1b fanancial markets Flashcards
monetary policy instruments
1) conventional (e.g. setting interest rates)
2) nonconventional (e.g. quantitative easing)
non-financial firm’s balance sheet
- assets
1. current assets
2. investments
3. property, plant, equipment
4. intangible assets
5. other assets - liabilities
1. current liabilities
2. long-term liabilities
3. capital (equity)
bank’s balance sheet
- assets
1. cash
2. securities
3. loans
4. other assets - liabilities
1. deposits
2. interbank market
3. capital
4. profit
bank’s profit & loss statement
- costs
1. profit - revenues
types of financial markets
- the bond market
(interest rates are determined) - the stock market
(has a major effect on people’s wealth and on firms’ investment decisions) - the foreign exchange market
(fluctuations in the foreign exchange rate have major consequences for an economy)
bond
is a security that promises to make payments periodically for a specified period of time
are financial debts of corporates (corporates bonds) and sovereigns (sovereign bonds)
long-term treasury bonds vs short-term treasury bills
types of bonds
according to:
1. coupon
zero-coupon vs coupon bonds
2. coupon-rate variability
floating-rate vs fixed-rate bond
3. issuer
public sector vs financial institutions vs companies
4. embedded options
callable vs putable vs convertible bonds
5. maturity
short-term vs medium-term vs long-term
security/stock
is a claim on the issuer’s future income or assets
share of stock
is a security that has a claim on the earnings and assets of the corporation - a residual claim on funds not otherwise committed
stock market
claims on the earnings of corporations (shares of stock) are traded in the stock market
it is the most widely followed financial market in an economy
stock markets are very volatile
stocks and bonds in the balance sheet
- investments (stocks and bonds bought)
- current liabilities (short-term bonds issued)
- long-term liabilities (long-term bonds issued)
- equity (stocks issued)
the best instrument for an investor
stocks
risk-return relationship
low risk low return bills
low risk medium return bonds
high risk high return stocks
triangle of investing
liquidity
rate of return
risk
bull/bear market
- bull = rise
optimism, prices going up - bear = decline
pessimism, prices going down
overvalued stocks
if the Price-to-earnings (p/e) ratio is above the long-term average
foreign exchange markets
the FX market is where currency conversion takes place -> instrumental in moving funds between countries
The foreign exchange rate
FX rate= the price of one country’s currency in terms of another’s is determined
functions of financial markets (8)
- allow a fund transfer from surplus to deficit entities
- capital allocation and the reallocation of capital according to its efficiency (e.g. project selection)
- securing the liquidity of financial assets and through the allocation efficiency of financial markets create prices continuously
- enforcement of contracts, debtors must repay their debts
- cost efficiency - financial markets lower costs of the payment system and financial transactions in general (so called operational efficiency)
- support for ownership rights performance in the principal-agent model, sometimes also called the financial model
- risk sharing - FMs enable the allocation, transfer and share of risk with other investors and companies (vs subprime crisis/CDOs…)
- risk diversification - with respect to expected CF from different projects
