negatively impact your returns.

Should You Buy TIPS?

If you’re a safety-minded investor who wants some government-backed protection against inflation, TIPS can make good sense.

“TIPS matter to Main Street investors because they can help you protect your buying power from rising inflation,” says Tom Preston, who spent 30 years as a Wall Street trader and is a market strategist for Tastytrade, a Chicago-based digital finance and investment marketplace. “When inflation increases the price of things you need to buy, the extra return from a TIPS can offset that.”

Before buying your TIPS, though, be sure to compare current bond yields to expected inflation rates. Because they adjust for inflation, TIPS interest rates tend to be much smaller than non-TIPS bonds. For instance, if bonds are yielding 3%, inflation is only 2%, and TIPS interest is 0.5%, you would only expect to earn the equivalent of 2.5% on your TIPS each year. This could make it an inferior choice to the non-TIPS Treasury. Conversely, if non-TIPS bonds were only yielding 2%, TIPS would give you an extra half a percent over traditional bonds.

According to Raymond James, the average breakeven point has been around 2.5% since the mid-1990s, meaning a non-TIPS bond must yield at least that much to hypothetically outperform a TIPS.

Everything You Need to Know About Junk BondsEverything You Need to Know About Junk Bonds

By THE INVESTOPEDIA TEAM Updated May 17, 2022 Reviewed by CIERRA MURRY

https://www.investopedia.com/articles/02/052202.asp

The term "junk bond" can evoke memories of investment scams such as those perpetrated by Ivan Boesky and Michael Milken, the junk-bond kings of the 1980s. But if you own a bond fund today, some of this so-called junk may have already found its way into your portfolio. And that's not necessarily a bad thing.

Here's what you need to know about junk bonds.

Like any bond, a junk bond is an investment in debt. A company or a government raises a sum of money by issuing IOUs stating the amount it is borrowing (the principal), the date it will return your money (maturity date), and the interest rate (coupon) it will pay you on the borrowed money. The interest rate is the profit the investor will make for lending the money.

KEY TAKEAWAYS

· Junk bonds have a lower credit rating than investment-grade bonds, and therefore have to offer higher interest rates to attract investors.

· Junk bonds are generally rated BB[+] or lower by Standard & Poor's and Ba[1] or lower by Moody's.

· The rating indicates the likelihood that the bond issuer will default on the debt.

· A high-yield bond fund is one option for an investor interested in junk bonds but wary of picking them individually.

Before it is issued, every bond is rated by Standard & Poor's or Moody's, the major rating agencies that are tasked with determining the financial ability of the issuer to repay the debt it is taking on. The ratings range from AAA (the best) to D (the company is in default).

The two agencies have slightly different labeling conventions. AAA from Standard & Poor's, for example, is Aaa from Moody's.

Broadly speaking, all bonds can be placed in one of two categories:

Investment-grade bonds are issued by low-risk to medium-risk lenders. A bond rating on investment-grade debt can range from AAA to BBB. These highly-rated bonds pay relatively low interest because their issuers don't have to pay more. Investors looking for an absolutely sound place to put their money will buy them.

Junk bonds are riskier. They will be rated BB or lower by Standard & Poor's and Ba or lower by Moody's. These lower-rated bonds pay a higher yield to investors. Their buyers are getting a bigger reward for taking a greater risk.

Think of a bond rating as the report card for a company's credit rating. Blue-chip firms with solid financials and steady income will get a high rating for their bonds. Riskier companies and government bodies with rocky financial histories will get a lower rating.

The chart below shows the bond-rating scales from the two major rating agencies.

Historically, average yields on junk bonds have been 4% to 6% above those for comparable U.S. Treasuries. U.S. bonds are generally considered the standard for investment-grade bonds because the nation has never defaulted on a debt.

Bond investors break down junk bonds into two broad categories:

Fallen angels are bonds that were once rated investment grade but have since been reduced to junk-bond status because concerns have emerged about the financial health of the issuers.

Rising stars are the opposite. The companies that issue these bonds are showing financial improvement. Their bonds are still junk, but they've been upgraded to a higher level of junk and, if all goes well, they could be on their way to investment quality.

Who Buys Junk Bonds?

The obvious caveat is that junk bonds are a high-risk investment. There's a risk that the issuer will file for bankruptcy and you'll never get your money back.

There is a market for junk bonds, but it is overwhelmingly dominated by institutional investors who can hire analysts with knowledge of specialized credit.

This does not mean that junk-bond investing is strictly for the wealthy.

The High-Yield Bond Fund

For individual investors who are interested in junk bonds, investing in a high-yield bond fund can make sense.

You're dabbling in a higher-risk investment, but you're relying on the skills of professional money managers to make the picks.

High-yield bond funds also lower the overall risk to the investor by diversifying their portfolios across asset types. The Vanguard High-Yield Corporate Fund Investor Shares (VWEHX), for example, keeps 4.5% of its money in U.S. bonds and 3% in cash while spreading the rest among bonds rated from Baa3 to C. The Fidelity Capital and Income Fund (FAGIX) keeps nearly 20% of its money in stocks.

One important note: You need to know how long you can commit your cash before you decide to buy a junk bond fund. Many do not allow investors to cash out for at least one or two years.

Also, there is a point at which the rewards of junk bonds don't justify the risks. You can determine this by looking at the yield spread between junk bonds and U.S. Treasuries. The yield on junk is historically 4% to 6% above U.S. Treasuries. If you see the yield spread shrinking below 4%, it's probably not worth the added risk. to invest in junk bonds.

One more thing to look for is the default rate on junk bonds. This can be tracked on Moody's website.

One final warning: Junk bonds follow boom and bust cycles, just like stocks. In the early 1990s, many bond funds earned upwards of 30% annual returns. A flood of defaults can cause these funds to produce stunning negative returns.

Chapter 7 Rating, Term structure

Part I: Credit Rating Agency Self-Produced Video Game Quiz

The Big Short - Standard and Poors scene --- This is how they worked

1. Conflict of interest?

2. Who is doing the right thing: the lady representing the rating agency, or the Investment Banker?

Who are the three Rating Agencies?

How credit agencies work(video)

Feature	Moody's	Standard & Poor's (S&P)	Fitch
Rating Scale	Aaa, Aa, A, Baa, Ba, etc.	AAA, AA, A, BBB, BB, etc.	AAA, AA, A, BBB, BB, etc.
Highest Rating	Aaa	AAA	AAA
Lowest Rating	C	D	D
Ownership	Publicly traded (NYSE: MCO)	Owned by S&P Global (NYSE: SPGI)	Jointly owned by Hearst and FIMALAC
Founded	1909	1941	1914
Headquarters	New York City, USA	New York City, USA	New York City, USA
Global Market Share	~40%	~40%	~15%
Primary Focus	Bonds, Corporate debt	Bonds, Corporate debt, Sovereign debt	Bonds, Corporate debt, Sovereign debt
Major Clients	Governments, Corporations	Governments, Corporations	Governments, Corporations
Key Issue	Often accused of conflicts due to being paid by the companies they rate	Similar conflict of interest	Similar conflict of interest

Rating Conflicts (video) https://www.youtube.com/watch?v=-C5JW4I3nfU

A ratings conflict happens when a credit rating agency faces a situation where its interests clash with its duty to provide honest ratings. This mainly occurs because:

• Who pays the agency: Companies, like investment banks, pay the credit rating agencies to rate their bonds or financial products. This means the agencies want to keep these companies happy to continue getting paid.
• Pressure for higher ratings: Since the companies paying them want better ratings (like AAA instead of BBB), the agencies might give higher ratings than the product deserves. This creates a conflict between making money and giving accurate ratings.

A major example of this happened before the 2008 financial crisis, when many risky mortgage-backed securities were rated as AAA (very safe), even though they were actually risky. This misled investors and contributed to the financial crash.

How the credits are assigned? The Altman Z-Score

· The Altman Z-Score is one popular model used to predict the likelihood of a company going bankrupt within two years.

The Altman Z-Score Formula (https://www.investopedia.com/terms/z/zscore.asp)

The Altman Z-score is the output of a credit-strength test that helps gauge the likelihood of bankruptcy for a publicly traded manufacturing company. The Z-score is based on five key financial ratios that can be found and calculated from a company's annual 10-K report. The calculation used to determine the Altman Z-score is as follows:

$ζ$=1.2A+1.4B+3.3C+0.6D+1.0E

where: Zeta(ζ)=The Altman Z-score

· A=Working capital/total assets

· B=Retained earnings/total assets

· C=Earnings before interest and taxes (EBIT)/totalassets

· D=Market value of equity/book value of total liabilities

· E=Sales/total assets

Typically, a score below 1.8 indicates that a company is likely heading for or is under the weight of bankruptcy. Conversely, companies that score above 3 are less likely to experience bankruptcy.

· How Agencies Use It:

• Low Z-Scores (Below 1.8): Indicates a high risk of bankruptcy. A company with a low Z-Score may receive a lower credit rating (e.g., BB or below), signaling higher risk to investors.
• Medium Z-Scores (1.8 to 3.0): Indicates a moderate risk. Agencies might assign a rating in the middle range (e.g., BBB).
• High Z-Scores (Above 3.0): Suggests a low risk of bankruptcy. Companies with high Z-Scores could receive higher ratings (e.g., A or AAA).

· Influence on Ratings: While the Z-Score is a useful tool, credit rating agencies also consider other factors such as industry risk, management quality, market conditions, and broader economic factors. Therefore, the Z-Score may be one of many inputs in determining a company's final rating. It helps agencies gauge how likely a company is to default, but the final rating involves a broader analysis.

· How to use Z score?

· look for companies with higher Z-Scores if you want to invest in safer stocks. A Z-Score under 1.8 could be a red flag for risky companies.

Example: https://www.gurufocus.com/term/zscore/AAPL

Apple Inc. (AAPL) Altman Z-Score Calculation

· X1 (Working Capital / Total Assets):
X1 = (125,435 - 131,624) / 331,612 = -0.0187

· X2 (Retained Earnings / Total Assets):
X2 = -4,726 / 331,612 = -0.0143

· X3 (EBIT / Total Assets):
X3 = (120,873 - (-1,002)) / 331,612 = 0.3675

· X4 (Market Value of Equity / Total Liabilities):
X4 = 3,595,474.318 / 264,904 = 13.5727

· X5 (Revenue / Total Assets):
X5 = 385,603 / 331,612 = 1.1628

· Final Z-Score:
Z = (1.2 * -0.0187) + (1.4 * -0.0143) + (3.3 * 0.3675) + (0.6 * 13.5727) + (1.0 * 1.1628) = 10.48

In Class exercise Z-Score Calculation

Financial Data:

Income Statement:

• EBT (Earnings Before Tax): $250,000
• Interest Expense: $15,000
• Revenue: $1,200,000

Balance Sheet:

• Current Assets: $500,000
• Current Liabilities: $450,000
• Total Assets: $2,000,000
• Retained Earnings: $200,000
• Market Value of Equity: $3,500,000
• Total Liabilities: $1,200,000

Hint:

Z-Score Formula:

$$Z = 1.2X_1 + 1.4X_2 + 3.3X_3 + 0.6X_4 + 1.0X_5$$Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5

Where:

• $X_1$X1 = Working Capital / Total Assets
• $X_2$X2 = Retained Earnings / Total Assets
• $X_3$X3 = EBIT / Total Assets
• $X_4$X4 = Market Value of Equity / Total Liabilities
• $X_5$X5 = Sales / Total Assets

Homework of chapter 7 part I:

Question 1: ABC Corp’s Financial Data:

• Current Assets: $20,000
• Current Liabilities: $15,000
• Total Assets: $100,000
• Retained Earnings: -$15,000
• EBT: $10,000
• Interest Expense: $5,000
• Market Value of Equity: $20,000
• Total Liabilities: $80,000
• Revenue: $50,000

Task:

• Calculate the Z-Score for ABC Corp (Hint: Find Working Capital first).
• Interpret the Z-Score. If it’s around 0.5, what does this mean for the company's bankruptcy risk?

Question 2: What is Z score? Refer to the Z scores of American airlines, Jet Blue Airlines, and Delta Airlines. Do you think that Delta airline is more likely to default than the other two airlines based on z score? Why or why not?

Hint: search for z scores of the three airlines and compare for z scores.

