This is an extensive summary of Introduction to financial markets (1107TEMBDK), lectured by Marc Deceuster in semester 2 of academic year , which includes slides and notes during the lesson (oral explanation, etc.), supplemented by the book “An Introduction to Global Financial Markets” ', as st...
Unit 1: The financial system
Section 1: The actors
Haves and havenots
• Haves: possess capita land and can lend it out (lenders)
o Individuals
• Havenots: have more needs than money and they will have to raise capital
(borrowers)
o The government
o Corporates (work with the money of others)
o Banks (everything that comes in goes out)
• The haves give what they have extra to the havenots with taxes for example
Households
• Household balance sheet gives an overview of the assets and the liabilities of a single
household
• Net wealth = assets – liabilities (what you have – what you must give away)
• Balance sheet Households
o Real assets: tangible assets, things you can hold (cars, houses)
o Financial assets: intangible assets that represent a claim to future cash, things
you cannot hold (stocks, mutual funds, cash)
o Intangible assets: derive value from a legal claim to some future benefit
Asset Classes
• Traditional
o Common stock
o Bonds
o Cash
• Alternative
o Real estate (financialize asset and get money from the loan)
o Commodities (dangerous because of high price)
o Hedge funds
o Venture capital
o Currencies
• Liabilities
o Mortgage loans
o Consumer loans
o Tax debt
1
,Growth drivers in Net wealth
• Value changes all the time
• Where does your net wealth come from?
o Buy a car for 100 and sell it for 200 → your net wealth is 100
• Net-income from labour
• When market grows your wealth grows, but when there is a big crash than your
wealth goes down
• “Assets put money in your pocket, whether you work or not, and liabilities take money
from your pocket.” Robert Kiyosaki
Wealth creation
• Poor people work and get a little amount of money and they have to buy food, house
so everything they earned they spend again
• Middle class are poor families with a home. They earn money and there is some left
over, and they pay a house with a mortgage loan, so they have to pay it back for the
next 20 years
• Rich have assets on their income. They get more than just their salary. They have
appartements they rent, stocks
• Wealth inequality: Wealth isn’t divided fair all over the world
o Poverty in Africa
o Wealth in Europe, VS
• Global wealth pyramid
o As a banker it is more interested to be working with the 1% wealthiest people
• Final thoughts
o Households own all the assets, because they are in contact with everyone and
everything, but this means they also have a lot of risks
2
,Section 2: How do the Balance Sheets of Other Actors look like?
Corporates (companies)
• Balance sheets
o Liabilities (right)
▪ Equity: claim of shareholders, we give money to company, and we get
something in return (e.g.: when we sell it)
▪ Debt: everything the company lent, but when you loan you also have
to pay extra
=> entrepreneurs: you work with money of others so that your money
is safe, hopes that the cost on the loan is less than the return
investment (= leverage, with little money controlling much more)
o Assets (left)
▪ Fixed assets: a long-term commitment
▪ Current assets:
Gearing
• ROE: return on equity → important for shareholders
• ROA: return on assets → the money you get with all the money you use
ROE = ROA x LM
• Gearing ratio: ratio between long-term debt and equity (Assets= 300, Equity= 100,
Debt= 200 so the ratio = 200/100 = 2)
• Asset equity: 300/100= 3
Financial sector: BANK
• They have more debts than equity, because they give your money to others
for the bank is your money a liability and for you it is an asset
• Trading book: asset that the bank owns for trading, no intention keeping it for a long-
term
• Banking book: granting loans
Banks want to turn deposits in a loan
• Bond portfolio: when we can’t put it in loans, we put it in bonds
Financial sector: MUTUAL FUND
• He is in charge of your investments; client gives money, and the mutual fund gives a
certificate, and he is in charge of buying things for you so that you don’t have to do it
yourself
Financial sector: INSURANCE COMPANIES
• Casualty insurance (they pay you pack when you need it)
• They invest your money in the insurance company, and they will use it in some cases
The Government
• Equity: is negative because debt > liabilities → not a big problem because at the end
the householders pay it off with taxes
• Liabilities: debt
• Assets: not a lot (little amounts)
3
,Section 3: The financial system
Importance
− Economic growth is linked to financial development → you can do things with money
− Role is to facilitate production, employment, and consumption
− Resources flow to their most efficient uses
You can do things when you have money. You can start your business
with a loan and someone else wants to invest in you
• Safers = haves
borrowers = have-nots
o Direct financing: from parents to child (you bought a car and your parents
paid half and you have to pay them back)
o Semi-direct financing: When there is someone in between that helps in the
transaction there is always a FEE, so you don’t give 100 and get 100, but you
get 95
o Indirect financing: haves put their money at the bank at the liability side and
the bank gives a loan to the have-nots from the asset side, have and have-
nots don’t know each other
• Shadow banking: financial activities where you give credits to others without the
normal legislation (you don’t have the “safety” of the bank)
Section 4: Role of the Government
Should they interfere or not? Yes, they have to interfere.
• Regulations
o Disclosure regulation:
o Market conduct regulation:
o Financial institution regulation:
o Restrictions on foreign participants:
• Bail out banks that go bankrupted
• Influence markets through monetary policy
• Act as financial intermediary
Section 5: Review questions
It is a big system where they have, and haven-nots are helping each other. The one is making
it able to invest and get your dream with the others giving you the money
4
,Unit 2: Fixed income markets
Debt instruments → gift economies (people give things to people: now you own me
something, whit a little bit of interest)
Oldest source: stone pillar of Hammurabi (in there: legal text 1780BC): interest of 20%
➔ interests are very old
Loan book → lowel from one person to another
Section 1: Interest Rates
Interest rates = plural → multidimensional thing → hard to capture
Modeling in mathematic way → complex
Interest rate = the price of money
• You have to pay a little bit more for money
• Price to rent money
For economists
• Income: consumption or postpone consumption
• Interest rates = the reward for the lender to postpone consumption
EX: 2.34%
Basis points
• You have to be careful with percentages
• Percentage points in 100 → basis points
• 2.34% → 2 percentage points and 34 basis points
How much interest is the lender to charge you?
• Fair if banks charge everyone the same interest?
• =/ how financial markets work
• Credit risk: the likely that you don’t get your money back
• Maturity of dept: in a horizon of 2 years, there is less uncertainty than a horizon of
20 years
• FM = continuous spectrum → different interest rate for every maturity and every
creditor
Visualize
Term structure of interest rates
• Something what a CB is publishing
• Every day another graph, apart for f.e. ‘the Belgian government’
• Y-as: what the interest rates is for that particular thing on that day
5
, AAA rated bonds
• The best of the best
• The best bonds available
• Less than half a percent over a period of 20 years
• Very unlikely
• Long term interest rates are higher than short term
• If STIR is increasing very fast → curve becomes flat or even might become downer
o = bad news for the economy
o CB lifting STIR → spill over the LTIR
o Interest rates are increasing → taking out credit will become more expensive
o Less people are going to take credit → less people are going to invest → less
people are going to buy → break on the economy
• AAA AA A BBB BB B CCC CC C
o Rate category
o AAA is better, further to the right → become worse
o AAA AA A BBB
▪ Investment rate → relatively good bonds
o BB B CCC
▪ Much more speculative
o If the credit quality deteriorates, that the market charge extra premia for that
How does an interest rate come alive?
• Demand and supply for credit
• Rules are the same
• Demand high → IR increase
• A lot of supply → IR will be lower
• Risk free IR → price of postponing consumption
• IR on loans are pretty close to risk free, but it cannot be totally risk free
6
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller StudentUA8. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.50. You're not tied to anything after your purchase.
