BANKING & FINANCE
International Business Management
Iman Van De Perre
1IBM11 | 2020-2021
,Table of Contents
INVESTMENTS AND FINANCING DECISIONS .................................................................................................... 4
WHAT IS CORPORATION?................................................................................................................................. 4
FINANCIAL MANAGER(S) DEFINITION: ANYONE RESPONSIBLE FOR AN INVESTMENT OR FINANCIAL
DECISION ........................................................................................................................................................... 6
GOALS OF THE CORPORATION ........................................................................................................................ 6
AGENCY PROBLEMS, EXECUTIVE COMPENSATION, AND CORPORATE GOVERNANCE ................................. 7
CORPORATE GOVERNANCE DEFINITION ........................................................................................................................................ 8
ETHICS OF MAXIMIZING VALUE ..................................................................................................................................................... 8
THE IMPORTANCE OF FINANCIAL MARKETS AND INSTITUTIONS................................................................... 9
THE FLOW OF SAVINGS TO CORPORATIONS .................................................................................................. 9
STRUCTURE OF FINANCIAL MARKETS: DEBT AND EQUITY MARKETS........................................................... 10
ISSUANCE OF DEBT INSTRUMENTS (= (FIXED)-INCOME SECURITIES/FIXED INCOME MARKET)......................................................... 10
ISSUANCE OF EQUITIES ............................................................................................................................................................... 10
STRUCTURE OF FINANCIAL MARKETS: PRIMARY AND SECONDARY MARKETS........................................... 11
PRIMARY MARKET DEFINITION (DIRECT) BV; NEW YORK STOCK EXCHANGE ................................................................................. 11
SECONDARY MARKET DEFINITION (INDIRECT) ............................................................................................................................... 11
STRUCTURE OF FINANCIAL MARKETS: EXCHANGES AND OVER-THE-COUNTER MARKETS ........................ 11
STRUCTURE OF FINANCIAL MARKETS: MONEY AND CAPITAL MARKETS .................................................... 12
FINANCIAL INTERMEDIARIES .......................................................................................................................... 12
FUNCTIONS OF FINANCIAL MARKETS AND INTERMEDIARIES ...................................................................... 14
THE CRISIS OF 2007-2008 (2009).................................................................................................................... 15
THE BANK BALANCE SHEET ............................................................................................................................ 17
SOURCES OF FUNDING ............................................................................................................................................................... 17
WHERE DOES A BANK GET ITS FUNDING? ................................................................................................................................... 17
HOW DOES A BANK USE THE MONEY IT HAS COLLECTED? ........................................................................................................... 18
BANKS CREATING MONEY ............................................................................................................................. 19
DEPOSIT MULTIPLIER OR THE THEORY OF FRACTIONAL RESERVE BANKING .................................................................................... 20
DEPOSIT MULTIPLIER .................................................................................................................................................................... 20
BANKS CREATING MONEY .......................................................................................................................................................... 21
CAPITAL ADEQUACY MANAGEMENT ............................................................................................................ 22
GENERAL PRINCIPLES OF BANK MANAGEMENT ............................................................................................................................ 22
THE BANK BALANCE SHEET: LEVERAGE & CAPITAL RATIO ........................................................................... 22
EXAMPLE..................................................................................................................................................................................... 23
FUTURE VALUES AND COMPOUND INTEREST ................................................................................................ 24
FUTURE VALUE DEFINITION ....................................................................................................................................................... 24
COMPOUND INTEREST DEFINITION (YOU GET MORE INTEREST EVERY YEAR) ............................................................................ 24
SIMPLE INTEREST DEFINITION (SAME INTEREST ALL THE TIME) ................................................................................................... 25
PRESENT VALUES............................................................................................................................................. 25
DISCOUNTED CASH FLOW (DCF) ............................................................................................................................................... 26
TIME VALUE OF MONEY (APPLICATIONS) ..................................................................................................................................... 27
MULTIPLE CASH FLOWS ................................................................................................................................... 28
FUTURE VALUE OF MULTIPLE CASH FLOWS DEFINITION ................................................................................................................ 28
CREATING VALUE WITH FINANCING .............................................................................................................. 30
TYPES OF SECURITIES .................................................................................................................................................................. 30
,EQUITY ............................................................................................................................................................ 30
DEBT................................................................................................................................................................. 30
PATTERNS OF CORPORATE FINANCING ........................................................................................................ 30
SOURCES OF FUNDS ................................................................................................................................................................... 30
Debt ratio ........................................................................................................................................................................... 30
PATTERNS OF CORPORATE FINANCING ....................................................................................................................................... 31
COMMON STOCK DEFINITION ........................................................................................................................ 31
BOOK VALUE VS MARKET VALUE DEFINITION ............................................................................................................................... 32