Sovereign Credit Rating

By JAMES CHEN, Reviewed by GORDON SCOTT on August 26, 2020 https://www.investopedia.com/terms/s/sovereign-credit-rating.asp

What Is a Sovereign Credit Rating?

A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity. Sovereign credit ratings can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.

At the request of the country, a credit rating agency will evaluate its economic and political environment to assign it a rating. Obtaining a good sovereign credit rating is usually essential for developing countries that want access to funding in international bond markets.

KEY TAKEAWAYS

· A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.

· Investors use sovereign credit ratings as a way to assess the riskiness of a particular country's bonds.

· Standard & Poor's gives a BBB- or higher rating to countries it considers investment grade, and grades of BB+ or lower are deemed to be speculative or "junk" grade.

· Moody’s considers a Baa3 or higher rating to be of investment grade, and a rating of Ba1 and below is speculative.

Understanding Sovereign Credit Ratings

In addition to issuing bonds in external debt markets, another common motivation for countries to obtain a sovereign credit rating is to attract foreign direct investment (FDI). Many countries seek ratings from the largest and most prominent credit rating agencies to encourage investor confidence. Standard & Poor's, Moody's, and Fitch Ratings are the three most influential agencies. Other well-known credit rating agencies include China Chengxin International Credit Rating Company, Dagong Global Credit Rating, DBRS, and Japan Credit Rating Agency (JCR). Subdivisions of countries sometimes issue their own sovereign bonds, which also require ratings. However, many agencies exclude smaller areas, such as a country's regions, provinces, or municipalities.

Investors use sovereign credit ratings as a way to assess the riskiness of a particular country's bonds.

Sovereign credit risk, which is reflected in sovereign credit ratings, represents the likelihood that a government might be unable—or unwilling—to meet its debt obligations in the future. Several key factors come into play in deciding how risky it might be to invest in a particular country or region. They include its debt service ratio, growth in its domestic money supply, its import ratio, and the variance of its export revenue.

Many countries faced growing sovereign credit risk after the 2008 financial crisis, stirring global discussions about having to bail out entire nations. At the same time, some countries accused the credit rating agencies of being too quick to downgrade their debt. The agencies were also criticized for following an "issuer pays" model, in which nations pay the agencies to rate them. These potential conflicts of interest would not occur if investors paid for the ratings.

Examples of Sovereign Credit Ratings

Standard & Poor's gives a BBB- or higher rating to countries it considers investment grade, and grades of BB+ or lower are deemed to be speculative or "junk" grade. S&P gave Argentina a CCC- grade in 2019, while Chile maintained an A+ rating. Fitch has a similar system.

Moody’s considers a Baa3 or higher rating to be of investment grade, and a rating of Ba1 and below is speculative. Greece received a B1 rating from Moody's in 2019, while Italy had a rating of Baa3. In addition to their letter-grade ratings, all three of these agencies also provide a one-word assessment of each country's current economic outlook: positive, negative, or stable.

Sovereign Credit Ratings in the Eurozone

The European debt crisis reduced the credit ratings of many European nations and led to the Greek debt default. Many sovereign nations in Europe gave up their national currencies in favor of the single European currency, the euro. Their sovereign debts are no longer denominated in national currencies. The eurozone countries cannot have their national central banks "print money" to avoid defaults. While the euro produced increased trade between member states, it also raised the probability that members will default and reduced many sovereign credit ratings.

Sovereigns Rating (http://countryeconomy.com/ratings/)

Part II: Yield curve (or Term structure) Self-produced video Game Quiz

https://www.ustreasuryyieldcurve.com/

US Treasuries Yield Curve - October 22, 2024

· Inverted Yield Curve: The curve starts high at the short end, with a peak around 1-month maturity, and then declines, hitting a low point at around 3 years. This is indicative of an inverted yield curve, which often signals an impending economic recession.

· Steepening Beyond 10 Years: After the 10-year mark, the curve starts to rise again, indicating investors expect higher returns for longer maturities, possibly due to anticipated future inflation or uncertainty.

• Fed Funds Target Range: The checked Fed Funds Target Range highlights that short-term interest rates are influenced by the Federal Reserve's policy, which is likely elevated in this case to combat inflation.

Or at https://www.gurufocus.com/yield_curve.php

Current Treasury Yield Curve vs. prior years’

• Flatter Yield Curve: This graph compares the yield curve for current, October 2023, and October 2022. All three curves are relatively flat, indicating limited difference in yields across maturities. This can signal economic stagnation or low growth expectations.
• Declining Trend: Yields from 2022 to 2023 and now show a decline, reflecting that interest rates have decreased over time, largely due to The Federal Reserve’s policies.

Summary:

· Inflation:

• A flattening or inverted yield curve can indicate lower inflation expectations. If the yield curve is flat or inverted, it suggests that investors expect slower economic growth, which may dampen inflation in the future.
• Long-term rates are low, reflecting that investors do not foresee a significant rise in inflation over time. The Federal Reserve’s efforts to control inflation through higher short-term rates appear to be having the desired effect.

· Stock Market:

• An inverted yield curve is often a predictor of economic recessions, which tend to negatively affect the stock market. Historically, such curves are followed by a period of reduced corporate profits and economic contraction, leading to lower stock prices.
• The flattening curve signals caution among investors. The expectation of slower growth could lead to a more volatile or downward-trending stock market as investors become more risk-averse, favoring safer, interest-bearing assets like bonds over equities.

· Economic Growth:

• The inverted or flattening yield curve typically signals slowing economic growth or an impending recession. In this scenario, investors are betting that the Federal Reserve’s actions (e.g., raising short-term rates) to combat inflation will lead to reduced economic activity in the near term.
• The low long-term yields reflect an outlook of subdued growth over the long term, meaning the economy could be entering a period of stagnation or slow recovery, rather than robust expansion.

Yield Curve Type	Definition	What It Means	Historical Significance	Example
Steep Upward Yield Curve	Long-term interest rates are significantly higher than short-term rates.	Signals investor confidence in strong future economic growth and rising inflation.	Often appears during periods of economic recovery and expansion, following recessions or slow growth periods.	2013-2014: After the 2008 financial crisis, the yield curve steepened as the U.S. economy began to recover.
Normal Yield Curve	Long-term interest rates are moderately higher than short-term rates.	Indicates steady economic growth with moderate inflation expectations.	The most common yield curve during periods of stable economic growth without immediate concerns of recession.	2017-2018: The U.S. economy showed steady growth, and the Fed gradually raised interest rates to manage inflation.
Flat Yield Curve	Little difference between short-term and long-term interest rates.	Signals uncertainty about future economic growth or transitionary economic periods.	Often seen before a slowdown or recession, or when monetary policy is in transition.	2019: The U.S. yield curve flattened as economic growth slowed and concerns about a recession increased.
Inverted Yield Curve	Short-term interest rates are higher than long-term interest rates.	Investors are concerned about the future economy, often predicting a recession.	Has preceded every U.S. recession since the 1970s, signaling slowing growth or an upcoming recession.	August 2019: The U.S. yield curve inverted for six days, preceding the 2020 COVID-19-triggered recession.
Recent Inverted Yield Curve	Short-term interest rates (2-year) exceeded long-term rates (10-year, 30-year).	Investors foresee economic challenges, signaling concerns about a potential slowdown or recession.	One of the longest inversions, signaling concerns about inflation and possible recession.	2023-2024: The yield curve inverted starting in 2022 and remained inverted into 2024, signaling concerns about inflation, aggressive Fed rate hikes, and fears of a potential recession.

Are There Any Concerns About a Recession in 2025?

Economic Signal	What It Means
Inverted Yield Curve (2023-2024)	The yield curve has been upside down for a long time. This usually means people are worried about the future, and it can predict a slowdown in the economy.
Fed Rate Hikes	The Fed is raising interest rates fast to fight inflation. This can make borrowing expensive and slow down the economy.
High Inflation	Prices are still going up, especially for things like housing and energy. High prices can make people spend less, which slows the economy.
Global Problems	Issues like the war in Ukraine and China's economy affect trade and can hurt the U.S. economy.
Consumer Sentiment	People are unsure about the future, so they might spend less. If this happens, the economy can slow down.

The probability of a recession now stands at 35% - by JP Morgan

https://www.jpmorgan.com/insights/global-research/economy/recession-probability

Key takeaways

• In light of recent economic developments, J.P. Morgan Research has raised the probability of a U.S. and global recession starting before end-2024 to 35%.
• The probability of a recession happening by the end of 2025 remains unchanged at 45%.
• With inflation coming down, J.P Morgan Research now sees a 30% chance the Fed will keep interest rates high-for-long, which is down from 50% two months ago.

~ Supplement 1 ~ -Year vs. 10-Year Spread: A Quick Indicator for Economy ~

• 2-Year Rate: This is a short-term interest rate, usually lower, and reflects what the market expects in the near future.
• 10-Year Rate: This is a long-term interest rate and shows expectations for the economy over a longer period.

What the 2-Year and 10-Year Spread Tells Us:

• Normal Spread: The 10-year rate is higher than the 2-year rate. This means the economy is expected to grow steadily, and investors feel confident about the long-term future.
• Narrow Spread or Flat: The 2-year and 10-year rates are close together. This suggests uncertainty, and investors aren’t sure about future growth.
• Inverted Spread: The 2-year rate is higher than the 10-year rate. This signals that investors are worried about the economy and often predicts a recession. It shows that people expect things to get worse soon.

Why It’s Important:

• Investors and the Fed watch the 2-year and 10-year spread to understand how confident people are about the future.
• When the spread inverts (2-year rate > 10-year rate), it’s one of the most reliable indicators that a recession might be coming.

https://fred.stlouisfed.org/series/T10Y2Y

Notes:

• Inverted Yield Curve (below 0): This is usually a warning sign of a potential recession. The line dropped below 0 during parts of 2022 and 2023, meaning that investors were worried about the future.
• Current Situation (October 23, 2024): The line is at 0.17%, slightly above 0, which means the 10-year rate is a bit higher than the 2-year rate again. This could mean that worries are easing, but things are still uncertain.

~ Supplement 2 ~ Expectation Theory ~

Example: Given that the current 2-year rate is 4.1% and the 1-year rate is 4.3%, what is the expected 1-year rate one year from now? (Answer: 3.9%. Why?)

Homework (due with the second midterm exam):

1. Given that the current 2-year rate is 4% and the 1-year rate is 3%, what is the expected 1-year rate one year from now?

2. Based on current indicators like the yield curve and Federal Reserve actions, do you think a recession is likely in 2025? Why or why not?

Is A Recession Coming For The U.S. Economy?

Simon Moore Aug 30, 2024,12:08pm EDT

https://www.forbes.com/sites/simonmoore/2024/08/30/is-a-recession-coming-for-the-us-economy/

The U.S. economy grew at a healthy 3% annual rate as of the latest Q2 GDP report. However, as the Federal Reserve signals that interest rate cuts are likely, what are the risks? A 2024 recession is generally seen as unlikely, but metrics that economics take seriously hint that a recession could occur, perhaps in 2025.

Two Key Indicators Call A Recession

Two historically proven indicators suggest a recession could be coming. The first is the Sahm Rule, this implies that when inflation rises materially within a year, a recession is likely on the way. That’s because jobs are so important to the economy. When people lose their jobs, they typically cut back on spending. That can slow growth.

For example, the Employment Situation Report for July 2024, showed unemployment at 4.3% up from 3.5% a year earlier. These are still relatively low unemployment figures, but the increase is a concern for some economists.

Secondly, the yield curve has now been calling for a recession for two years now. Currently, analysis by the New York Federal Reserve suggests that using the yield curve metric, the chance of a recession in the next 12 months is about 50%.

Essentially, this analysis implies that as the Federal Open Market Committee raises interest rates, as they have done up to July 2023, so a future recession becomes likely. That relationship is historically robust. However, this economic cycle has been unusual in many respects, and the yield curve indicator has been wrong so far.

Assessment of a 2024 Recession

A recession typically comes with 2 quarters of negative growth. We’re running out of time for that to happen in 2024 because the first half of the year saw positive economic growth. Therefore, if a 2024 recession were occurring, it would have to have already begun. Of course, that’s not impossible given the economic data is reported with a lag.

