Samenvatting
Introduction to financial markets
UNIT 1
Section 1
Haves own capital, they can lend it out = Lenders
Havenots more needs then money, they need extra money = Borrowers
Government = havenots, a government has a lot of dept
Corporate = havenots, work with other people’s money
Family’s = haves, the money is devided over different family’s, unequal
The main actor: Households
In the end families own the world
Behind every corporate there are individuals
Highly unevenly distributed over the population
The more corporates you own/assets you own, the more risk you take
Net wealth = assets – liabilities
What do you really have
Household balance sheet
- Real Assets
- Financial Assets
Tangible assets = real assets, physical so therefore they have value
Intangible assets = a legal claim to future benefit
Finacnial assets = intangible assets that represent a claim to future cash
Traditional assets Alternative assets
- Common stock - Real estate
- Bonds - Commodities
- Cash - Private equity
- Hedge funds
- Venture capital
- Currencies
,Wealth
Growth drivers in wealth
Value changes in assets and liabilities
Net-income of labour, capital or tranfsers
Inheritances or gifts
Wealth creation
The poor have no assets/liabilities
Middle class are poor families with a home,
Rich have a lot of assets and different forms of income
Wealth is distributed unevenly in the world
Developed economies: less inequality
Emerging markets: High inequality
Section 2
Balance sheets of the other actors
Companies
Liabilities “side”
Equity
Shareholders, they own the company
Debt
Have given money to the company but don’t have anything to say
Everything the company has borrowed
E.G. ; Bonds, investment loans, other bank loans, trade credit,…
Assets “side”
Fixed assets
Long term commitment
Current assets
Leverage
When companies use dept to finance their operations
Return on assets = return you get with alk the money you use
Return on equity = interesting for shareholder
ROE = ROA x LM
LM = leverage multiplier
Gearing ratio = the ratio between long-term debt and equity
The net gearing ratio = the ratio of the financial debt and the equity
,Financial sector – Bank
Banks are way higher levered then companies
Trading book and banking book
T.B.
assets/shares kept to serve the client
B.B.
all the kind of different loans
Financial sector – Mutual Fund
A portfolio manager who is gathering funds
Issuing certificates of a fund in exchange of money
Money is used to invest
Financial sector – Insurance Company
Casualty
Investment instrument
Has to invest incoming money to cover pay-outs in case of accidents, deaths, ect
The government
Only entity that can get away with a negative equity
Section 3
The financial system
Importance
Economic growth is linked to financial development
Role of financial system = facilitate production, employment and consumption
Resources flow to their most efficient uses (after going through the system)
If it breaks down you have a huge problem
Big fear in 2008
People did not understand what policymakers did, giving money to the greedy bankers in their
eyes, actually they saved the system by doing it
Direct financing
From the haves to have-nots
Semi-Direct financing
There is an intermediary
Most of the funding happens through this system
E.G. you invest 100, company receives 97 and intermediary receives a fee worth 3
,Indirect financing
The haves put deposits in a financial intermediary (F.I.), eg a bank
The F.I. then loans money to the have-nots
Section 3
The role of the government
Regulations
Disclosure regulation: prevent issuers from defrauding investors by concealing relevant
information
Market conduct regulation: financial activity regulation, eg prevent inside trading
Financial institution regulation: prevent the default of financial intermediaries and in order to
safeguard the payment system
Restrictions on foreign participants: in order to control eg money supply
Other potential roles
Act as financial intermediary
Influence the markets through monetary policy
Provide bail out
o Last one is highly debated
o Some banks are to crucial to fail!
, UNIT 2
Financial History
Debt instruments = oldest instruments in the word
The codex of Hammurabi (1780 BC) provided amongst orhers in loan concepts, including
interest charges and insurance/risk sharing contracts
Interest rates
Is the price of money, price to rent money
It is a reward for the lender to postpone his consumption
(getallen achter de komma = basis points)
How much will you be charged?
Depends on variables
o Credit worthiness of the borrower
o Maturity of the debt
An interest rate per maturity and per borrower
o Enormously big interest spectrum
Can be made visually by the graph named the term structure of interest rates
o People often talk about a yield curve, but that is less precise
o Long term interest rates are normally higher than short term rates
When short rates are rising taking out credit becomes more expensive, brake
for the economy
Investment grade = relatively good bonds, lower interest rates
Speculative grade = higher interest rates
Decomposition of an Interest rate
Risk free interest rate = a reward only for the delay of consumption
The lender faces risks which requires a compensation
Maturity premium
Expected inflation premium
Credit spread = the higher risk that the counter party defaults (liquidity premium)
Factors conveniently ignored
Special contractual provisions (have influence on the rates)
o Seniority, embedded options,...
Collateral arrangements
Differential tax treatment
…
Irvin Fisher
Relationship between nominal and real interest rates
Fisher used expected inflation!