............................................................................................................................................................................................. 32
Calculation:......................................................................................................................................................................... 32
COMMON STOCK VOTING SYSTEMS .............................................................................................................. 33
PREFERRED STOCK .......................................................................................................................................... 33
CORPORATE DEBT (LONG TERM & SHORT TERM, BANK, GOVERNMENTS, ETC) .......................................... 34
DEFAULT RISK.............................................................................................................................................................................. 34
CORPORATE DEBT ........................................................................................................................................... 35
KIND OF BONDS ......................................................................................................................................................................... 36
SPECIAL KINDS, ALSO DEBT ............................................................................................................................ 37
ASSET BACKED BONDS ................................................................................................................................... 37
CONVERTIBLE SECURITIES DEFINITION ........................................................................................................... 37
LEVEL CASH FLOWS: PERPETUITIES AND ANNUITIES ..................................................................................... 38
.................................................................................................................................................................................................. 41
ANNUITIES DUE FORMULA ............................................................................................................................. 43
EFFECTIVE ANNUAL INTEREST RATES ............................................................................................................. 43
INFLATION AND THE TIME VALUE OF MONEY .............................................................................................. 44
INFLATION .................................................................................................................................................................................. 44
WHY MUTUAL FUNDS ...................................................................................................................................... 45
HOW (MUTUAL) FUNDS WORK ....................................................................................................................... 46
HOW FUNDS CAN EARN YOU MONEY ........................................................................................................................................ 46
NET ASSET VALUE ........................................................................................................................................... 47
CHARACTERISTICS OF FUNDS......................................................................................................................... 47
OPEN-ENDED VERSUS CLOSED FUNDS ......................................................................................................................................... 48
DIFFERENT TYPES OF FUNDS .......................................................................................................................... 48
SOME FINAL REMARKS ................................................................................................................................... 49
BONDS ............................................................................................................................................................. 51
BONDS AT INCEPTION/CREATION ............................................................................................................................................... 51
INTEREST RATES AND BOND PRICES .............................................................................................................. 52
YIELD TO MATURITY ....................................................................................................................................... 55
BOND YIELDS .............................................................................................................................................................................. 55
BOND RATES OF RETURNS ............................................................................................................................. 56
RETURN VS YIELD ........................................................................................................................................................................ 56
RETURN VS YIELD VS YIELD TO MATURITY ..................................................................................................................................... 56
THE YIELD CURVES .......................................................................................................................................... 57
NOMINAL AND REAL RATES OF INTEREST ..................................................................................................... 57
, CORPORATE BONDS AND THE RISK OF DEFAULT (WHEN COMPANY GOES BANKRUPT) ........................... 58
DEFAULT RISK.............................................................................................................................................................................. 58
PROTECTING AGAINST DEFAULT RISK .......................................................................................................................................... 60
CORPORATE BONDS ................................................................................................................................................................... 60
VENTURE CAPITAL (VC) DEFINITION .............................................................................................................. 61
WHAT? ...................................................................................................................................................................................... 61
WHO?............................................................................................................................................................... 61
SOURCES OF VENTURE CAPITAL (NOT FOR SHARES) .................................................................................................................... 61
HOW?............................................................................................................................................................... 61
THE INITIAL PUBLIC OFFERING (IPO) .............................................................................................................. 62
ARRANGING A PUBLIC ISSUE ....................................................................................................................................................... 62
Terminology ....................................................................................................................................................................... 63
UNDERWRITER SPREAD ................................................................................................................................................................ 63
UNDERPRICING OF AN IPO ........................................................................................................................................................ 63
COSTS........................................................................................................................................................................................ 63
