2022
Introduction to the
financial markets
BASED ON POWERPOINT WITH TEXTBOOK
1E BACHELOR HANDELSINGENIEUR
,Unit 1 – The financial system
1.THE ACTORS
In this financial system and in the economy, there are two main parties
Haves or lenders Have-nots or borrowers
= possess capital and can lend it out = have more needs than money and they will have to
raise capital
Example Example
- Households = MAIN ACTOR* - Corporates = bedrijven
- Government
- The financial industry (e.g. banks)
= haves can always fulfill have-nots their needs, but sometimes in different ways
*Household are the main actor of the economy and will keep it running.
IMPORTANT: net wealth = assets bezittingen – liabilities Lening
Net wealth can grow, because of
- Value changes in assets and liabilities
- Net-income from labour, capital or transfers (i.e. pensions, social security based income)
- Inheritances, gifts
Overview: the household balance sheet = an overview of the assets and liabilities
Stocks: aandelen, the part you own of a company
Bonds: a piece of paper stating the terms on which the money will
be paid back
Govies/ corporates by how the bond is offered
Assets: a possession that has value in an exchange transaction
Tangible/ real assets; derive value from their physical character and the utility they generate
Intangible assets; derive value from a legal claim to some future benefit
Financial assets; intangible assets that represent a claim to future cash
= can be used as a way to capture money (e.g. real estate, commodities,… )
Liabilities:
Mortgage loans: a type of loan that's used to finance property; a secured loan
Consumer loans: a transaction in which the bank agrees to lend money to a customer so they can buy a
product or use a service
Tax debt: any taxes that you owe to the IRS Overheidsinstelling: fiscus after the filing deadline
PAGINA 1
,There are different types of households in the economy
When people must work hard for a → ‘Poor people with a house’ The idea when whether you work or
certain income but also have to live not: your assets, … will always
The house will be paid from their
so they spend their entire income generate cash for you
income
on living
= you become independent
AS A COMPANY: Focus on the middle class that keeps growing instead of the rich people.
2.HOW DO THE BALANCE SHEETS OF OTHER ACTORS LOOK LIKE
2.1 Corporates
Equity: what the company own’s
Debt: What the company own, but isn’t theirs schuld
= on a debt you need to pay interest
WHY A DEBT? as a company you hope that the cost of the
interest of the loan is lower than the profit of the
company
You can easily make a lot of money;
Funding of a company;
- Shareholder funds (equity)
• Original equity
• Rights issues
• Retained profit
- Debt = leverage rendement
Leverage is a way to raise the ROE above the ROA
- ROE = return on equity e.g. profit/ equity → important as a shareholder
- ROA = return on assets e.g. profit/ assets
= can be measured in different ways:
As a Debt/ Equity ratio
𝑑𝑒𝑏𝑡
o Gearing ratio = the ratio between long-term debt and equity = (𝑒𝑞𝑢𝑖𝑡𝑦 )
o Net gearing ratio = the ratio of financial debt and the equity
= long term debt + short term debt – cash – short term financial assets
PAGINA 2
, 𝑎𝑠𝑠𝑒𝑡𝑠
As a Assets/ Equity ration = (𝑒𝑞𝑢𝑖𝑡𝑦 ); leverage multiplier LM
DUPONT: ROE = ROA * LM
2.2 Financial sector
2.2.1 Bank
= debt of the bank is much higher than ‘normal’, Leverage multiplier is much higher, and leverage is important
Trading book:
Banking book: different kind of loans
= a real form of banking
Bonds: investors
2.2.2 Mutual fund
→ A mutual fund is someone who invests for you
2.2.3. Insurance Company
Technical provisions technische voorzieningen: rather important
2.3 The government
The balance sheet of a government;
- Hasn’t a lot of assets
- A lot of debt
- The equity is negative
3.THE FINANCIAL SYSTEM
Why is the financial system important?
- Economic growth is linked to financial development.
- The role of the financial system is to facilitate production, employment, and consumption.
PAGINA 3
, - Resources are funneled through the system so resources flow to their most efficient uses.
(semi-) direct finance through financial markets
Borrowers sell securities directly to lenders in the
primary market. After issuance, these securities often can
be traded in the secondary market
▪ Money markets
▪ Capital markets
Direct finance provides financing for governments
and corporations
Indirect finance through financial intermediaries → the haves and have-not’s don’t know each other
o An institution stands between lender and borrower
E.g. We get a loan from a bank or finance company to buy a car
Shadow banking: a term used to describe bank-like activities (mainly lending) that take place outside the traditional
banking sector.
4.ROLE OF THE GOVERNMENT
4.1 Why the government?
Financial markets are important in the economy, so the government is needed for possible market failure*.