Forecasting market Kalshi, currently puts the chance of a 2024 recession at around 9%. However, some economists are more pessimistic. For example, J.P. Morgan estimate a 2024 recession probability of about 1 in 3 as of August 15 based primarily on labor market risks as well as some softness in manufacturing and the Euro area. However, it is worth noting that economists do have a record of forecasting recessions more frequently than they occur.

What To Expect

The stock market is a powerful recession indicator, too. It often declines ahead of economic weakness. After some concern in early August caused a sell-off, the S&P 500 has currently rebounded to almost its recent high. This suggests a recession may not be imminent in the eyes of financial markets.

Nonetheless, correctly calling a recession is a challenge and the two metrics that do have particularly impressive forecasting records are calling for a recession currently. These are the Sahm Rule and the yield curve. However, there have been many unique aspects to the pandemic recovery and relatively robust recession predictors getting it wrong may be another quirk of this economic cycle.

Still, the next jobs report on September 6 will be closely watched. Unemployment has been on a steadily increasing path for 2024 albeit of historically low levels. It remains to be seen to what extent the U.S. economy can continue to grow should unemployment move up further from here.

~ Let's learn about bonds by playing the Bond Game! ~

Check it out at https://www.jufinance.com/game/bond

~ Second Midterm Exam Announcement ~ Solutions

Date: October 29, 2024
Location: In the classroom
Format: Closed book and closed notes

The exam will include:

• 50 True/False questions
• 3 Short answer questions

This exam is non-cumulative, meaning it will only cover material from after the first midterm.

~ Study Guide ~

1. Understanding Order Types

• Limit Buy
• Market Buy
• Limit Sell
• Market Sell
• Stop Buy
• Stop Sell
• Short Sell

2. Call and Put Options Basics

• Definition, traits (strike price, premium, expiration)
• Difference between Call and Put options

3. Why Diversify?

• Lowering risk
• Steady returns
• Protection from market shocks

4. Understanding the S&P 500

• What is the S&P 500 index?
• How does it represent the U.S. stock market?

5. Company Weighting in the S&P 500

• Largest companies by weight (Apple, Microsoft, Nvidia, etc.)
• How company weighting affects the index.
• Impact of high-tech companies on the index's performance.

6. S&P 500 Sector Weighting

• Key sectors: Technology, Healthcare, Financials, Consumer Staples, etc.
• Sector performance and how it impacts overall index performance.

7. Diversification and Risk

• Why diversification across sectors and companies is essential.
• Risks of investing in a few high-weight companies.

8. Comparing ETFs: SPY vs. QQQ

• Differences in composition and risk between SPY (S&P 500 ETF) and QQQ (Nasdaq 100 ETF).

9. Growth vs. Value Stocks

• Definition of growth stocks (e.g., Nvidia, Amazon) and value stocks (e.g., JPMorgan, Berkshire Hathaway).
• Differences in risk, return potential, and investment strategies.
• How these categories are represented in the S&P 500.

10. Understanding Yield Curves and Economic Indicators

• What is a yield curve and its relevance to the economy.
• Inverted vs. normal yield curves and what they signal about economic health.
• How yield curves affect stock market expectations, especially within the S&P 500.

11. Behavioral Finance and Investing Biases

• Concepts like anchoring, herding, overconfidence, and disposition effect.
• How behavioral biases affect investment decisions in the stock market.
• Strategies to avoid common cognitive biases when investing.

12. Risk Tolerance and Personal Investment Strategy

• Understanding and evaluating personal risk tolerance.

13. Bond Market Overview and Comparisons

• Difference between government, corporate, and junk bonds.
• Role of bonds in a diversified portfolio.
• Understanding bond duration and its impact on interest rate sensitivity.

14. Bond Rating Agencies and Altman Z-score

• The Three Major Rating Agencies: An overview of the three main bond rating agencies.
• Altman Z-score: Explanation of the Z-score model and its three benchmarks for assessing a company’s financial health.
• Altman Z-score in the Airline Industry: Analysis of the Altman Z-score application within the airline industry.

Short Answer Questions

1. What is the primary difference between the S&P 500 and the Nasdaq 100 (e.g., QQQ)?

• Key Concepts: Index composition, sector concentration, and risk profiles.

2. Explain why diversification is important in portfolio management and how it can reduce risk.

• Key Concepts: Sector diversification, risk mitigation, and the impact of market volatility.

3. What does an inverted yield curve indicate about the economy, and why is it often considered a predictor of a recession?

• Key Concepts: Yield curve shapes, interest rates, economic forecasts.

4. Describe the main difference between growth stocks and value stocks. Provide an example of each from the S&P 500.

• Key Concepts: Risk, return potential, and investment strategies.

5. What are the different types of bonds (e.g., government, corporate, municipal), and how do they vary in terms of risk and return?

• Key Concepts: Bond types, issuers, credit risk, interest rate risk, and liquidity.

6. In behavioral finance, what is the disposition effect, and how can it negatively impact an investor's portfolio performance?

Bitcoin Basics: From Transactions to Technology

The Basics of Bitcoins and Blockchains on youtube (FYI)

(from 4:31:00 - …) (from 4:57:41 - …) (from 5:32:27 - …)

Part I - Blockchain in general, and Bitcoin

· PPT

· Quiz

· Self-produced video: Understanding Bitcoin

· Also watch Blockchain Full Course - 4 Hours |Simplilearn (from beginning to 1:20:10) (FYI only)

o https://www.youtube.com/watch?v=SyVMma1IkXM&t=4849s

· Bitcoin Supply Game

1. What is Bitcoin?

• Definition: Bitcoin is a decentralized digital currency, created in 2009 by an unknown person or group of people using the pseudonym Satoshi Nakamoto. It operates without a central authority or banks.
• How it works: Bitcoin transactions are recorded on a public ledger called the blockchain, which is maintained by a network of computers (nodes).

2. The Technology Behind Bitcoin

• Blockchain: The concept of blockchain as a distributed ledger that records all transactions across a network of computers. Each block in the chain contains a list of transactions and is linked to the previous block, forming a chain.
• Mining: The process of mining, where participants (miners) use computational power to solve complex mathematical problems that validate and secure transactions on the Bitcoin network. In return, miners are rewarded with newly created bitcoins.

3. Why Bitcoin?

• Decentralization: Unlike traditional currencies, Bitcoin is not controlled by any central government or institution. This decentralization is a key feature that attracts many users.
• Limited Supply: There will only ever be 21 million bitcoins, which creates scarcity and can drive demand.
• Transparency and Security: Bitcoin transactions are transparent and secure, thanks to the blockchain. Transactions cannot be altered once they are recorded, which provides a high level of security.

4. How to Use Bitcoin

• Transactions: Bitcoin can be used to buy goods and services, transferred between individuals, or held as an investment.
• Wallets: The concept of Bitcoin wallets, which are digital tools that allow users to send, receive, and store their bitcoins. Wallets can be software-based (like apps) or hardware-based (physical devices).

5. The Impact of Bitcoin

• Financial Innovation: Bitcoin is considered the first successful cryptocurrency and has paved the way for thousands of other digital currencies.
• Global Economy: The potential impact of Bitcoin on the global financial system, including topics like financial inclusion, remittances, and challenges to traditional banking systems.
• Challenges and Criticisms: Some challenges Bitcoin faces, such as regulatory issues, price volatility, and environmental concerns related to mining.

6. Future of Bitcoin

• Adoption: Growing acceptance of Bitcoin by businesses, investors, and even some governments.
• Technological Advancements: Mention ongoing developments, such as the Lightning Network, which aims to make Bitcoin transactions faster and cheaper.

Part II - Bitcoin Mining

· Blockchain Full Course - 4 Hours by Simplilearn (2:16:48 – 2:34:44) (FYI only)

· PPT

· Quiz

· Bitcoin_Mining_Simulator

· Self-produced video: Bitcoin Mining Explained!

1. What is Bitcoin Mining?

• Definition: Bitcoin mining is the process by which new bitcoins are created and transactions are added to the blockchain, the public ledger of all Bitcoin transactions.
• Analogy: Think of Bitcoin mining as a competitive game. In this game, participants (called miners) are trying to solve a really difficult puzzle. The first one to solve the puzzle gets to add a new block of transactions to the blockchain and is rewarded with new bitcoins.

2. The Role of Hashing

• What is Hashing? Hashing is like taking a piece of information (like a list of transactions) and running it through a special mathematical function that turns it into a unique string of numbers and letters. This string is called a "hash."
• Analogy: Imagine hashing as a blender. You put in different ingredients (transactions), blend them, and what comes out is a smoothie (the hash). Even if you slightly change the ingredients (like changing a single transaction), you’ll get a completely different smoothie (hash).

3. Proof of Work (PoW)

• Definition: Proof of Work is the mechanism that makes Bitcoin mining possible. It requires miners to solve a complex mathematical problem before they can add a new block to the blockchain. This problem is solved by finding a special kind of hash.
• How it Works:
• The puzzle miners are trying to solve involves finding a hash that starts with a certain number of zeros.
• Miners do this by trying different inputs (numbers called "nonces") until they find one that, when hashed, produces the required hash with the zeros.
• The process takes a lot of computational power because miners have to try many different nonces before they find the right one.
• Analogy: Think of PoW as a guessing game. The game asks miners to guess a number, but the only way to know if the guess is correct is to try it and see if it works. This means miners have to make many, many guesses before they get it right.

4. Why is Mining Important?

• Security: The difficulty of solving the PoW puzzle ensures that Bitcoin's blockchain is secure. Because it takes so much effort to solve, it’s practically impossible for someone to change or tamper with a block once it’s been added to the blockchain.
• Decentralization: Mining is decentralized, meaning that anyone with the right equipment can participate, which helps keep the Bitcoin network fair and secure.

5. Mining Rewards

• Block Reward: When a miner successfully solves the PoW puzzle and adds a new block to the blockchain, they are rewarded with a certain number of bitcoins. This is called the block reward.
• Transaction Fees: In addition to the block reward, miners also earn transaction fees from the transactions included in the block they added to the blockchain.

6. Environmental Concerns

• Energy Use: Mining requires a lot of computational power, which in turn requires a lot of electricity. This has raised concerns about the environmental impact of Bitcoin mining.
• Efforts to Improve: The Bitcoin community is continually looking for ways to make mining more energy-efficient, including exploring alternative consensus mechanisms and renewable energy sources.

Summary

• Bitcoin mining is the process of adding new transactions to the blockchain and earning new bitcoins as a reward.
• Hashing is used to turn transaction data into a unique code, and miners must find a specific type of hash to solve the PoW puzzle.
• PoW is a guessing game that ensures Bitcoin’s security by making it hard to alter the blockchain.

Part III – Bitcoin Wallet

· ppt

· Quiz

· Simplilearn 4 hour course (2:35:34 – 2:57:05) (FYI only)

· Crypto Wallet Simulator

· Self-produced video: Stay Safe in Crypto - MetaMask

1. What is a Bitcoin Wallet?

• Definition: A Bitcoin wallet is a digital tool that allows you to send, receive, and store your bitcoins. It’s like a bank account for your bitcoins, but instead of holding physical money, it holds digital currency.
• Analogy: Imagine a Bitcoin wallet as a real wallet you carry in your pocket. Just like you use your physical wallet to store cash, a Bitcoin wallet stores your digital money (bitcoins).

2. How Does a Bitcoin Wallet Work?

• Private Key and Public Key:
• Private Key: This is a secret code that allows you to access and control your bitcoins. It’s like the password to your bank account. If someone has your private key, they can spend your bitcoins, so it’s essential to keep it safe.
• Public Key: This is like your bank account number. It’s a code that people use to send you bitcoins. You can share your public key with others, and they can use it to send bitcoins to your wallet.
• Analogy: Think of your private key as the key to a safety deposit box. Only you should have access to this key because it gives you control over the money inside. The public key is like the address of the bank where your safety deposit box is located, which others can use to send money to your box.

3. Types of Bitcoin Wallets

• Software Wallets:
• These are apps or programs you can install on your computer or smartphone. They allow you to easily access and manage your bitcoins.
• Example: Mobile wallets like Coinbase or desktop wallets like Electrum.
• Hardware Wallets:
• These are physical devices, like a USB stick, that store your private keys offline. They are more secure because they are not connected to the internet, making them less vulnerable to hacking.
• Example: Ledger Nano S, Trezor.
• Paper Wallets:
• This is a piece of paper with your public and private keys printed on it. It’s a very secure way to store bitcoins, as long as you keep the paper safe.
• Example: You generate a paper wallet using a secure online service, then print it out and store it in a safe place.
• Analogy: If a software wallet is like an app on your phone, a hardware wallet is like a safe that you keep at home, and a paper wallet is like writing down your bank details on a piece of paper and keeping it in a safe place.