IPO FLOWCHART ....................................................................................................................................................................... 64
UNDERWRITING ARRANGEMENTS ............................................................................................................................................... 64
INITIAL PUBLIC OFFERING BENEFITS .............................................................................................................................................. 64
THE PRIVATE PLACEMENT ............................................................................................................................... 65
GENERAL CASH OFFERS .............................................................................................................................................................. 65
RIGHTS ISSUE.............................................................................................................................................................................. 65
GENERAL CASH OFFERS .............................................................................................................................................................. 65
STOCKS AND THE STOCK MARKET ................................................................................................................ 67
MARKET VALUES, BOOK VALUES, AND LIQUIDATION VALUES.................................................................... 68
VALUING COMMON STOCK ........................................................................................................................... 68
STOCK VALUATION METHODS..................................................................................................................................................... 68
SIMPLIFIED DIVIDEND DISCOUNT MODEL....................................................................................................... 70
VALUING NON-CONSTANT GROWTH ............................................................................................................ 72
DISCOUNTED CASH FLOW MODEL .................................................................................................................. 73
NO FREE LUNCHES (NOT MANY OPPORTUNITIES ON THE STOCK MARKET) ............................................... 73
RANDOM WALK THEORY................................................................................................................................ 73
ANOTHER TOOL .............................................................................................................................................. 74
NO FREE LUNCHES – CONCLUSION............................................................................................................................................. 74
MARKET ANOMALIES AND BEHAVIOURAL FINANCE.................................................................................... 75
EFFICIENT-MARKET THEORY ......................................................................................................................................................... 75
FOREIGN EXCHANGE MARKETS ..................................................................................................................... 76
SPOT RATES ................................................................................................................................................................................ 76
FORWARD RATES ........................................................................................................................................................................ 76
HEDGING CURRENCY RISK (REDUCE RISKS) .................................................................................................. 77
HEDGING METHODS ........................................................................................................................................ 77
CALCULATIONS: .............................................................................................................................................. 78
International Business Management
Iman Van De Perre
1IBM11 | 2020-2021
,Table of Contents
INVESTMENTS AND FINANCING DECISIONS .................................................................................................... 4
WHAT IS CORPORATION?................................................................................................................................. 4
FINANCIAL MANAGER(S) DEFINITION: ANYONE RESPONSIBLE FOR AN INVESTMENT OR FINANCIAL
DECISION ........................................................................................................................................................... 6
GOALS OF THE CORPORATION ........................................................................................................................ 6
AGENCY PROBLEMS, EXECUTIVE COMPENSATION, AND CORPORATE GOVERNANCE ................................. 7
CORPORATE GOVERNANCE DEFINITION ........................................................................................................................................ 8
ETHICS OF MAXIMIZING VALUE ..................................................................................................................................................... 8
THE IMPORTANCE OF FINANCIAL MARKETS AND INSTITUTIONS................................................................... 9
THE FLOW OF SAVINGS TO CORPORATIONS .................................................................................................. 9
STRUCTURE OF FINANCIAL MARKETS: DEBT AND EQUITY MARKETS........................................................... 10
ISSUANCE OF DEBT INSTRUMENTS (= (FIXED)-INCOME SECURITIES/FIXED INCOME MARKET)......................................................... 10
ISSUANCE OF EQUITIES ............................................................................................................................................................... 10
STRUCTURE OF FINANCIAL MARKETS: PRIMARY AND SECONDARY MARKETS........................................... 11
PRIMARY MARKET DEFINITION (DIRECT) BV; NEW YORK STOCK EXCHANGE ................................................................................. 11
SECONDARY MARKET DEFINITION (INDIRECT) ............................................................................................................................... 11
STRUCTURE OF FINANCIAL MARKETS: EXCHANGES AND OVER-THE-COUNTER MARKETS ........................ 11
STRUCTURE OF FINANCIAL MARKETS: MONEY AND CAPITAL MARKETS .................................................... 12
FINANCIAL INTERMEDIARIES .......................................................................................................................... 12
FUNCTIONS OF FINANCIAL MARKETS AND INTERMEDIARIES ...................................................................... 14
THE CRISIS OF 2007-2008 (2009).................................................................................................................... 15
THE BANK BALANCE SHEET ............................................................................................................................ 17
SOURCES OF FUNDING ............................................................................................................................................................... 17
WHERE DOES A BANK GET ITS FUNDING? ................................................................................................................................... 17
HOW DOES A BANK USE THE MONEY IT HAS COLLECTED? ........................................................................................................... 18
BANKS CREATING MONEY ............................................................................................................................. 19
DEPOSIT MULTIPLIER OR THE THEORY OF FRACTIONAL RESERVE BANKING .................................................................................... 20
DEPOSIT MULTIPLIER .................................................................................................................................................................... 20
