INVESTMENTS
D0M32a
2025-2026
,Investments - capital markets and products
1) financial markets
Function
Why do financial markets exist?
- They allow us to share/ transfer risk
- They allow us to separate the timing of income & consumption
o Money can be used productively
- They allow us to separate ownership & management
o If a company only has its on financial needs → limited
o Possibly agency problems → tension between managers, shareholders etc.
- They allow us to allocate resources efficiently
o Efficiency of the market= efficient allocation of resources
▪ If market assigns correct resources to company’s → optimal
Asset classes
2 broad asset classes
- Money market instruments → low risk, short-term debt securities=> allow you to save
o Depends on identity of investor
- Capital market instruments → riskier, LT, more diverse assets (stocks& bonds) => allow to
invest
➔ Each instrument = unique
Putting money aside = saving, buying a share= investment
Money market instruments
- Treasury bill (<1year) → government debt obligation
o Lowest risk
- Certificate of deposit (CD): time deposit at a bank
- Commercial paper (CP): short term unsecured debt issued by a large corporation (only issued
by trustworthy company’s)
- Bankers’ acceptance: a bank promise to pay a prespecified (= vooraf bepaald) amount
- Repurchase agreement (Repo or RP) & reverse repo: Short term loan using other securities
as collateral
- Interbank loans: short term loans among banks (wholesale market = market in between
banks) → reference rate
o €ster rate = overnight loans in between banks
o EURIBOR rates= going from 1 week to 1 year
▪ References rates used for many other products in the markets
- Central bank deposits& loans: short term deposit/loan of a bank by its central bank
o Range: 4 - 4.25 → in Europe: lower
1
, - Call loans: loans that need to be repaid, on demand at any time
o Loans that banks make to brokerage houses
o As an invester you barrow money to make investments
Most of these = low risk (“risk free”)
TED-spread (see graph) → mostly stable (nog eens bekijken)
Capital market instruments: bonds
Longer term (1year - … ) debt instruments with wide range of maturities
Various credit qualities: from high credit-quality instruments to (very) low credit-quality (junk)
instruments
Credit risk depends on issuer
Not all bonds are liquid → liquidity varies from very high to almost zero
Often in smaller denominations => they can be held by retail investors
Often not traded on the exchange, but rather traded over the counter (OTC) via dealers
Expressed as a % of the par value
Typically pay coupon interest (annual or semi-annual)
Performance measurement: hpr or yield with (including a risk premium for credit risk)
- Treasury notes: government debt with 1year < maturity < 10 years
- Treasury bonds: government debt with maturity > 10 years
- Treasury inflation-protected securities (TIPS); government debt with principal and interest
adjusted for inflation
- Federal agency/ municipal bonds: debt issued/ guaranteed by, respectively, a federal
agency, state or local government
- Corporate bonds: firms that issues debt
- Asset backed debt: proportional ownership claim in an asset pool
Capital market instruments: stocks
Stocks represent ownership in a firm
Issued by corporations
You have voting power
Risk = much higher
o Stocks represent a residual claim (you’re the last to be paid)
Equity has limited liability: you can lose it all, but not more than 100%
Performance measurement → return
To model returns → normal distribution (range: -infinity, to infinity), but is not in line with limited
liability (because max. = 100%)
2
, ➔ Work with daily returns
➔ Log (logarithm) returns: why? On a daily basis (small horizon), it will be almost identical to a
return.
o If your horizon is bigger (ex. Year) → than there will be a difference between log
returns& returns
o Advantage: you cannot have log of a negative number
≠ preferred share
2) investment funds
Economies of scale:
- Diversification and divisibility
o Divisibility: investing in a company that invests in real estate instead of directly
investing in real estate (really expensive)
- Lower transaction costs
o Professional investor will be able to transact at lower costs
- Professional management
o Asset manager should work in a professional way
▪ They have access to a lot of information (you don’t)
- Record keeping and administration
Net asset value (NAV) → fundamental value of a share in an investment company
≠ necessarily value at which you can buy the fund
Turnover rate → whenever the composition of the fund changes
Transaction costs = paid by owners of the funds (investors)
Investment companies
- Open-end fund (= mutual fund)
o managed fund with specified investment policy that issues new shares when
investors buy in and redeem shares when investors cash out (most popular)
o Priced at NAV
- Closed-end fund
o Managed by management company
o Closed end => number of shares outstanding = fixed
▪ Buy shares on the stock exchange
3
D0M32a
2025-2026
,Investments - capital markets and products
1) financial markets
Function
Why do financial markets exist?