What is market failure? Not producing services efficiently at the lowest cost
Types of regulation:
1. Disclosure regulation: prevent issuers from defrauding investors by concealing relevant information.
Issuer→ a legal entity that develops, registers and sells securities to finance its operations.
2. Market conduct regulation: financial activity regulation to prevent insider trading, impose trading, …
3. Financial institution regulation: to prevent the default of financial intermediaries and to safeguard the
payment system
4. Restrictions on foreign participants: To control e.g., the money supply
4.2 Other potential roles of the Government
o Act as financial intermediary
o Influence the markets through monetary policy
o Provide bail outs
*bail out: een economische term voor het geven van een lening aan een bedrijf of een land dat in
ernstige financiële moeilijkheden verkeert of dat geconfronteerd wordt met een faillissement.
UNDER DISCUSSION:
o No bail out policies
o Systemically important financial institutions (SIFIs)
VOORBEELDVRAGEN VANAF DIA 37/40
PAGINA 4
, UNIT 2 – Fixed Income Markets
loans and debt securities (debt instruments)
Financial History:
Debt instruments are the oldest instruments in the world through history people gave money to each other, not
out of charity but in the interest of making money (by asking interest)
Codes of Hammurabi (1780 before C) = provided amongst others in loan concepts and insurance/ risk sharing
contracts
1.INTEREST RATES
1.1 Interest
= positive interest; you will have to pay back more than the amount you borrowed
The rate of interest is the “price of money”:
- The price to ‘rent’ money
- The reward for the lender to postpone consumption
You must be careful with percentages because there is difference between purpose (change % or extra %)
AN OTHER UNDERSTANDING: basis points (1 basis point = 100%)
Interest is an understanding that’s rather personal; nobody will get the same interest because of the different risks
the lender takes by borrow you the money.
Risks depend (at least) on the:
Credit worthiness of the borrower
Maturity of the debt
SO there isn’t a thing as ‘the interest’, because there are different interest rate per maturity and per borrower.
1.2 Term structure of interest rates
→The graph we get if we plot the ‘interest rate’
!! this graph is made on a particular day, keeping all the loan characteristics
constant except for het maturity looptijd of the loan.
If you would draw this for a different, less credit worthy borrower: the interest would be higher
= term structure of interest rates
AN OTHER UNDERSTANDING: yield curve → less precise
You can rate the structure of interest based on a category;
AAA – AA – A – BBB = good
BB – B – CCC - … = bad
PAGINA 5
Introduction to the
financial markets
BASED ON POWERPOINT WITH TEXTBOOK
1E BACHELOR HANDELSINGENIEUR
,Unit 1 – The financial system
1.THE ACTORS
In this financial system and in the economy, there are two main parties
Haves or lenders Have-nots or borrowers
= possess capital and can lend it out = have more needs than money and they will have to
raise capital
Example Example
- Households = MAIN ACTOR* - Corporates = bedrijven
- Government
- The financial industry (e.g. banks)
= haves can always fulfill have-nots their needs, but sometimes in different ways
*Household are the main actor of the economy and will keep it running.
IMPORTANT: net wealth = assets bezittingen – liabilities Lening
Net wealth can grow, because of
- Value changes in assets and liabilities
- Net-income from labour, capital or transfers (i.e. pensions, social security based income)
- Inheritances, gifts
Overview: the household balance sheet = an overview of the assets and liabilities
Stocks: aandelen, the part you own of a company
Bonds: a piece of paper stating the terms on which the money will
be paid back
Govies/ corporates by how the bond is offered
Assets: a possession that has value in an exchange transaction
Tangible/ real assets; derive value from their physical character and the utility they generate
Intangible assets; derive value from a legal claim to some future benefit
Financial assets; intangible assets that represent a claim to future cash
= can be used as a way to capture money (e.g. real estate, commodities,… )
Liabilities:
Mortgage loans: a type of loan that's used to finance property; a secured loan
Consumer loans: a transaction in which the bank agrees to lend money to a customer so they can buy a
product or use a service
Tax debt: any taxes that you owe to the IRS Overheidsinstelling: fiscus after the filing deadline
PAGINA 1
,There are different types of households in the economy
When people must work hard for a → ‘Poor people with a house’ The idea when whether you work or
certain income but also have to live not: your assets, … will always
The house will be paid from their
so they spend their entire income generate cash for you
income
on living
= you become independent
AS A COMPANY: Focus on the middle class that keeps growing instead of the rich people.