4. Why Use a Bitcoin Wallet?

• Security: A Bitcoin wallet helps keep your bitcoins safe. By securely storing your private key, you control who can access your funds.
• Convenience: Bitcoin wallets make it easy to send and receive bitcoins. You can quickly make transactions by scanning a QR code or entering an address.
• Ownership: When you have a Bitcoin wallet, you have full control over your bitcoins. No one else can access your funds unless they have your private key.

5. How to Use a Bitcoin Wallet

• Receiving Bitcoins:
• To receive bitcoins, you give someone your public key (or wallet address). They send the bitcoins to that address, and it shows up in your wallet.
• Example: You can send your friend a QR code that represents your wallet address, and they can scan it to send you bitcoins.
• Sending Bitcoins:
• To send bitcoins, you enter the recipient’s wallet address and the amount you want to send. The wallet uses your private key to authorize the transaction.
• Example: If you want to pay for something online with Bitcoin, you would enter the seller's wallet address and send the payment through your wallet.

6. Security Tips

• Backup: Always back up your wallet. If you lose your private key, you lose your bitcoins forever.
• Secure Storage: Keep your private key safe. Use hardware wallets or paper wallets for long-term storage, especially if you have a significant amount of bitcoins.
• Beware of Scams: Never share your private key with anyone, and be cautious of phishing attempts that try to steal your private key.

Summary

• A Bitcoin wallet is a digital tool that stores your private and public keys, allowing you to send, receive, and store bitcoins.
• There are different types of wallets (software, hardware, paper), each offering varying levels of security and convenience.
• Security is crucial; keep your private key safe and always back up your wallet.

(Disclaimer: Some of the slides posted on this website are screenshots from the Simplilearn 4 Hour Blockchain video at https://www.youtube.com/watch?v=SyVMma1IkXM&t=4849s)

Bitaddress.org

Bitaddress.org is an open-source, web-based tool for generating Bitcoin addresses and their corresponding private keys. It's a simple and secure way to create Bitcoin wallets offline, without needing to rely on a centralized service.

How to Use Bitaddress.org:

1. Access the Site: Go to bitaddress.org. To enhance security, you can download the site’s HTML file and run it offline.

2. Generate a Bitcoin Address:

· Move your mouse around or type random characters in the provided box to add randomness. This process helps in generating a unique Bitcoin address.

· Once enough randomness is collected, a Bitcoin address and its corresponding private key will be displayed.

3. Save Your Keys:

· You can print the generated address and private key on paper (often called a paper wallet).

· Store the printed document securely, as anyone with access to your private key can access your Bitcoin.

4. Use the Address:

· The Bitcoin address can be shared with others to receive Bitcoin.

· The private key is used to send or transfer Bitcoin from that address.

Important: Always ensure you are using Bitaddress.org securely, preferably offline, and keep your private key safe to prevent unauthorized access to your funds.

Homework (due with final)

1. Tyler and Emanuel both have purchased Bitcoin through their Robinhood accounts, where they don't have access to private or public keys.

Questions:

• Ownership: Do Tyler and Emanuel truly own the Bitcoin in their Robinhood accounts without access to the private keys?
• Transferability: Can they transfer their Bitcoin to external wallets or other platforms outside of Robinhood?
• Risks: What potential risks are associated with not having direct control over their Bitcoin holdings?
• Advice: What steps should they consider to ensure full control and security of their Bitcoin investments?

2. Layton has purchased Tether (USDT) and is storing it in a Coinbase wallet.

Question: Is Layton's USDT safe in his Coinbase wallet, or is there a risk involved? What advice would you give him regarding the security of his USDT holdings?

Hint:

• For beginners: Exodus (for ease) or Coinbase Wallet (for integration with Coinbase services): https://www.exodus.com/
• For intermediate users: Trust Wallet or Mycelium for mobile; Electrum for desktop: https://www.trustwallet.com
• For advanced users and high-security needs: Ledger Nano X, Trezor Model T, or Coldcard.

3. Given Bitcoin's divisibility into smaller units—such as millibitcoin (1 mBTC = 0.001 BTC), microbitcoin (1 μBTC = 0.000001 BTC), and satoshi (1 satoshi = 0.00000001 BTC)—should it be included in your investment portfolio? For instance, one satoshi is approximately $0.000676, making Bitcoin accessible for investment at various levels. What are the potential benefits and risks of adding Bitcoin to your portfolio?

4. What is double spending, and why is it a concern for digital currencies like Bitcoin? Describe how Bitcoin's blockchain technology helps prevent double spending.

Blockchain Full Course - 4 Hours  (1:06:26 – 1:08:31)

5. Can transactions be altered, and is this a concern for digital currencies like Bitcoin? Describe how Bitcoin's blockchain technology helps prevent data tampering..

Blockchain Full Course - 4 Hours  (1:02:50 – 1:06:26)

6. What are the differences between Bitcoin and Bitcoin Cash?

· Blockchain Full Course - 4 Hours  (1:08:31 – 1:11:34)

· Bitcoin Cash (BCH): https://bitcoincash.org/

· Bitcoin (BTC): https://bitcoin.org/en/

Websites for beginners learning about Ethereum and blockchain:

1. Ethereum Foundation Blog https://blog.ethereum.org/

• Ethereum Foundation Blog
• Official blog with updates, news, and educational articles about Ethereum.

2. Consensys Academy https://consensys.io/academy

• Consensys Academy
• Offers courses and resources on Ethereum development, blockchain basics, and more.

3. Blockgeeks

• Blockgeeks
• Provides educational articles, guides, and courses on blockchain technology and Ethereum.

4. Coursera - Blockchain Specialization

• Coursera Blockchain Specialization
• A series of courses by top universities on blockchain technology, including an introduction to Ethereum.

5. CryptoCompare

• CryptoCompare
• Provides data, news, and educational resources on cryptocurrencies and blockchain technology.

6. CoinDesk

• CoinDesk
• Leading news website that covers blockchain, Ethereum, and cryptocurrency trends and developments.

7. DappRadar

• DappRadar
• A platform for exploring and tracking decentralized applications (dApps) across multiple blockchains.

8. The Ethereum Reddit Community

• Ethereum Subreddit
• A community forum where beginners can ask questions, share information, and learn more about Ethereum.

9. Binance Academy https://academy.binance.com/\

• Binance Academy
• Provides educational resources on blockchain, cryptocurrency, and decentralized finance (DeFi).

Ethereum 101: Smart Contracts, DApps, and the Future of Decentralization

Part I – What is Ethereum? A Comparison between Ethereum and Bitcoin Quiz

What is Ethereum?

· Simplilearn 4 hour Blockchain Video (from 1:26:00 – 2:19:34 )

· Self-produced video: Ethereum 2.0 & Smart Contracts: Simple Guide to Key Concepts

1. Introduction to Ethereum

• Definition: Ethereum is a decentralized, open-source blockchain platform that enables developers to build and deploy decentralized applications (dApps) and smart contracts. It was proposed by Vitalik Buterin in 2013 and launched in 2015.
• Purpose: While Bitcoin was created as a digital currency, Ethereum was designed to be a more versatile platform, allowing for the creation of decentralized applications beyond just currency.

2. Key Features of Ethereum

• Smart Contracts:
• Definition: Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automatically enforce and execute the contract when certain conditions are met, without the need for intermediaries.
• Example: Imagine a vending machine as a smart contract. You insert money, select a product, and the machine automatically delivers it to you. There's no need for a cashier because the contract (machine) handles everything.
• Ethereum Virtual Machine (EVM):
• Definition: The EVM is a global decentralized computer that runs the smart contracts on the Ethereum network. It allows anyone to execute code in a decentralized manner, ensuring that the same result is achieved everywhere.
• Decentralized Applications (dApps):
• Definition: dApps are applications that run on a blockchain network rather than a central server. They leverage Ethereum’s smart contracts to function without a central authority.
• Example: A decentralized social media platform where users control their data, and no single entity can censor or remove content.

3. A Comparison between Bitcoin and Ethereum

· Simplilearn 4 hour video (2:57:06 – 3:03:00)

Feature	Bitcoin	Ethereum
Primary Purpose	Digital currency (peer-to-peer transactions)	Platform for decentralized applications and smart contracts
Launch Year	2009	2015
Founder	Satoshi Nakamoto (pseudonymous)	Vitalik Buterin
Native Cryptocurrency	Bitcoin (BTC)	Ether (ETH)
Supply	Maximum supply of 21 million BTC	No fixed supply; continuous issuance of ETH
Blockchain Structure	Simple, secure, focused on transactions	Complex, programmable, supports smart contracts and dApps
Consensus Mechanism	Proof of Work (PoW)	Transitioning from PoW to Proof of Stake (PoS) with Ethereum 2.0
Transaction Speed	~10 minutes per block	~15 seconds per block
Scalability	Handles ~7 transactions per second (TPS)	More scalable; ongoing upgrades like Ethereum 2.0 aim to further improve scalability
Smart Contracts	Not supported	Fully supported; core feature of the platform
Decentralized Applications (dApps)	Not supported	Fully supported; numerous dApps are built on Ethereum
Use Case	Digital money, store of value	Platform for building decentralized applications and smart contracts
Energy Efficiency	Energy-intensive due to PoW mining	Moving towards energy efficiency with PoS in Ethereum 2.0
Nickname	Often referred to as "Digital Gold"	Sometimes called "Programmable Blockchain"

Part II – Ethereum Mining

1. What is Ether Mining?

• Definition: Ether mining is the process of validating transactions on the Ethereum blockchain and adding them to the public ledger. Miners use computational power to solve complex mathematical puzzles, and in return, they are rewarded with newly created Ether.

2. How Ether Mining Works

• Proof of Work (PoW): Ethereum currently uses the Proof of Work (PoW) consensus mechanism, similar to Bitcoin. Miners compete to solve cryptographic puzzles, and the first one to solve it gets to add a block of transactions to the blockchain and earns Ether as a reward.
• Hashing: To solve the puzzle, miners use a hashing function (specifically, Ethash for Ethereum). They repeatedly process the block data through the hashing function with different "nonces" (random numbers) until they find a hash that meets the network’s difficulty target.

3. Equipment Needed

• Mining Hardware: To mine Ether, you need a powerful computer with a high-performance GPU (Graphics Processing Unit). GPUs are preferred for mining because they are more efficient than CPUs for the type of calculations involved in mining.
• Mining Software: You’ll need mining software that connects your hardware to the Ethereum network. Popular mining software includes Ethminer, PhoenixMiner, and Claymore.
• Ethereum Wallet: You’ll need an Ethereum wallet to store the Ether you mine. This can be a software wallet (like MetaMask) or a hardware wallet (like Ledger or Trezor) for added security.

4. Mining Solo vs. Joining a Pool

• Solo Mining: In solo mining, you mine independently. While the rewards can be significant if you solve a block, it’s highly competitive and may take a long time before you find a block.
• Mining Pool: Most miners join a mining pool, where multiple miners work together to solve blocks. The rewards are shared among all participants based on the amount of computational power they contribute. This provides more consistent, though smaller, earnings.

5. Steps to Start Mining Ether

1. Set Up Hardware: Install and configure your mining hardware, ensuring you have a powerful GPU.
2. Install Mining Software: Download and install your chosen mining software.
3. Join a Mining Pool: If you prefer, join a mining pool to increase your chances of earning rewards regularly.
4. Start Mining: Begin mining by running the mining software, which will connect your hardware to the Ethereum network and start solving cryptographic puzzles.
5. Monitor and Optimize: Regularly monitor your mining performance and optimize your setup to ensure efficient mining.

6. Transition to Proof of Stake (PoS)

• Ethereum 2.0: Ethereum is transitioning from Proof of Work (PoW) to Proof of Stake (PoS) with Ethereum 2.0. In PoS, validators are chosen to create new blocks based on the amount of Ether they hold and "stake." This transition will eventually make mining obsolete as the network moves towards staking.

