Math summer term

• Financial assets


  Liquid assets the value of which are derived from contractual right or ownership of financial instruments like stocks, bonds, mutual funds, cash etc. They do not have physical values like tangible physical assets but might originate from real assets
• Securities


  A type of financial instruments which are negotiable and fungible in nature. Their distribution is subject to legal requirements and restrictions and they hold a certain monetary value to represent one or more of the following criteria of holding the position of ownership through stocks, bonds, options, futures
• Financial market


  • Enables the exchange of previously issued financial assets
  • Facilitates borrowing and lending through the sale of newly issued financial assets
• Financial institution


  An institution whose primary source of revenue is through pursuing financial asset transactions
• Financial institutions


  • Investment banks
  • Insurance companies
• Importance of financial markets

  • Encourage the allocation of funds to those assets that appear to have the best prospects
  • Allow transfers of funds from a person or a business without investment opportunities to one who has them
  • Enable the separation of decisions concerning consumption from current earnings
  • Improve economic efficiency
• Prices of assets reflect the collective judgement of the market participants
• Examples of financial assets


  • Stocks (common and preferred)
  • Equities
  • Debts
  • Bonds / Debentures
  • Money market instruments
  • Derivatives
• Bonds


  A 'type of loan' issued to an entity by an investor
• Bonds


  • Government bonds vs corporate bonds
  • Regarded as a debt
  • Low risk, low return
  • Bond holders get paid before stock holders due to the fixed interest nature of a bond
  • Face value, coupon rate, yield, maturity date
  • Can be traded between investors prior to maturity date
  • Bonds traded below face value = discount
  • Bonds traded above face value = premium
• Bond details


  • Face value: £1,000
  • Maturity period: 3 years
  • Coupon rate: 5%
  • Year 1: £1,000 * 5% = £50
  • Year 2: £1,000 * 5% = £50
  • Year 3: £1,000 * 5% = £50
• Stock market index


  Statistical measure of the stock market (incl. any of its the subsets). Functions include calculating market performance, providing benchmarks to facilitate decision-making, acting as a base for derivatives
• Factors affecting stock market indices

  • Demand & supply
  • Investor psyche
  • Investor perception on a firm/technology/industry
  • Political factors
  • Rates of interests
  • Exchange rates
  • Factors beyond control (e.g. Natural calamities)
• Comparison of global stock indices (1990 – 2019)
• Primary market


  • New security issues sold to initial buyers
  • Initial public offerings (IPOs)
  • Bond auction
  • Issuer receives the proceeds from the sale
• Secondary market


  • Securities previously issued are bought and sold
  • London Stock Exchange (LSE)
  • New York Stock Exchange (NYSE)
  • Existing owner sells to another party and the issuing firm does not receive proceeds and is not directly involved
• Classifications of financial markets

  • Primary market
  • Secondary market
• Domestic market


  Financial markets where foreign bonds are issued in domestic market currency
• Eurobonds


  Financial markets where bonds are issued in a currency other than the currency of the country in which it is issued
• How Financial markets work

  • Borrowing and Lending
  • Pricing (e.g. price determination)
  • Aggregation (e.g. futures market)
  • Risk sharing
  • Liquidity provision
  • Reducing transaction and information costs
• Market participants


  • Lenders
  • Borrowers
• Key market participants


  • Brokers
  • Dealers
  • Investment bank(er)s
  • Financial intermediaries
• Broker


  An agent of a buyer or seller facilitating trade by locating a seller or buyer fulfilling required needs and completing the transaction. They do not maintain inventories in these assets. Fee structure: Commission from the clients i.e. buyers or sellers, or both
• Dealer


  Dealers match buyers with sellers of assets. They maintain inventories which allows them to "sell out of inventory" rather than always having to locate sellers to match every offer to buy. Fee structure: Dealers do not receive sales commissions. They make profits by buying assets at relatively low prices and reselling them at relatively high prices. Terminology: Ask price, Bid price, Bid-ask spread
• Investment banks


  • Assisting in the initial sale of newly issued securities like IPOs
  • Advisory: advising corporations on which financial instruments should be issued to raise capital from the market, along with related aspects
  • Underwriting: guaranteeing corporations a price on the securities they offer, either individually or by having several different investment banks form a syndicate to underwrite the issue jointly
  • Other functions: Mergers & Acquisitions, Sales and Trading, (Re)structuring, Equities, FX & PM
• Firm commitment


  An underwriter's agreement to assume all inventory risk and to purchase all securities for an initial public offering (IPO) directly from the issuer for sale to the public
• Best efforts


  A contractual term in which an underwriter promises to make its best effort to sell as much of a securities offering (e.g., IPO) as possible
• Financial intermediaries


  Institutions engaging in financial asset transformation i.e. they purchase one kind of financial asset from borrowers and sell a different kind of financial asset to savers. They typically hold financial assets as part of an investment portfolio rather than as an inventory for resale. They charge relatively high interest rates to borrowers and paying relatively low interest rates to savers
• Types of financial intermediaries

  • Depository institutions
  • Retail banks
  • Savings and loan associations
  • Contractual savings institutions
  • Life insurance companies
  • Pension/Retirement funds
  • Investment intermediaries
  • Finance companies
  • Mutual funds
• The evolution of trust in investment bank-client relationship - A mergers & acquisitions perspective
• Understanding the loss of trust in large banks
• Markets and Hierarchies: Analysis & anti-trust implications
• The economic institutions of capitalism