BANKS CREATING MONEY .......................................................................................................................................................... 21
CAPITAL ADEQUACY MANAGEMENT ............................................................................................................ 22
GENERAL PRINCIPLES OF BANK MANAGEMENT ............................................................................................................................ 22
THE BANK BALANCE SHEET: LEVERAGE & CAPITAL RATIO ........................................................................... 22
EXAMPLE..................................................................................................................................................................................... 23
FUTURE VALUES AND COMPOUND INTEREST ................................................................................................ 24
FUTURE VALUE DEFINITION ....................................................................................................................................................... 24
COMPOUND INTEREST DEFINITION (YOU GET MORE INTEREST EVERY YEAR) ............................................................................ 24
SIMPLE INTEREST DEFINITION (SAME INTEREST ALL THE TIME) ................................................................................................... 25
PRESENT VALUES............................................................................................................................................. 25
DISCOUNTED CASH FLOW (DCF) ............................................................................................................................................... 26
TIME VALUE OF MONEY (APPLICATIONS) ..................................................................................................................................... 27
MULTIPLE CASH FLOWS ................................................................................................................................... 28
FUTURE VALUE OF MULTIPLE CASH FLOWS DEFINITION ................................................................................................................ 28
CREATING VALUE WITH FINANCING .............................................................................................................. 30
TYPES OF SECURITIES .................................................................................................................................................................. 30
,EQUITY ............................................................................................................................................................ 30
DEBT................................................................................................................................................................. 30
PATTERNS OF CORPORATE FINANCING ........................................................................................................ 30
SOURCES OF FUNDS ................................................................................................................................................................... 30
Debt ratio ........................................................................................................................................................................... 30
PATTERNS OF CORPORATE FINANCING ....................................................................................................................................... 31
COMMON STOCK DEFINITION ........................................................................................................................ 31
BOOK VALUE VS MARKET VALUE DEFINITION ............................................................................................................................... 32
............................................................................................................................................................................................. 32
Calculation:......................................................................................................................................................................... 32
COMMON STOCK VOTING SYSTEMS .............................................................................................................. 33
PREFERRED STOCK .......................................................................................................................................... 33
CORPORATE DEBT (LONG TERM & SHORT TERM, BANK, GOVERNMENTS, ETC) .......................................... 34
DEFAULT RISK.............................................................................................................................................................................. 34
CORPORATE DEBT ........................................................................................................................................... 35
KIND OF BONDS ......................................................................................................................................................................... 36
SPECIAL KINDS, ALSO DEBT ............................................................................................................................ 37
ASSET BACKED BONDS ................................................................................................................................... 37
CONVERTIBLE SECURITIES DEFINITION ........................................................................................................... 37
LEVEL CASH FLOWS: PERPETUITIES AND ANNUITIES ..................................................................................... 38
.................................................................................................................................................................................................. 41
ANNUITIES DUE FORMULA ............................................................................................................................. 43
EFFECTIVE ANNUAL INTEREST RATES ............................................................................................................. 43
INFLATION AND THE TIME VALUE OF MONEY .............................................................................................. 44
INFLATION .................................................................................................................................................................................. 44
WHY MUTUAL FUNDS ...................................................................................................................................... 45
HOW (MUTUAL) FUNDS WORK ....................................................................................................................... 46
HOW FUNDS CAN EARN YOU MONEY ........................................................................................................................................ 46
NET ASSET VALUE ........................................................................................................................................... 47
CHARACTERISTICS OF FUNDS......................................................................................................................... 47
OPEN-ENDED VERSUS CLOSED FUNDS ......................................................................................................................................... 48
DIFFERENT TYPES OF FUNDS .......................................................................................................................... 48
SOME FINAL REMARKS ................................................................................................................................... 49
BONDS ............................................................................................................................................................. 51