Part III – Smart Contract (FYI) Quiz

· Simplilearn 4 hour video (from 1:27:14 to 2:13:44 )

· Self-produced video on smart contract

1. Definition

• Smart Contract: A smart contract is a self-executing contract with the terms of the agreement directly written into lines of code. It automatically enforces and executes the contract when certain conditions are met, without the need for intermediaries like lawyers or banks.

2. How Smart Contracts Work

• Code and Conditions: The smart contract is programmed to perform specific actions when certain predefined conditions are met. For example, a smart contract could be set up to transfer ownership of a digital asset automatically when payment is received.
• Decentralization: Smart contracts run on a decentralized blockchain network like Ethereum, meaning no single entity controls them. Once deployed, they are immutable (cannot be changed) and transparent, with the code visible to all participants.

3. Example of a Smart Contract

• Real Estate Transaction: Imagine buying a house through a smart contract. The contract could be programmed to automatically transfer ownership of the property to the buyer when the agreed payment is received. This eliminates the need for a middleman, like a lawyer, to verify and process the transaction.

Software Needed for Smart Contracts

1. Development Environment

• Solidity: Solidity is the most commonly used programming language for writing smart contracts on the Ethereum blockchain. It’s similar to JavaScript in syntax and is specifically designed for developing smart contracts.
• Remix IDE: Remix is an online Integrated Development Environment (IDE) that allows developers to write, compile, and deploy smart contracts in Solidity. It’s beginner-friendly and widely used for Ethereum smart contract development.

2. Blockchain Network

• Ethereum: Ethereum is the most popular blockchain platform for deploying smart contracts. It provides a decentralized environment where smart contracts can be executed securely and transparently.
• Testnets: Before deploying a smart contract on the Ethereum mainnet (the live blockchain), developers typically use testnets like Ropsten or Rinkeby to test their contracts. This allows them to identify and fix any issues without risking real Ether.

3. Wallet and Blockchain Interface

• MetaMask: MetaMask is a browser extension wallet that allows users to interact with Ethereum dApps and smart contracts. It also provides a way to manage your Ether and deploy smart contracts.
• Truffle Suite: Truffle is a development framework for Ethereum that provides tools for compiling, deploying, and managing smart contracts. It’s often used in larger, more complex smart contract projects.

Why Do We Need Smart Contracts?

1. Automation

• Self-Executing: Smart contracts automate processes that would normally require manual intervention. For example, a smart contract can automatically release funds when a task is completed or a condition is met, reducing the need for middlemen.

2. Trust and Transparency

• Immutable and Transparent: Once deployed, smart contracts cannot be altered, ensuring that the terms of the agreement are always enforced as written. The contract’s code is also visible to everyone on the blockchain, which increases transparency and trust among participants.

3. Cost Efficiency

• Reduced Costs: By eliminating intermediaries (like lawyers, notaries, or escrow services), smart contracts reduce transaction costs. This is especially beneficial in industries like finance, real estate, and supply chain management, where traditional processes can be slow and expensive.

4. Security

• Blockchain Security: Smart contracts benefit from the security of the underlying blockchain. Since they are decentralized and cryptographically secure, they are highly resistant to fraud, tampering, and censorship.

5. Global Reach

• Borderless: Smart contracts can be used globally without the need for intermediaries or cross-border legal considerations, making them ideal for international transactions and agreements.

Summary

• Smart contracts are self-executing contracts written in code that automatically enforce and execute agreements without intermediaries.
• They require specific software tools, including Solidity for programming, Remix for development, and Ethereum as the blockchain platform.
• Smart contracts offer automation, transparency, cost efficiency, security, and global reach, making them valuable in many industries.

Part IV – Solidity Coding Simplilearn 6 hour video (from 1:26:00–2:41:55 ) (FYI)

1. Introduction to Solidity

• Definition: Solidity is a high-level programming language designed specifically for writing smart contracts on the Ethereum blockchain. It’s statically typed and contract-oriented, meaning it allows developers to define the data structure and functions that will govern the behavior of the smart contract.
• Similarities to JavaScript: Solidity syntax is similar to JavaScript, making it easier to learn for those who are already familiar with web development.

2. Purpose of Solidity

• Smart Contract Development: Solidity is used to create smart contracts that can handle various functions, such as transferring tokens, enforcing agreements, creating decentralized applications (dApps), and more.
• Blockchain Interaction: Contracts written in Solidity can interact with the Ethereum blockchain, allowing developers to create decentralized and secure applications.

How to Compile and Deploy a Solidity Contract

1. Writing a Smart Contract

• Using Solidity: Start by writing the smart contract in Solidity. You can use a basic text editor, but it’s better to use a specialized Integrated Development Environment (IDE) like Remix.
• Example Contract:

pragma solidity ^0.8.0;
 
contract SimpleStorage {
 uint256 storedData;
 
 function set(uint256 x) public {
 storedData = x;
 }
 
 function get() public view returns (uint256) {
 return storedData;
 }
}

• Explanation: In this simple contract, there is a variable storedData that can be set and retrieved through the set and get functions.

2. Compiling the Smart Contract

• Using Remix IDE:

• Open Remix at remix.ethereum.org.
• Create a new file and paste your Solidity code into the editor.
• Select the compiler version (e.g., 0.8.0) that matches the pragma statement in your code.
• Click on the "Compile" button. If there are no errors, your contract will be compiled into bytecode, which is what the Ethereum Virtual Machine (EVM) can execute.

• Output: The compiler will generate ABI (Application Binary Interface) and bytecode, which are essential for deploying and interacting with the contract.

3. Deploying the Smart Contract

• Using Remix with MetaMask:

• Set Up MetaMask: Install the MetaMask browser extension and set up a wallet. Make sure you have some Ether in your wallet for gas fees (you can use test Ether on a test network like Ropsten).
• Deploy: In Remix, switch to the "Deploy & Run Transactions" tab. Select "Injected Web3" as the environment to connect Remix with MetaMask.
• Deploy the Contract: Select your contract from the dropdown and click "Deploy." MetaMask will prompt you to confirm the transaction, which includes paying a gas fee.
• Confirm Deployment: Once confirmed, the contract will be deployed to the Ethereum network (or testnet), and you’ll receive a contract address where it resides on the blockchain.

Procedure Summary

1. Write your smart contract in Solidity using an IDE like Remix.
2. Compile the contract using the built-in compiler in Remix, generating ABI and bytecode.
3. Deploy the contract to the Ethereum network via Remix and MetaMask.
4. Interact with the deployed contract using the contract’s functions through Remix or any other Ethereum interface.

Conclusion

• Solidity coding allows developers to create and deploy smart contracts on the Ethereum blockchain.
• Compiling and deploying a contract involves writing the code, compiling it to generate bytecode, and deploying it to the Ethereum network using tools like Remix and MetaMask.
• Troubleshooting involves addressing common issues like syntax errors, gas limits, and network connectivity problems. Regular practice and careful attention to detail can help avoid many of these issues.

Part V – DApp (Decentralized Application) and DAO (FYI)

· Simplilearn 4 hour video (from 3:02:31 to 3:09:15 )

1. Definition

• DApp: A decentralized application (DApp) is an application that runs on a decentralized network, typically a blockchain like Ethereum, rather than on a centralized server. Unlike traditional apps, DApps are not controlled by a single entity and operate on a peer-to-peer network.

2. Key Characteristics of DApps

• Decentralization: DApps are built on a blockchain, which is maintained by a distributed network of computers (nodes) rather than a single central authority. This ensures that no single entity has control over the application.
• Open Source: Most DApps are open source, meaning their code is available for anyone to inspect, use, and modify. This transparency helps build trust among users.
• Smart Contracts: DApps use smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. These contracts automate various functions of the DApp without needing intermediaries.
• Tokenization: Many DApps have their own tokens, which can be used within the application for various purposes, such as payments, voting, or rewarding users. These tokens are often created using Ethereum’s ERC-20 or ERC-721 standards.

3. How DApps Work

• Frontend: Like traditional apps, DApps have a user interface (frontend) that users interact with. This can be a website, mobile app, or any other user interface.
• Backend: Unlike traditional apps, the backend of a DApp consists of smart contracts deployed on a blockchain. The logic and data of the DApp are stored on the blockchain, making it immutable and transparent.
• Interacting with the Blockchain: Users interact with the DApp through a web browser that connects to the blockchain. For example, MetaMask is a popular browser extension that allows users to interact with Ethereum-based DApps.

4. Examples of DApps

• Decentralized Finance (DeFi): Platforms like Uniswap (a decentralized exchange) and Aave (a lending platform) allow users to trade and lend cryptocurrencies without relying on traditional financial institutions.
• Gaming: Games like CryptoKitties allow users to buy, breed, and trade virtual cats as non-fungible tokens (NFTs). These assets are owned by the users and exist on the blockchain.
• Social Media: Platforms like Steemit offer decentralized social networks where users can earn tokens for creating and curating content, with no central authority controlling the platform.

Why Do We Need DApps?

1. Trust and Security

• Transparency: Because DApps run on a blockchain, all transactions and actions are transparent and verifiable by anyone. This reduces the need to trust a central authority.
• Security: DApps are more resistant to hacking and censorship because they are decentralized. Even if one part of the network goes down or is compromised, the rest of the network continues to function.

2. User Control and Ownership

• Data Ownership: In traditional apps, user data is often controlled and monetized by the company that owns the app. In DApps, users have greater control over their data, which is stored on the blockchain and cannot be easily tampered with.
• Asset Ownership: In DApps that involve digital assets (like tokens or NFTs), users truly own their assets. For example, if you own an NFT in a DApp, it is stored on the blockchain and cannot be taken away by anyone.

3. Innovation and Accessibility

• Global Access: DApps are accessible to anyone with an internet connection, making them available globally without the restrictions of traditional apps (like geographical restrictions or the need for a bank account).
• Innovation: DApps enable new types of applications that weren’t possible before, such as decentralized finance (DeFi) platforms, decentralized exchanges, and blockchain-based games.

Challenges and Considerations

1. Scalability

• Performance Issues: Since DApps run on a decentralized network, they can face scalability issues, such as slower transaction times and higher fees, especially during periods of high network congestion.
• Ongoing Development: Developers are continuously working on solutions to improve the scalability and performance of DApps, such as layer 2 scaling solutions and more efficient consensus mechanisms.

2. User Experience

• Complexity: Using DApps can be more complex than traditional apps, especially for users who are not familiar with blockchain technology. For example, users need to manage private keys and interact with smart contracts, which can be confusing for beginners.
• Improving Accessibility: Efforts are being made to improve the user experience of DApps, making them more accessible to mainstream users without compromising their decentralized nature.

Conclusion

• DApps are decentralized applications that run on blockchain networks, offering transparency, security, and user control.
• They leverage smart contracts to automate processes and often use tokens for various functions within the app.
• DApps are increasingly popular in fields like decentralized finance (DeFi), gaming, and social media, although they face challenges like scalability and user experience.

Part VI – Real World Examples

1. Walmart – Supply Chain Management

· Overview: Walmart uses blockchain technology to improve the traceability and transparency of its food supply chain. This implementation helps Walmart quickly identify and address issues such as contamination or recalls, ensuring food safety and reducing waste.

· Blockchain Platform: IBM Food Trust (built on Hyperledger Fabric) https://www.ibm.com/products/supply-chain-intelligence-suite/food-trust

· Website:

• Walmart's Blockchain Initiative: IBM Food Trust for Walmart
• IBM Food Trust: IBM Food Trust

· Additional Information: Walmart was one of the first major retailers to adopt blockchain for supply chain management, initially focusing on tracing pork and leafy greens to enhance food safety.

2. Maersk – Shipping and Logistics with TradeLens

· Overview: Maersk, in collaboration with IBM, developed TradeLens, a blockchain-based platform designed to streamline global shipping processes. TradeLens enhances transparency, reduces paperwork, and increases efficiency by providing real-time access to shipping data and documents.

· Blockchain Platform: TradeLens (built on Hyperledger Fabric)

· Website: TradeLens https://www.tradelens.com/

· Additional Information: TradeLens has partnered with numerous shipping companies, ports, and customs authorities worldwide to create a more connected and efficient global trade ecosystem.

