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L2 BKM CH 2 Finance

The document summarizes key concepts in finance including: 1) It describes the money market which involves short term, highly liquid, and low risk securities like treasury bills, certificates of deposit, commercial paper, and bankers' acceptances. 2) It then explains components of the capital market like long term bonds, equity/common stocks, mortgage backed securities, and derivatives like options and futures. 3) Key characteristics of equities/common stocks are that they represent ownership in a corporation and have residual claims and limited liability for investors.

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41 views3 pages

L2 BKM CH 2 Finance

The document summarizes key concepts in finance including: 1) It describes the money market which involves short term, highly liquid, and low risk securities like treasury bills, certificates of deposit, commercial paper, and bankers' acceptances. 2) It then explains components of the capital market like long term bonds, equity/common stocks, mortgage backed securities, and derivatives like options and futures. 3) Key characteristics of equities/common stocks are that they represent ownership in a corporation and have residual claims and limited liability for investors.

Uploaded by

Codreanu Anda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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L2 – BKM ch 2

Finance
Financial market:
Money market Capital market
Short term securities, liquid Longer term
Highly marketable securities Diverse
Low risk High risk
Cash or cash equivalents - Long term bonds market
- Equity markets
- Options and futures markets

Money market asset types:


Treasury bills Certif. of deposits = CD Commercial paper Bankers’ acceptance
The government raises money Time deposit with bank Big companies use debt Person obliges bank to pay a
by selling bills to the public notes not borrow from certain amount at a specific date
banks like a check with a date
Investors buy the bill for less You hold the money there Usually non financial They are used as a payment
than the maturity value and not allowed to take firms so not banks form for big companies
At the maturity, the gov. pays Can only take money at the Very short term - > no It is the bank that guarantees
investors the face value of the end of agreed period and risk. Easy to predict what that the money will be paid = >
bill = current value bank pays you interest firm will do in 1 month no risk
Investor earns from the diff. BA can be sold to others - to
between purch. Value and face get money immediately and
value then they will be waiting
Not much risk, paid cash

Eurodollars Repos and reverses Federal funds LIBOR


London interbank offered rate
US dollars held in banks Selling gov. securities over Banks have deposit at Rate at which London banks
outside US -> not subject to night and promise to federal banks just as us lend money among themselves
US regulations purchase tomorrow having CD’s
No regulations means high They’re purchased at Each indiv. bank is req. Serves as a reference for many
sums and high interest higher price to hold a specific amount transactions or interest rate calc.
in reserves = “fed funds”
Reverse repo: buying gov.
securities now to sell them
soon at higher price.

LIBOR is replaced by:


 GBP: SONIA (Sterling Overnight Index Average)
 USD: SOFR (Secured Overnight Financing Rate)
 Euro: €STR (Euro Short-Term Rate)
 DKK: DESRT (Denmark Short-Term Rate)
CAPITAL MARKET:

Components:
 Treasury notes + bonds: how the US gov. finances itself. These bonds or treasuries have a maturity date
of around 10 years = long run. Coupon payments = interest payments investors receive every
period.
 International bonds: a bond in a different currency from the currency of the country in which is issued.
Ex: a dollar bond issued in UK
 Corporate bonds: ways of firms to borrow money from the public. Investor get coupon payments such as
for treasury notes. But not the gov is now but firms
 Inflation protected securities: bonds are linked to inflation. The value is adjusted with the CPI
 Mortgage and mortgage backed securities: investing in other people’s loan from the bank (for example
when they wanted to buy a house). Investors get the interest payment directly from the person having the
loan at the bank. The bank acts as intermediary

Equity:
 Common stocks/equities = ownership in a corporation
 Buying shares gives voting power at annual meetings
Characteristics of common stock/equity:
Residual claim Limited liability
Stakeholders are the last to get any profits from the firms The stakeholders can only lose their initial investment if
assets the firms goes bankrupt
They get the money after tax authorities and reinvestment They are not personally liable for the firms actions

Preferred stock:
 Similar to a perpetuity – promises amounts back for an infinite amount of periods
 No voting power in the firm
 Firm is not obliged to pay dividends to these stakeholders
 Different tax treatment
Stock market indexes:

 Dow Jones Industrial average: best measure of performance on the stock market, price weighted index
 Others: S&P 500: 500 firms included, market value weighted index
 OMXC25: 25 companies and is a price weighted index
Provide payoffs depending on the values of other variables. (value
DERIVATIVES
derives from other assets)
OPTIONS: / call option
 An investor can purchase an asset for a specified price at an
expiration date
 Ex: an option on IBM stock allows the person to purchase the stock
for 1 month on the same price
 The investor wins from the difference between how much the value
of that stock is and the value he bought it for
Put option: the person can sell an asset for a specific time in a period of
FUTURES:
 Delivery of an asset at a specified time for an agreed price = future price
 Long position = buyer while short position = the one delivering the asset
 The investor benefits from the price increase in that good: he will buy for an agreed price but if
the price on the market for that specific asset increases, then he bought for cheaper and can now
sell for higher and make profit
 Thus, how much the person earns depends on how the price of the asset will evolve
- It increases: good. They buy cheap and sell expensive
- It decreased: not good. They bought for more than they can sell for (than its worth)

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