BONDS AT INCEPTION/CREATION ............................................................................................................................................... 51
INTEREST RATES AND BOND PRICES .............................................................................................................. 52
YIELD TO MATURITY ....................................................................................................................................... 55
BOND YIELDS .............................................................................................................................................................................. 55
BOND RATES OF RETURNS ............................................................................................................................. 56
RETURN VS YIELD ........................................................................................................................................................................ 56
RETURN VS YIELD VS YIELD TO MATURITY ..................................................................................................................................... 56
THE YIELD CURVES .......................................................................................................................................... 57
NOMINAL AND REAL RATES OF INTEREST ..................................................................................................... 57
, CORPORATE BONDS AND THE RISK OF DEFAULT (WHEN COMPANY GOES BANKRUPT) ........................... 58
DEFAULT RISK.............................................................................................................................................................................. 58
PROTECTING AGAINST DEFAULT RISK .......................................................................................................................................... 60
CORPORATE BONDS ................................................................................................................................................................... 60
VENTURE CAPITAL (VC) DEFINITION .............................................................................................................. 61
WHAT? ...................................................................................................................................................................................... 61
WHO?............................................................................................................................................................... 61
SOURCES OF VENTURE CAPITAL (NOT FOR SHARES) .................................................................................................................... 61
HOW?............................................................................................................................................................... 61
THE INITIAL PUBLIC OFFERING (IPO) .............................................................................................................. 62
ARRANGING A PUBLIC ISSUE ....................................................................................................................................................... 62
Terminology ....................................................................................................................................................................... 63
UNDERWRITER SPREAD ................................................................................................................................................................ 63
UNDERPRICING OF AN IPO ........................................................................................................................................................ 63
COSTS........................................................................................................................................................................................ 63
IPO FLOWCHART ....................................................................................................................................................................... 64
UNDERWRITING ARRANGEMENTS ............................................................................................................................................... 64
INITIAL PUBLIC OFFERING BENEFITS .............................................................................................................................................. 64
THE PRIVATE PLACEMENT ............................................................................................................................... 65
GENERAL CASH OFFERS .............................................................................................................................................................. 65
RIGHTS ISSUE.............................................................................................................................................................................. 65
GENERAL CASH OFFERS .............................................................................................................................................................. 65
STOCKS AND THE STOCK MARKET ................................................................................................................ 67
MARKET VALUES, BOOK VALUES, AND LIQUIDATION VALUES.................................................................... 68
VALUING COMMON STOCK ........................................................................................................................... 68
STOCK VALUATION METHODS..................................................................................................................................................... 68
SIMPLIFIED DIVIDEND DISCOUNT MODEL....................................................................................................... 70
VALUING NON-CONSTANT GROWTH ............................................................................................................ 72
DISCOUNTED CASH FLOW MODEL .................................................................................................................. 73
NO FREE LUNCHES (NOT MANY OPPORTUNITIES ON THE STOCK MARKET) ............................................... 73
RANDOM WALK THEORY................................................................................................................................ 73
ANOTHER TOOL .............................................................................................................................................. 74
NO FREE LUNCHES – CONCLUSION............................................................................................................................................. 74
MARKET ANOMALIES AND BEHAVIOURAL FINANCE.................................................................................... 75
EFFICIENT-MARKET THEORY ......................................................................................................................................................... 75
FOREIGN EXCHANGE MARKETS ..................................................................................................................... 76
SPOT RATES ................................................................................................................................................................................ 76
FORWARD RATES ........................................................................................................................................................................ 76
HEDGING CURRENCY RISK (REDUCE RISKS) .................................................................................................. 77
HEDGING METHODS ........................................................................................................................................ 77
CALCULATIONS: .............................................................................................................................................. 78