3. De Beers – Diamond Provenance Tracking with Tracr

· Overview: De Beers uses the Tracr platform to track diamonds from the mine to the retail point. This ensures that each diamond is ethically sourced and conflict-free, enhancing consumer trust and maintaining the integrity of their supply chain.

· Blockchain Platform: Tracr (developed by De Beers)

· Website: De Beers Tracr https://www.tracr.com/

· Additional Information: Tracr allows consumers to verify the origin and journey of their diamonds, promoting transparency and ethical sourcing in the diamond industry.

4. Nestlé – Food Supply Chain Transparency

· Overview: Nestlé leverages blockchain technology to enhance the transparency and traceability of its food products. By tracking ingredients through the supply chain, Nestlé ensures quality, safety, and ethical sourcing.

· Blockchain Platform: IBM Food Trust (built on Hyperledger Fabric)

· Website: Nestlé and IBM Food Trust https://www.ibm.com/blogs/think/2019/04/tracing-your-mashed-potatoes-on-ibm-blockchain/

· Additional Information: Nestlé's participation in IBM Food Trust helps the company monitor the supply chain in real-time, ensuring that products meet safety standards and are sourced responsibly.

5. FedEx – Package Tracking and Logistics

· Overview: FedEx explores blockchain technology to improve its package tracking system, aiming for more secure and transparent tracking information for shipments. Blockchain enhances the reliability and efficiency of tracking packages through the supply chain.

· Blockchain Platform: Potential Platforms: Hyperledger Fabric, Ethereum, or proprietary solutions

· Website: FedEx Blockchain Initiatives https://www.fedex.com/en-us/about/policy/technology-innovation/blockchain.html

· Additional Information: FedEx has been involved in blockchain pilot projects to explore how distributed ledger technology can optimize logistics and reduce fraud.

6. Provenance – Supply Chain Transparency for Various Industries

· Overview: Provenance is a platform that helps businesses track the origins and journey of their products using blockchain. This ensures transparency, ethical sourcing, and allows consumers to verify product claims.

· Blockchain Platform: Ethereum and other blockchain technologies

· Website: Provenance https://www.provenance.org/

· Additional Information: Provenance works with various industries, including fashion, food, and consumer goods, to provide detailed product histories and build consumer trust through transparency.

7. Microsoft – Azure Blockchain Services

· Overview: Microsoft offers Azure Blockchain Services, enabling businesses to build, deploy, and manage blockchain applications easily. Numerous companies use Azure Blockchain to develop solutions across different industries such as finance, supply chain, and healthcare.

· Blockchain Platform: Azure Blockchain (supports multiple blockchain frameworks including Ethereum, Hyperledger Fabric)

· Website: Microsoft Azure Blockchain https://azure.microsoft.com/en-us/blog/digitizing-trust-azure-blockchain-service-simplifies-blockchain-development/

· Additional Information: Azure Blockchain provides tools and templates to help enterprises integrate blockchain into their existing systems, facilitating faster and more secure transactions.

8. JPMorgan Chase – Financial Services with Quorum

· Overview: JPMorgan Chase developed Quorum, an enterprise-focused version of Ethereum, to facilitate secure and efficient financial transactions. Quorum is used for various applications, including payment processing, interbank transfers, and blockchain-based financial instruments.

· Blockchain Platform: Quorum (a fork of Ethereum developed by JPMorgan Chase) https://phemex.com/academy/what-is-quorum-jp-morgan

· Website: Quorum by ConsenSys https://consensys.io/blog/what-is-consensys-quorum

· Additional Information: Quorum enhances Ethereum's capabilities by adding privacy features and improving performance, making it suitable for enterprise use cases in the financial sector.

9. IBM – Various Enterprise Blockchain Solutions

· Overview: IBM offers a range of blockchain solutions tailored for different industries, including supply chain, finance, healthcare, and more. IBM Blockchain, built on Hyperledger Fabric, provides the infrastructure for businesses to create secure and scalable blockchain applications.

· Blockchain Platform: IBM Blockchain (built on Hyperledger Fabric)

· Website: IBM Blockchain https://www.ibm.com/blockchain

· Additional Information: IBM collaborates with numerous enterprises to implement blockchain solutions that enhance transparency, security, and efficiency in their operations.

10. Amazon Web Services (AWS) – Managed Blockchain Services

· Overview: Amazon Web Services offers Amazon Managed Blockchain, a fully managed service that makes it easy to create and manage scalable blockchain networks using popular frameworks like Hyperledger Fabric and Ethereum.

· Blockchain Platform: Amazon Managed Blockchain (supports Hyperledger Fabric and Ethereum)

· Website: Amazon Managed Blockchain Distributed Ledger Software & Technology - Amazon Managed Blockchain - AWS

· Additional Information: AWS Managed Blockchain allows businesses to quickly set up and manage blockchain networks without the overhead of maintaining the underlying infrastructure, supporting various use cases from supply chain to digital identity.

11. Coca-Cola – Supply Chain and Product Authentication

· Overview: Coca-Cola utilizes blockchain technology to enhance its supply chain management and product authentication processes. Blockchain helps Coca-Cola track ingredients, ensure quality, and authenticate products to prevent counterfeiting.

· Blockchain Platform: IBM Food Trust (built on Hyperledger Fabric)

· Website: Coca-Cola and IBM Food Trust https://shping.com/shping-and-ibm-food-trust-pioneering-a-new-era-of-product-transparency-for-consumers/

· Additional Information: By integrating blockchain into its supply chain, Coca-Cola ensures better transparency and efficiency, from sourcing raw materials to delivering finished products.

12. Pfizer – Pharmaceutical Supply Chain Management

· Overview: Pfizer uses blockchain to improve the traceability and security of its pharmaceutical supply chain. Blockchain helps Pfizer ensure the authenticity of medicines, prevent counterfeiting, and comply with regulatory requirements.

· Blockchain Platform: Provenance, IBM Blockchain, or other enterprise blockchains

· Website: Pfizer and Blockchain Initiatives https://news.crunchbase.com/health-wellness-biotech/pharmaceuticals-blockchain-crypto-web3-pfizer-pfe/

· Additional Information: Blockchain technology enables Pfizer to maintain a secure and transparent record of its supply chain, enhancing trust and safety in its pharmaceutical products.

13. Starbucks – Coffee Supply Chain Tracking

· Overview: Starbucks has explored using blockchain to track the provenance of its coffee beans, ensuring quality and ethical sourcing. Blockchain helps verify the journey of the coffee from farm to cup, enhancing transparency and consumer trust.

· Blockchain Platform: IBM Food Trust (similar to Walmart and Nestlé)

· Website: Starbucks and Blockchain https://stories.starbucks.com/press/2022/starbucks-brewing-revolutionary-web3-experience-for-its-starbucks-rewards-members/

· Additional Information: By leveraging blockchain, Starbucks can provide customers with detailed information about the origin and quality of their coffee, supporting sustainable and ethical sourcing practices.

14. BP – Energy Supply Chain Management

· Overview: BP utilizes blockchain technology to manage and optimize its energy supply chain. Blockchain helps BP track the movement of energy resources, ensure compliance with regulations, and improve the efficiency of transactions.

· Blockchain Platform: IBM Blockchain or other enterprise solutions

· Website: BP and Blockchain https://www.hartenergy.com/exclusives/bp-tries-out-blockchain-energy-trading-30388

· Additional Information: BP's adoption of blockchain in the energy sector demonstrates how blockchain can enhance transparency, reduce costs, and improve operational efficiency in complex supply chains.

15. Anheuser-Busch InBev – Beverage Supply Chain Transparency

· Overview: Anheuser-Busch InBev uses blockchain to enhance the transparency and efficiency of its beverage supply chain. Blockchain enables the company to track ingredients, monitor production processes, and ensure the authenticity of its products.

· Blockchain Platform: IBM Food Trust (built on Hyperledger Fabric)

· Website: AB InBev and IBM Food Trust https://www.foodnavigator.com/Article/2019/08/06/Anheuser-Busch-InBev-joins-new-IBM-blockchain

· Additional Information: By integrating blockchain into its supply chain, Anheuser-Busch InBev ensures better quality control, traceability, and consumer trust in its beverage products.

Company	Application	Token Use
Walmart, Nestlé, Coca-Cola, BP	Supply Chain Management (IBM Food Trust)	No use of Ether or specific tokens; focus on transparency and traceability.
Maersk	TradeLens (Shipping and Logistics)	No use of Ether or specific tokens; focus on logistics transparency.
De Beers	Tracr (Diamond Provenance Tracking)	No use of Ether or specific tokens; ensures ethical sourcing.
FedEx	Package Tracking and Logistics	No use of Ether or specific tokens; focuses on tracking and logistics.
Provenance	Supply Chain Transparency	May use tokens depending on implementation, not necessarily Ether.
Microsoft Azure Blockchain	Blockchain Services	Token use depends on the specific application; Ether or custom tokens can be used.
JPMorgan Chase	Quorum (Enterprise Blockchain)	Can use Ether or custom tokens depending on the application; often no tokens.
Uniswap	Decentralized Finance (DeFi)	Uses Ether (ETH) for transactions and its own token (UNI) for governance.
Amazon Managed Blockchain	Managed Blockchain Services	Token use depends on the specific application; not inherently tied to Ether.
Pfizer	Pharmaceutical Supply Chain Management	No use of Ether or specific tokens; focuses on supply chain security.
Starbucks	Coffee Supply Chain Tracking	No use of Ether or specific tokens; focuses on transparency.

https://etherscan.io/

Etherscan.com is a popular blockchain explorer specifically designed for the Ethereum network. It allows users to explore and search the Ethereum blockchain for transactions, addresses, tokens, prices, and other activities.

Key Features of Etherscan:

1. Transaction Tracking:

· You can search for any Ethereum transaction by entering its transaction hash (TXID) into the search bar. This will provide details such as the amount transferred, gas fees, block confirmation, and the status of the transaction (e.g., pending, successful, failed).

2. Wallet and Address Lookup:

· Etherscan allows you to view the balance and transaction history of any Ethereum address. Just enter the wallet address in the search bar to see the current Ether balance, list of ERC-20 tokens held, and transaction history.

3. Smart Contract Interaction:

· You can view, verify, and interact with smart contracts directly on Etherscan. It shows the contract's source code, ABI (Application Binary Interface), and allows you to execute functions if the contract is verified.

4. Token Information:

· Etherscan provides information on all ERC-20 tokens, including their contract address, holders, transactions, and price data.

5. Gas Tracker:

· The site features a gas tracker that shows real-time information on Ethereum gas prices, helping users choose optimal times for transactions to minimize fees.

How to Use Etherscan:

1. Search Transactions or Addresses:

· Enter a transaction hash, wallet address, or smart contract address into the search bar to retrieve detailed information.

2. Explore Contracts:

· If you're dealing with a smart contract, you can search for it on Etherscan to review its code, check its status, or interact with it directly.

3. Check Gas Fees:

· Use the gas tracker to monitor current gas prices and plan your transactions accordingly.

4. Token Lookup:

· Search for any ERC-20 token to view its distribution, market data, and associated transactions.

Etherscan is an essential tool for anyone working with Ethereum, offering transparency and a wealth of information about the blockchain.

NFT 101 – Understanding Non-Fungible Token

· Self-produced video on NFT

· Quiz

NFT Knowledge Summary

1) Fungibility:

· NFTs are non-fungible tokens, meaning each one is unique and cannot be exchanged on a one-to-one basis like fungible tokens (e.g., Bitcoin).

· Each NFT represents a specific digital item or asset.

2) Ownership of Digital Assets:

o NFTs can represent ownership of various digital assets, including:

§ Digital art

§ Music

§ Videos

§ Collectibles

o Purchasing an NFT provides proof of ownership, similar to a certificate of authenticity.

3) Indivisibility:

· Unlike cryptocurrencies like Bitcoin, which can be divided into smaller units, NFTs are indivisible.

· An NFT exists as a whole token that cannot be split.

4) Storage on Blockchain:

o NFTs are stored on a blockchain, which is a secure digital ledger that records all transactions and ownership.

o The blockchain allows for verification of authenticity and ownership history, making it difficult to forge or counterfeit NFTs.

5) Support Across Blockchains:

· Although Ethereum is the most popular blockchain for NFTs, other blockchains like Binance Smart Chain, Flow, and Tezos also support NFT creation and trading.