2.HOW DO THE BALANCE SHEETS OF OTHER ACTORS LOOK LIKE
2.1 Corporates
Equity: what the company own’s
Debt: What the company own, but isn’t theirs schuld
= on a debt you need to pay interest
WHY A DEBT? as a company you hope that the cost of the
interest of the loan is lower than the profit of the
company
You can easily make a lot of money;
Funding of a company;
- Shareholder funds (equity)
• Original equity
• Rights issues
• Retained profit
- Debt = leverage rendement
Leverage is a way to raise the ROE above the ROA
- ROE = return on equity e.g. profit/ equity → important as a shareholder
- ROA = return on assets e.g. profit/ assets
= can be measured in different ways:
As a Debt/ Equity ratio
𝑑𝑒𝑏𝑡
o Gearing ratio = the ratio between long-term debt and equity = (𝑒𝑞𝑢𝑖𝑡𝑦 )
o Net gearing ratio = the ratio of financial debt and the equity
= long term debt + short term debt – cash – short term financial assets
PAGINA 2
, 𝑎𝑠𝑠𝑒𝑡𝑠
As a Assets/ Equity ration = (𝑒𝑞𝑢𝑖𝑡𝑦 ); leverage multiplier LM
DUPONT: ROE = ROA * LM
2.2 Financial sector
2.2.1 Bank
= debt of the bank is much higher than ‘normal’, Leverage multiplier is much higher, and leverage is important
Trading book:
Banking book: different kind of loans
= a real form of banking
Bonds: investors
2.2.2 Mutual fund
→ A mutual fund is someone who invests for you
2.2.3. Insurance Company
Technical provisions technische voorzieningen: rather important
2.3 The government
The balance sheet of a government;
- Hasn’t a lot of assets
- A lot of debt
- The equity is negative
3.THE FINANCIAL SYSTEM
Why is the financial system important?
- Economic growth is linked to financial development.
- The role of the financial system is to facilitate production, employment, and consumption.
PAGINA 3
, - Resources are funneled through the system so resources flow to their most efficient uses.
(semi-) direct finance through financial markets
Borrowers sell securities directly to lenders in the
primary market. After issuance, these securities often can
be traded in the secondary market
▪ Money markets
▪ Capital markets
Direct finance provides financing for governments
and corporations
Indirect finance through financial intermediaries → the haves and have-not’s don’t know each other
o An institution stands between lender and borrower
E.g. We get a loan from a bank or finance company to buy a car
Shadow banking: a term used to describe bank-like activities (mainly lending) that take place outside the traditional
banking sector.
4.ROLE OF THE GOVERNMENT
4.1 Why the government?
Financial markets are important in the economy, so the government is needed for possible market failure*.
What is market failure? Not producing services efficiently at the lowest cost
Types of regulation:
1. Disclosure regulation: prevent issuers from defrauding investors by concealing relevant information.
Issuer→ a legal entity that develops, registers and sells securities to finance its operations.
2. Market conduct regulation: financial activity regulation to prevent insider trading, impose trading, …
3. Financial institution regulation: to prevent the default of financial intermediaries and to safeguard the
payment system
4. Restrictions on foreign participants: To control e.g., the money supply
4.2 Other potential roles of the Government
o Act as financial intermediary
o Influence the markets through monetary policy
o Provide bail outs
*bail out: een economische term voor het geven van een lening aan een bedrijf of een land dat in
ernstige financiële moeilijkheden verkeert of dat geconfronteerd wordt met een faillissement.
UNDER DISCUSSION:
o No bail out policies
o Systemically important financial institutions (SIFIs)
VOORBEELDVRAGEN VANAF DIA 37/40
PAGINA 4
, UNIT 2 – Fixed Income Markets
loans and debt securities (debt instruments)
Financial History:
Debt instruments are the oldest instruments in the world through history people gave money to each other, not
out of charity but in the interest of making money (by asking interest)
Codes of Hammurabi (1780 before C) = provided amongst others in loan concepts and insurance/ risk sharing
contracts
1.INTEREST RATES
1.1 Interest
= positive interest; you will have to pay back more than the amount you borrowed
The rate of interest is the “price of money”:
- The price to ‘rent’ money
- The reward for the lender to postpone consumption
You must be careful with percentages because there is difference between purpose (change % or extra %)
AN OTHER UNDERSTANDING: basis points (1 basis point = 100%)
Interest is an understanding that’s rather personal; nobody will get the same interest because of the different risks
the lender takes by borrow you the money.
Risks depend (at least) on the:
Credit worthiness of the borrower
Maturity of the debt
SO there isn’t a thing as ‘the interest’, because there are different interest rate per maturity and per borrower.
1.2 Term structure of interest rates
→The graph we get if we plot the ‘interest rate’
!! this graph is made on a particular day, keeping all the loan characteristics
constant except for het maturity looptijd of the loan.
If you would draw this for a different, less credit worthy borrower: the interest would be higher
= term structure of interest rates
AN OTHER UNDERSTANDING: yield curve → less precise
You can rate the structure of interest based on a category;
AAA – AA – A – BBB = good
BB – B – CCC - … = bad
PAGINA 5