FORMULE IN PP
Most people use an approximation
Introduction to financial markets
UNIT 1
Section 1
Haves own capital, they can lend it out = Lenders
Havenots more needs then money, they need extra money = Borrowers
Government = havenots, a government has a lot of dept
Corporate = havenots, work with other people’s money
Family’s = haves, the money is devided over different family’s, unequal
The main actor: Households
In the end families own the world
Behind every corporate there are individuals
Highly unevenly distributed over the population
The more corporates you own/assets you own, the more risk you take
Net wealth = assets – liabilities
What do you really have
Household balance sheet
- Real Assets
- Financial Assets
Tangible assets = real assets, physical so therefore they have value
Intangible assets = a legal claim to future benefit
Finacnial assets = intangible assets that represent a claim to future cash
Traditional assets Alternative assets
- Common stock - Real estate
- Bonds - Commodities
- Cash - Private equity
- Hedge funds
- Venture capital
- Currencies
,Wealth
Growth drivers in wealth
Value changes in assets and liabilities
Net-income of labour, capital or tranfsers
Inheritances or gifts
Wealth creation
The poor have no assets/liabilities
Middle class are poor families with a home,
Rich have a lot of assets and different forms of income
Wealth is distributed unevenly in the world
Developed economies: less inequality
Emerging markets: High inequality
Section 2
Balance sheets of the other actors
Companies
Liabilities “side”
Equity
Shareholders, they own the company
Debt
Have given money to the company but don’t have anything to say
Everything the company has borrowed
E.G. ; Bonds, investment loans, other bank loans, trade credit,…
Assets “side”
Fixed assets
Long term commitment
Current assets
Leverage
When companies use dept to finance their operations
Return on assets = return you get with alk the money you use
Return on equity = interesting for shareholder
ROE = ROA x LM
LM = leverage multiplier
Gearing ratio = the ratio between long-term debt and equity
The net gearing ratio = the ratio of the financial debt and the equity
,Financial sector – Bank
Banks are way higher levered then companies
Trading book and banking book
T.B.
assets/shares kept to serve the client
B.B.
all the kind of different loans
Financial sector – Mutual Fund
A portfolio manager who is gathering funds
Issuing certificates of a fund in exchange of money
Money is used to invest
Financial sector – Insurance Company
Casualty
Investment instrument
Has to invest incoming money to cover pay-outs in case of accidents, deaths, ect
The government
Only entity that can get away with a negative equity
Section 3
The financial system
Importance
Economic growth is linked to financial development
Role of financial system = facilitate production, employment and consumption
Resources flow to their most efficient uses (after going through the system)
If it breaks down you have a huge problem
Big fear in 2008
People did not understand what policymakers did, giving money to the greedy bankers in their
eyes, actually they saved the system by doing it
Direct financing
From the haves to have-nots
Semi-Direct financing
There is an intermediary
Most of the funding happens through this system
E.G. you invest 100, company receives 97 and intermediary receives a fee worth 3
,Indirect financing
The haves put deposits in a financial intermediary (F.I.), eg a bank
The F.I. then loans money to the have-nots
Section 3
The role of the government
Regulations
Disclosure regulation: prevent issuers from defrauding investors by concealing relevant
information
Market conduct regulation: financial activity regulation, eg prevent inside trading
Financial institution regulation: prevent the default of financial intermediaries and in order to
safeguard the payment system
Restrictions on foreign participants: in order to control eg money supply
Other potential roles
Act as financial intermediary
Influence the markets through monetary policy
Provide bail out
o Last one is highly debated
o Some banks are to crucial to fail!
, UNIT 2
Financial History
Debt instruments = oldest instruments in the word
The codex of Hammurabi (1780 BC) provided amongst orhers in loan concepts, including
interest charges and insurance/risk sharing contracts
Interest rates
Is the price of money, price to rent money
It is a reward for the lender to postpone his consumption
(getallen achter de komma = basis points)
How much will you be charged?
Depends on variables
o Credit worthiness of the borrower
o Maturity of the debt
An interest rate per maturity and per borrower
o Enormously big interest spectrum
Can be made visually by the graph named the term structure of interest rates
o People often talk about a yield curve, but that is less precise
o Long term interest rates are normally higher than short term rates
When short rates are rising taking out credit becomes more expensive, brake
for the economy
Investment grade = relatively good bonds, lower interest rates
Speculative grade = higher interest rates
Decomposition of an Interest rate
Risk free interest rate = a reward only for the delay of consumption
The lender faces risks which requires a compensation
Maturity premium
Expected inflation premium
Credit spread = the higher risk that the counter party defaults (liquidity premium)
Factors conveniently ignored
Special contractual provisions (have influence on the rates)
o Seniority, embedded options,...
Collateral arrangements
Differential tax treatment
…
Irvin Fisher
Relationship between nominal and real interest rates
Fisher used expected inflation!
FORMULE IN PP
Most people use an approximation