6) Smart Contracts:

· NFTs utilize smart contracts, which are self-executing agreements where the terms are directly written into code.

· Smart contracts automate the transfer and ownership rules of NFTs, ensuring that transactions are executed as agreed upon without intermediaries.

7) Verification of Physical Assets:

o NFTs can be linked to physical assets (e.g., luxury goods, real estate) to provide proof of authenticity and ownership.

o This capability helps reduce fraud and ensures that buyers are purchasing genuine items.

8) Cryptocurrency Transactions:

· NFTs are primarily bought and sold using cryptocurrencies, with Ether (ETH) being the most common currency for NFT transactions.

· The use of cryptocurrency facilitates quick and secure transactions on blockchain platforms.

9) Legal Recognition:

· The legal status of NFTs is evolving, with many jurisdictions beginning to recognize them as assets that can be owned and traded.

· As the market grows, legal frameworks are being developed to address ownership, copyright, and transfer rights related to NFTs.

10) Market Popularity:

· The NFT market has seen significant growth, with high-profile sales reaching millions of dollars.

· This popularity has drawn attention from various industries, including art, gaming, and entertainment.

International Finance

Part 1 - 11/12/2024 In-Class Discussion: The Global Impact of Trump’s Economic Strategies

· Reviving U.S. Manufacturing: Can It Happen by 2025? (self-produced video)

· What A U.S. Economy Under Trump Will Look Like (CNBC, youtube)

· Quiz 1 (Tariff and Quota) Quiz 2 (MAGA)

· Discussion Platform : Interactive Discussion Platform on Trump’s International Economic Policies

Class Discussion Day 1 Video Class Discussion Day 2 video

Discussion instruction:

Welcome to our class discussion on Trump's 2024 Economic Promises, organized into nine engaging chapters. Here's how we will conduct our analysis and gather everyone's insights:

1. Chapters Overview: Each chapter focuses on a specific economic policy topic related to Trump's potential presidency. You'll find a brief explanation of the topic, followed by a key question for discussion.

2. Your Instructor's Opinion: I have shared my perspective on each topic to provide a foundation for your understanding. Feel free to agree, disagree, or bring up new ideas!

3. Group Discussions:

• Group A and Group B: You will be divided into two groups. Each group will be responsible for discussing and sharing your opinions on the questions posed.
• How to Participate: Each group member will write their thoughts in the provided text area under "What Group A Says" or "What Group B Says". Press the "Submit" button to add your opinion.

4. Exporting Your Insights: At the end of the discussion, all the collected opinions will be exported into a summary file, which we will review together as a class. This will help us understand the diversity of perspectives and engage in a broader analysis.

Tariffs and Quotas

Aspect	Tariffs	Quotas
Definition	A tax imposed on imported goods	A limit on the quantity of goods that can be imported
Purpose	To raise government revenue and protect domestic industries	To restrict the volume of imports and protect domestic production
Types	- Ad Valorem (percentage-based)	- Absolute Quotas (fixed limit)
	- Specific (fixed fee per unit)	- Tariff-Rate Quotas (low tariff up to a limit, then higher tariff)
	- Compound (combination of ad valorem and specific)
Effect on Imports	Increases the cost of imported goods, reducing their demand	Limits the quantity of imports directly, creating scarcity
Revenue Impact	Generates revenue for the government	Does not generate revenue (unless paired with tariffs)
Impact on Prices	Raises prices of imported goods, potentially leading to higher domestic prices	Can lead to higher prices due to restricted supply
Market Flexibility	Allows market to adjust based on price changes	Creates a rigid cap on imports, limiting flexibility
Administrative Ease	Easier to implement and monitor	More complex to administer and enforce
Historical Examples	- Smoot-Hawley Tariff Act	- Voluntary Export Restraints (VERs)
	- Steel tariffs in the U.S.	- Import quotas on Japanese cars in the 1980s
Pros	- Protects domestic industries	- Protects domestic producers by limiting competition
	- Generates revenue for the government	- Can be effective in reducing trade deficits
Cons	- Higher prices for consumers	- Can lead to supply shortages and higher consumer prices
	- Risk of trade wars and retaliatory tariffs	- May result in inefficiency and favoritism
Economic Efficiency	Less distortion compared to quotas	More distortion and inefficiency in the market

Policy	Year	Purpose	Outcome
Smoot-Hawley Tariff Act	1930	Protect American farmers and manufacturers	Led to global trade retaliation, worsened the Great Depression
Tariff of Abominations	1828	Protect Northern industries from cheap imports	Benefited Northern manufacturers but hurt the Southern economy; increased regional tensions
U.S. Steel Tariffs	2002	Save American steel jobs and domestic industry	Raised steel prices, hurt steel-using industries, led to WTO ruling against the U.S.; tariffs removed in 2003
Voluntary Export Restraints (VERs)	1981	Protect U.S. automobile industry from Japanese imports	Higher car prices in the U.S.; Japanese automakers established factories in the U.S.
Textile Quotas (Multi-Fiber Arrangement)	1974-2004	Protect textile industries in developed countries	Higher prices for consumers; after lifting in 2005, significant increase in imports, impacting domestic producers

Part 2 - 11/14/2024 In-Class Discussion

Class Discussion Day 2 video

Factors Determining the Value of the U.S. Dollar Quiz

Factor	Impact on $ Value	Explanation	Example	Case Study
Inflation Rate	Decreases	Higher inflation reduces purchasing power	If U.S. inflation is higher than Japan's, the U.S. dollar weakens against the yen	The U.S. dollar weakened in the 1970s due to high inflation
Interest Rates	Increases	Higher interest rates attract foreign investment	When the Federal Reserve raises rates, the dollar strengthens	In 2018, the Fed’s rate hikes boosted the dollar value
Trade Balance	Decreases if deficit widens	A higher trade deficit increases the supply of dollars globally	If the U.S. imports more than it exports, the dollar weakens	The trade deficit contributed to the dollar's fall in the early 2000s
Economic Growth	Increases	Strong economic performance attracts investors	If the U.S. economy is growing faster than Europe, the dollar strengthens	The dollar strengthened after the 2008 financial crisis recovery
Political Stability	Increases	Stable politics attract investment, raising the dollar’s value	During global crises, investors buy U.S. assets as a safe haven	The dollar strengthened during the European debt crisis
AI and Technology	Mixed	AI can boost productivity (increase value) but also create job displacement concerns (decrease value)	Widespread use of AI could improve manufacturing output but may reduce jobs	The U.S. dollar's future strength could be impacted by AI-driven economic shifts
National Debt	Decreases	High national debt may lower investor confidence and increase concerns about the U.S.'s ability to pay its obligations	If the U.S. debt grows faster than GDP, the dollar could weaken	The U.S. dollar faced pressure in the 2010s due to rising national debt

Homework (due with final)

1) How do MAGA policies use tariffs to protect American industries?

2) How can MAGA tariffs affect everyday Americans?

3) How might MAGA policies impact the U.S.’s relationships with its trading partners?

4) Can AI help bring manufacturing back to the U.S., and will it restore jobs?

5) Predict whether the U.S. dollar will strengthen or weaken during Trump’s second term from 2025 to 2028.

· Choose one: Will the U.S. dollar become stronger or weaker?

· Explain your choice in 2-3 simple sentences, thinking about factors like tariffs, trade policies, or national debt.

Term Project 2 on Trump’s Tariff Policy (due with final, option 2)

SWIFT vs. BRICS Payment System

How realistic is the BRICS ambition to reshape global trade without the US Dollar? | DW News Quiz

Russia and China’s Plan to Bypass the US Dollar (self-produced)

Takeaway Summary

· Russia and China’s Goal: Russia and China aim to reduce the dominance of the US dollar in global finance. They are not trying to fully replace the dollar as the world's reserve currency but want to create alternatives, particularly in payment systems.

· Payment Systems, Not Unified Currency: The BRICS countries are unlikely to establish a unified currency due to differences in economic and fiscal policies. Instead, they are focused on building bilateral payment systems that allow them to trade directly in their own currencies, bypassing the dollar.

· China’s Efforts: China is making significant progress with systems like CIPS, an alternative to SWIFT, which handles both messaging and settlement of payments. Additionally, China is leading initiatives like the mBridge project, a cross-border central bank digital currency effort connecting multiple countries.

· Russia’s Strategy: Since sanctions have significantly impacted Russia, it is motivated to explore financial systems that can bypass the dollar, making bilateral arrangements with countries like China more appealing.

· Overall Progress: Although progress is being made, especially since the Russia-Ukraine conflict, these initiatives remain small in scale and experimental. They are far from challenging the dollar's global role but could become more significant over time, especially for sanctions evasion and economic independence from Western systems.

Key Challenges

• Liquidity and Accessibility: The US dollar remains dominant because of its wide accessibility and the stability provided by US financial institutions. Neither the Chinese YUAN nor other currencies can yet offer the same global liquidity.
• Differences Among BRICS: The BRICS countries (Brazil, Russia, India, China, South Africa) share a desire to lessen reliance on the dollar but lack a unified vision for what an alternative system should look like, especially since countries like India maintain strong ties with the US.

Conclusion

While Russia and China are actively working to reduce the dollar's influence through alternative payment systems, significant hurdles remain, including economic differences, limited global trust in alternative currencies, and the dollar’s unmatched liquidity and stability.

Note:

mBridge (Multiple Central Bank Digital Currency Bridge) is a collaborative project aimed at creating a cross-border payment system using multiple Central Bank Digital Currencies (CBDCs). The project is led by the Bank for International Settlements (BIS) Innovation Hub, in collaboration with central banks from Hong Kong, Thailand, the United Arab Emirates, and China.

What is SWIFT? How Russian banks got cut out of the financial system (CNBC) Quiz

Key Takeaways

· SWIFT's Dominance:

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the primary messaging system used by banks globally for secure and automated cross-border payments. It has been in use for nearly five decades and connects over 11,000 financial institutions across 200+ countries.

· SWIFT Is Not a Payment System:

SWIFT is a communication platform that facilitates the secure transmission of payment instructions between banks but does not transfer money itself. Funds are moved between banks through existing account relationships or intermediaries.

· Legacy System vs. Efficiency:

Before SWIFT, international transactions relied on telex, which was slow and prone to errors. SWIFT improved the process by using standardized codes and automating payment messages, reducing costs and time delays.

· Global Influence and Sanctions:

SWIFT’s role is not limited to financial transactions; it has geopolitical significance. The US and other authorities have used SWIFT to impose economic sanctions on countries like Russia, Iran, and North Korea by excluding their banks from the network.

· Emergence of Alternatives:

Russia and China have developed alternative systems, such as Russia's SPFS (System for Transfer of Financial Messages) and China's CIPS (Cross-Border Interbank Payment System). However, these systems currently have limited reach compared to SWIFT.

· Role of Blockchain and Cryptocurrency:

Blockchain technology introduces new possibilities for international transactions, offering decentralized and transparent methods of transferring value. However, widespread adoption in traditional banking remains challenging due to integration issues and the need for education and trust.

· Limitations of Crypto for Sanctions Evasion:

Cryptocurrencies are not a perfect solution for bypassing sanctions. Blockchain transactions are publicly recorded, making them traceable. Additionally, crypto systems have safeguards to alert users when interacting with sanctioned entities.

· Network Effects:

SWIFT benefits from strong network effects, making it difficult for new systems to attract banks away from an established and efficient network. Approximately 95% of SWIFT payments are completed within 24 hours.

· Technological Evolution:

Discussions around blockchain and emerging technologies have pushed SWIFT to innovate, resulting in improvements like the Global Payments Innovation (GPI), which enhances speed, transparency, and tracking of payments.

· Future of Financial Systems:

While blockchain and central bank digital currencies (CBDCs) have the potential to transform global finance, replacing legacy systems like SWIFT will take time. The development of these technologies could eventually change the way money moves worldwide, but the transition will be gradual.

· Potential for Personal Control:

Blockchain technology gives people the choice to manage their own funds without intermediaries, while others may prefer using traditional financial services. This flexibility could shape future financial behaviors and systems.

· SWIFT’s Adaptation:

As the financial landscape evolves, SWIFT may need to adapt to integrate new types of payments, like CBDCs, to maintain relevance and continue supporting global transactions.

