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College aantekeningen / samenvatting Financial Markets And Institutions (E_FIN_FMI)

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Summary of all the slides and the notations of the lecture. Added all important extra information which was said in the lecture.

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  • 23 de diciembre de 2021
  • 46
  • 2021/2022
  • Notas de lectura
  • Dr. alexey ivashchenko
  • Todas las clases

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Por: tymenbakker • 1 año hace

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Financial Market and Institutions Lecture
Nijsje Venrooy


Period 2-2021




1

,Introduction week 1: Financial Market and Institutions
Flow of funds through the financial system




Why financial intermediaries?
1. Transaction costs
Intermediaries take advantage of economies of scale. They also reduce search costs.
2. Risk sharing
Intermediaries facilitate hedging against ‘bad’ states. Thus, they make markets ‘more
complete’.
3. Information asymmetries: adverse selection and moral hazard
Information inefficiencies may lead to market breakdown. Financial intermediaries, through
pre-contractual research and post-contractual monitoring, reduce adverse selection and
moral hazard risks.

Primary and secondary markets
• Primary markets: where debt or equity is raised (funds are borrowed).
o Investment banks charge fees for organizing the issuance of securities. The
desks in charge are usually called ECM (equity capital markets) and DCM
(debt capital markets). It doesn’t need to be a public market. Markets for
loans and private equity financing are also primary markets with this regard.
• Secondary markets: where the value of existing (previously-issued) debt and equity
securities is determined by virtue of trading.
o This is a huge ecosystem: investors, brokers and dealers, exchanges, trading
platforms, clearing houses, rating agencies etc.




2

,Securities markets by type:
• Money markets
o Instruments with maturity < 1 year. Mainly fixed income and FX
• Capital markets
o Instruments with maturity > 1 year. Mainly equity and fixed income

Exchanges and over-the-counter (OTC) markets
• OTC markets: fragmented marketplace
• Exchange markets: centralized marketplace




3

, Week 1: Interest rates and Fixed Income markets

Lecture 1: Yield curve and fixed income instruments

Types of instruments
Bonds
• Government and corporate, fixed and floating coupon
• Nonconvertible preferred stock

Derivative Instruments
• Exchange-traded: interest-rate futures and options
• OTC: interest-rate forwards, swaps, options, swaptions

Securitized Products
• Mortgage-backed securities (MBS, CMBS, TBA)
• Asset-backed securities (car loans, student loans, etc.)

Formula
Assume there is NO RISK associated with the cash flows of an instrument/project. Then:




For notation in this course:
Small t or 0 is time RIGHT NOW.
Big T is some time in the future.




4

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