Money and Banking

Code:

LEC301

Acronym:

MF

Keywords
Classification	Keyword
OFICIAL	Economics

Instance: 2008/2009 - 1S

Active?	Yes
Responsible unit:	Grupo de Economia
Course/CS Responsible:	ECONOMICS

Cycles of Study/Courses

Acronym	No. of Students	Study Plan	Curricular Years	Credits UCN	Credits ECTS	Contact hours	Total Time
ECO	81	Official Curricular Structure since 2004	3	3		-

Teaching language

Portuguese

Objectives

For a semester, the objectives of MONEY AND BANKING may be considered quite ambicious.

The syllabus is composed of three parts, which are divided in chapters. The first two parts deal with economic theory and policy and the aims of both are: (1) to understand the different payment systems; (2) to know and quantify the monetary aggregates; (3) to understand the money creation process and the role played by the intervening economic agents, especially the Central Bank; (4) to study the instruments and conduct of monetary policy, noting the respective virtues and insufficiencies; (5) to review the theoretical perspectives of monetary policy, in particular in what concerns the impact of money on interest rates and prices.
The third and last part focuses specifically on the study of financial markets and financial instruments, in a corporate context. The student will be exposed to subjects like the structure and functions of financial markets, financial instruments, risk assessment and diversification, especially with the constitution of portfolios; determination and negotiation of forward interest rates; duration; some models of capital market equilibrium; models of equity and bond pricing.

Program

Part I

Chapter 1 – Money

1.1. Barter economies and monetary economies
1.2. Money and historical review of payment systems
1.3. Functions of money
1.4. Desirable properties of money
1.5. Measuring the quantity of money: the monetary aggregates

Chapter 2 – Money Supply

2.1. The institutional structure of the Portuguese financial system
2.2. The consolidated monetary balance sheet of the central banks of the Euro zone
2.3. The consolidated monetary balance sheet of the other monetary institutions in the Euro zone
2.4. The consolidated monetary balance sheet of the monetary financial institutions in the Euro zone
2.5. The central banks and the monetary base
2.6. Bank reserves and banking institutions
2.7. Money supply and the money multiplier
2.8. Determinants of the behaviour of the money multiplier

Chapter 3 – The Conduct of Monetary Policy

3.1. Monetary policy as an interactive system of decision taking
3.2. Classification of objectives: operational, intermediate and final
3.3. Instruments of monetary policy: general and selective
3.4. General instruments of monetary policy: the open market, the discount window and the minimum reserve requirements.
3.5. Contingencies and problems on monetary policy implementation

Part II

Chapter 4 – Theories on the Determination of Interest Rates and Prices
4.1. The Quantitative Theory of Money and its implications
4.2. The keynesian perspective
4.3. The monetarist perspective
4.4. The financing of the public deficit and inflation

Part III

Chapter 5 – Financial Markets

5.1. Segmentation and functioning of financial markets
5.2. Classification of financial markets
5.3. Instruments in the money and capital markets
5.4. The process of issuing securities
5.5. Short-selling operations
5.6. Margin accounts operations

Chapter 6 – Evaluation of Risk and Return from Financial Assets

6.1. Determinants of the demand for financial assets: risk, liquidity and return.
6.2. Risk classification
6.3. The Market Model and the quantification of risk
6.4. The constitution of portfolios
6.5. Modern Portfolio Theory
6.6. Evaluation of portfolios

Chapter 7 – Equilibrium Asset Pricing Models

7.1 The CAPM
7.2. The APT

Chapter 8 – Interest Rates

8.1. Spot and forward interest rates
8.2. Determination of forward interest rates
8.3. Implicit lending and borrowing forward interest rates
8.4. Coupon rate and coupon
8.5. Yield to maturity
8.6. Discount yield and the pricing of zero coupon bonds
8.7. Bond equivalent yield
8.8. Yield to maturity and the Coupon Effect
8.9. Some theorems on the behaviour of bond prices
8.10. Reading and interpretation of periodic financial information

Chapter 9 – The Term Structure of Interest Rates

9.1. Pure Expectations Theory
9.2. Market Segmentation Theory
9.3. Liquidity Preference Theory
9.4. Preferred Habitat Theory
9.5. The slope of the term structure

Chapter 10 – Duration

10.1. Concept and computation
10.2. Applications: measure of interest rate risk, immunization

Chapter 11 – Models of Equity and Bond Pricing

11.1. Fundamentals
11.2. The classical model with constant growth rate
11.3. The three stage model
11.4. The H-model

Mandatory literature

Fuller, R. e James Farrel; Modern Investments and Security Analysis, Mc Graw-Hill International Student Editions, 1988
Lucket, Dudley; Money and Banking, Mc Graw-Hill International Student Editions, 1986
Elton, E. e Martin Gruber; Modern Portfolio Theory and Investment Analysis, John Wiley & Sons, 1995
Mishkin, F.; The Economics of Money, Banking and Financial Markets, Harper Collins College Publishers, 2006

Complementary Bibliography

www.ecb.int
www.bportugal.pt

Teaching methods and learning activities

The course is based on a theoretical component and a practical component where students become familiar with the use of the concepts and the interpretation of results. In order to link the subjects of the course with the economic reality, news from the economic press will be read and interpreted.

Evaluation Type

Evaluation with final exam

Assessment Components

Description	Type	Time (hours)	Weight (%)	End date
Attendance (estimated)	Participação presencial	0,00
	Total:	-	0,00

Eligibility for exams

In order to be examined on the basis of three tests, students must attend a minimum number of classes. The minimum requirement is that students must attend 75% of the classes. Attendance is calculated as the ratio between the number of classes effectively attended by the student and the number of classes taught until the date of the test.

Students participating in this continuous examination process are free to choose, at any time, to be examined by means of a final exam instead.

Calculation formula of final grade

Examination by final exam: the final mark will be that obtained in the final exam.
Examination by tests: the final mark will be the weighted average of the marks obtained in the tests. In this case, the first two tests have a 25% weight each, and the third test a weight of 50%.

Examinations or Special Assignments

Examination by tests: the first two tests will take place during the classes and cover different parts of the syllabus; the third test will take place at the same time as the final exam and covers all the topics taught.

Classification improvement

As set by the “Regulamento de Avaliação de Conhecimentos”.

Observations

In case the student misses one of the tests (in the continuous examination process), he/she looses the right to continue in that examination method.