- They allow us to share/ transfer risk
- They allow us to separate the timing of income & consumption
o Money can be used productively
- They allow us to separate ownership & management
o If a company only has its on financial needs → limited
o Possibly agency problems → tension between managers, shareholders etc.
- They allow us to allocate resources efficiently
o Efficiency of the market= efficient allocation of resources
▪ If market assigns correct resources to company’s → optimal
Asset classes
2 broad asset classes
- Money market instruments → low risk, short-term debt securities=> allow you to save
o Depends on identity of investor
- Capital market instruments → riskier, LT, more diverse assets (stocks& bonds) => allow to
invest
➔ Each instrument = unique
Putting money aside = saving, buying a share= investment
Money market instruments
- Treasury bill (<1year) → government debt obligation
o Lowest risk
- Certificate of deposit (CD): time deposit at a bank
- Commercial paper (CP): short term unsecured debt issued by a large corporation (only issued
by trustworthy company’s)
- Bankers’ acceptance: a bank promise to pay a prespecified (= vooraf bepaald) amount
- Repurchase agreement (Repo or RP) & reverse repo: Short term loan using other securities
as collateral
- Interbank loans: short term loans among banks (wholesale market = market in between
banks) → reference rate
o €ster rate = overnight loans in between banks
o EURIBOR rates= going from 1 week to 1 year
▪ References rates used for many other products in the markets
- Central bank deposits& loans: short term deposit/loan of a bank by its central bank
o Range: 4 - 4.25 → in Europe: lower
1
, - Call loans: loans that need to be repaid, on demand at any time
o Loans that banks make to brokerage houses
o As an invester you barrow money to make investments
Most of these = low risk (“risk free”)
TED-spread (see graph) → mostly stable (nog eens bekijken)
Capital market instruments: bonds
Longer term (1year - … ) debt instruments with wide range of maturities
Various credit qualities: from high credit-quality instruments to (very) low credit-quality (junk)
instruments
Credit risk depends on issuer
Not all bonds are liquid → liquidity varies from very high to almost zero
Often in smaller denominations => they can be held by retail investors
Often not traded on the exchange, but rather traded over the counter (OTC) via dealers
Expressed as a % of the par value
Typically pay coupon interest (annual or semi-annual)
Performance measurement: hpr or yield with (including a risk premium for credit risk)
- Treasury notes: government debt with 1year < maturity < 10 years
- Treasury bonds: government debt with maturity > 10 years
- Treasury inflation-protected securities (TIPS); government debt with principal and interest
adjusted for inflation
- Federal agency/ municipal bonds: debt issued/ guaranteed by, respectively, a federal
agency, state or local government
- Corporate bonds: firms that issues debt
- Asset backed debt: proportional ownership claim in an asset pool
Capital market instruments: stocks
Stocks represent ownership in a firm
Issued by corporations
You have voting power
Risk = much higher
o Stocks represent a residual claim (you’re the last to be paid)
Equity has limited liability: you can lose it all, but not more than 100%
Performance measurement → return
To model returns → normal distribution (range: -infinity, to infinity), but is not in line with limited
liability (because max. = 100%)
2
, ➔ Work with daily returns
➔ Log (logarithm) returns: why? On a daily basis (small horizon), it will be almost identical to a
return.
o If your horizon is bigger (ex. Year) → than there will be a difference between log
returns& returns
o Advantage: you cannot have log of a negative number
≠ preferred share
2) investment funds
Economies of scale:
- Diversification and divisibility
o Divisibility: investing in a company that invests in real estate instead of directly
investing in real estate (really expensive)
- Lower transaction costs
o Professional investor will be able to transact at lower costs
- Professional management
o Asset manager should work in a professional way
▪ They have access to a lot of information (you don’t)
- Record keeping and administration
Net asset value (NAV) → fundamental value of a share in an investment company
≠ necessarily value at which you can buy the fund
Turnover rate → whenever the composition of the fund changes
Transaction costs = paid by owners of the funds (investors)
Investment companies
- Open-end fund (= mutual fund)
o managed fund with specified investment policy that issues new shares when
investors buy in and redeem shares when investors cash out (most popular)
o Priced at NAV
- Closed-end fund
o Managed by management company
o Closed end => number of shares outstanding = fixed
▪ Buy shares on the stock exchange
3