Term Project 3 – Develop a Stock Data Fetcher in Google Sheets

https://script.google.com/macros/s/AKfycby5vZhxEOed7AcET57IfRwkanirTqOszZ8Wtfs9OEM42vFb6As_cQaJL9wOWPF170xn/exec (example)

Step 1: Create a New Google Sheet

1. Open Your Web Browser: Go to Google Sheets.
2. Sign In: If you aren’t signed in already, use your Google account to sign in.
3. Create a New Sheet: Click on the “Blank” option to create a new, empty Google Sheet.

Step 2: Set Up the Google Apps Script

1. Open the Script Editor:
• In your new Google Sheet, click on Extensions in the top menu.
• Select Apps Script from the dropdown menu. This will open the Apps Script editor in a new tab.
2. Clear Any Default Code:
• If there is any default code in the editor, delete it to start with a blank script.
3. Paste the Script:
• Copy the following script and paste it into the editor:

// Function to serve the HTML file

function doGet() {

return HtmlService.createHtmlOutputFromFile('index');

}

function fetchStockData(ticker, startDateStr) {

var sheet = SpreadsheetApp.getActiveSpreadsheet().getActiveSheet();

// Clear previous data

sheet.getRange("A1:F1000").clearContent();

// Set the header row for daily data

sheet.getRange("A1").setValue("Date");

sheet.getRange("B1").setValue("Closing Price");

sheet.getRange("C1").setValue("Stock Name");

// Fetch and display the stock name using GOOGLEFINANCE

var stockNameFormula = `=GOOGLEFINANCE("${ticker}", "name")`;

sheet.getRange("C2").setFormula(stockNameFormula);

// Set up the formula to fetch daily data using GOOGLEFINANCE

var formula = `=GOOGLEFINANCE("${ticker}", "close", "${startDateStr}", TODAY(), "daily")`;

sheet.getRange("A2").setFormula(formula);

// Wait for the data to populate

SpreadsheetApp.flush();

// Copy the daily data into an array

var dataRange = sheet.getRange("A2:B1000").getValues();

var validData = dataRange.filter(row => row[0] && row[1]); // Remove empty rows and invalid data

if (validData.length === 0) {

return "No data available. Please check the stock ticker and date range.";

  }

// Set the header row for monthly data in columns D, E, and F

sheet.getRange("D1").setValue("Month");

sheet.getRange("E1").setValue("Closing Price");

sheet.getRange("F1").setValue("Monthly Return");

// Process data to calculate the last trading day of each month

var monthlyData = {};

validData.forEach(row => {

var date = new Date(row[0]);

var price = row[1];

var monthKey = `${date.getFullYear()}-${(date.getMonth() + 1).toString().padStart(2, '0')}`;

// Keep updating to get the last price of the month

monthlyData[monthKey] = price;

  });

// Write the monthly data and calculate returns

var previousPrice = null;

var rowIndex = 2;

for (var month in monthlyData) {

var price = monthlyData[month];

sheet.getRange(rowIndex, 4).setValue(month); // Write month in column D

sheet.getRange(rowIndex, 5).setValue(price); // Write price in column E

if (previousPrice !== null) {

var monthlyReturn = ((price - previousPrice) / previousPrice) * 100;

sheet.getRange(rowIndex, 6).setValue(monthlyReturn.toFixed(2) + "%"); // Write return in column F

    }

previousPrice = price;

rowIndex++;

  }

return "Data fetched and returns calculated successfully!";

}

4. Save the Script:
• Click on the Save icon (or press Ctrl + S).
• Name Your Project: Give it a simple name like "Stock Data Fetcher."

Step 3: Authorize and Run the Script

1. Authorize the Script:
• Click on the Run button (the ▶ icon).
• A dialog box will appear asking for permission. Click Review Permissions.
• Choose your Google account and click Allow to grant the necessary permissions.
2. Run the Script:
• After authorizing, click Run again to execute the script.

Step 4: Create the HTML File

1. In the Apps Script editor, click on the + button next to "Files" and select HTML.

2. Name the new file Index.html.

3. Paste the following HTML code into the Index.html file:

<!DOCTYPE html>

<html>

<head>

<base target="_top">

<title>Stock Data Fetcher</title>

<style>

body {

font-family: Arial, sans-serif;

margin: 20px;

    }

h2 {

color: #333;

    }

label {

display: block;

margin-top: 10px;

    }

input, button {

margin-top: 5px;

    }

.footer {

margin-top: 20px;

font-size: 12px;

color: #666;

text-align: center;

    }

</style>

</head>

<body>

<h2>Stock Data Fetcher</h2>

<label for="ticker">Stock Ticker:</label>

<input type="text" id="ticker" placeholder="e.g., AAPL, WMT" /><br>

<label for="startDate">Start Date:</label>

<input type="date" id="startDate" /><br>

<button onclick="fetchData()">Fetch Data</button>

<p id="status"></p>

<!-- Button to open the Google Sheet -->

<button onclick="openGoogleSheet()">Open Google Sheet</button>

<script>

function fetchData() {

var ticker = document.getElementById('ticker').value;

var startDate = document.getElementById('startDate').value;

// Call the Apps Script function

google.script.run.withSuccessHandler(function(response) {

document.getElementById('status').innerText = response;

      }).fetchStockData(ticker, startDate);

    }

function openGoogleSheet() {

// Replace with the URL of your Google Sheet

var sheetUrl = "YOUR_GOOGLE_SHEET_URL"; // Replace with your actual Google Sheet URL

window.open(sheetUrl, "_blank");

    }

</script>

</body>

</html>

Step 5: Deploy Your Web App

1. In the Apps Script editor, click on Deploy > New deployment.
2. Choose Web app.
3. Set the following options:
• Description: Enter a name like "Stock Data Fetcher Deployment."
• Execute as: Select Me.
• Who has access: Choose Anyone (if you want others to use it) or Only myself for private use.
4. Click Deploy and follow the instructions to authorize the app.
5. Copy the web app URL provided after deployment.

Step 6: Access and Use the Web App

1. Open the web app using the URL you copied.
2. Enter the stock ticker and start date.
3. Click Fetch Data to retrieve and display the data in your Google Sheet.
4. Share the URL so that others can use your app to fetch stock data.

Troubleshooting Tips:

1. Ensure You Have the Correct Google Sheet URL:

• Make sure to replace "YOUR_GOOGLE_SHEET_URL" in the HTML script with the correct URL of your Google Sheet.
• To copy the URL:
• Open your Google Sheet.
• Click on the address bar and copy the full URL.
• Paste this URL into the sheetUrl variable in the HTML file.

2. Set Google Sheet Share Settings:

• Open your Google Sheet.
• Click the “Share” button in the top right corner.
• In the sharing settings, select "Anyone with the link" and choose the appropriate permissions (view, comment, or edit).
• Click "Copy link" and use this link as your Google Sheet URL in the script.

3. Update the HTML Code:

• Replace the placeholder in the openGoogleSheet function with your actual Google Sheet URL:

function openGoogleSheet() {
 var sheetUrl = "YOUR_GOOGLE_SHEET_URL"; // Replace with your actual Google Sheet URL
 window.open(sheetUrl, "_blank");
}

Key Points to Remember:

• Correct URL: Ensure you copy and paste the full Google Sheet URL correctly.
• Sharing Settings: Double-check that the Google Sheet is set to "Anyone with the link" for access.

Final Exam – 11/23/2024, Closed Notes, Closed Book

~ 11/22-11/23, 118A, from 1 pm – 5 pm ~

~ Study Guide ~

Key Terms and Concepts (50 True/False Questions) Solutions

1. Bitcoin

• Definition: A decentralized digital currency created in 2009 by Satoshi Nakamoto.
• Blockchain: A distributed ledger technology that records all Bitcoin transactions.
• Mining: The process of validating transactions and adding them to the blockchain using computational power.
• Decentralization: Bitcoin operates without a central authority.
• Limited Supply: Only 21 million bitcoins will ever be created.
• Wallets: Tools for sending, receiving, and storing bitcoins. Types include software, hardware, and paper wallets.

2. Bitcoin Mining

• Proof of Work (PoW): The consensus mechanism that requires miners to solve complex puzzles to add blocks to the blockchain.
• Hashing: Converting transaction data into a fixed-length string of characters using a mathematical function.
• Mining Rewards: Miners earn block rewards and transaction fees.

3. Ethereum and Smart Contracts

• Ethereum: A decentralized platform that supports smart contracts and decentralized applications (dApps).
• Smart Contracts: Self-executing contracts with terms written in code that run on the Ethereum blockchain.
• Ethereum Virtual Machine (EVM): The runtime environment for executing smart contracts.
• Ethereum 2.0: The transition from Proof of Work (PoW) to Proof of Stake (PoS) to improve energy efficiency and scalability.

4. Blockchain Technology

• Definition: A decentralized ledger that records transactions transparently and securely.
• Use Cases: Supply chain management (Walmart, Nestlé), financial services (JPMorgan's Quorum), and global trade (Maersk's TradeLens).
• Smart Contracts: Automate agreements and reduce the need for intermediaries.
• Central Bank Digital Currencies (CBDCs): Digital currencies issued by central banks that could change the financial landscape.

5. Non-Fungible Tokens (NFTs)

• Definition: Unique digital tokens representing ownership of assets like art, music, or collectibles.
• Blockchain Storage: NFTs are stored on blockchains, ensuring authenticity and ownership.
• Smart Contracts: Govern the transfer and ownership rules of NFTs.

6. Economic Policies

• MAGA (Make America Great Again): A slogan used by Donald Trump emphasizing policies to boost American manufacturing, reduce trade deficits, and strengthen the U.S. economy.
• Tariffs: Taxes imposed on imported goods to protect domestic industries. For example, steel and aluminum tariffs were implemented to support American manufacturers.
• Quota: A limit on the quantity of a product that can be imported to protect domestic production.
• Protectionism: Economic policies aimed at protecting domestic industries from foreign competition through tariffs and trade restrictions.

7. Impact of Tariffs on the U.S. Economy

• Pros: Protects American jobs, raises government revenue, encourages domestic production.
• Cons: Increases prices for consumers, can lead to trade wars, and may hurt industries that rely on imported goods.
• Historical Examples: The Smoot-Hawley Tariff Act of 1930, which worsened the Great Depression, and the steel tariffs of 2002 that raised prices for steel-using industries.

8. Factors Determining the Value of the U.S. Dollar

• Inflation Rate: High inflation decreases the dollar's value.
• Interest Rates: Higher interest rates increase the dollar's value by attracting foreign investment.
• Trade Balance: A large trade deficit weakens the dollar.
• Political Stability: Stability attracts investment, strengthening the dollar.

9. BRICS and Their Efforts to Challenge the Dollar

• BRICS: An economic alliance consisting of Brazil, Russia, India, China, and South Africa.
• Alternative Payment Systems: BRICS countries are working on systems like Russia's SPFS and China's CIPS to bypass the U.S. dollar and SWIFT.
• Challenges: BRICS countries have differing economic goals, making it difficult to create a unified strategy against the dollar.

10. SWIFT (Society for Worldwide Interbank Financial Telecommunication)

• Function: A secure messaging system that banks use for international transactions. It does not transfer money but facilitates communication between banks.
• Global Influence: SWIFT can be used to impose sanctions on countries by disconnecting their banks from the network.
• Alternatives: Russia and China are developing systems like SPFS and CIPS, but these are not as widely adopted as SWIFT.

11. Russia and China’s Strategy

• Russia: Motivated to bypass the dollar due to sanctions, exploring bilateral trade agreements with countries like China.
• China: Developing the CIPS network and leading initiatives like the mBridge project for cross-border digital currency payments.
• Limitations: Lack of global liquidity and trust in alternative currencies compared to the dollar.

Short-Answer Questions (3 short answer questions will be selected from the following.)

1. What are the key differences between Bitcoin and Ethereum, and how do their purposes differ?

2. Explain the concept of a non-fungible token (NFT) and how it differs from a cryptocurrency like Bitcoin.

3. Explain how tariffs can protect American industries but also negatively impact consumers.

4. How does the imposition of tariffs under Trump's MAGA policies impact U.S. trade relations?

5. Describe the main purpose of SWIFT and why it is significant in global finance.

6. Discuss the impact of U.S. sanctions on countries like Russia and how this has motivated the development of alternative financial systems.

See you in 2025!