How to read financial papers
Basic financial terms, instruments and markets to
know in order to understand news
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How to read financial papers
How to get information for
the best investments?
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Would you have invested?
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December 1977: Arrested for bad driving
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The entire Microsoft staff.
Albuquerque, 1978
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Learning goals
Define Finance and the Financial System
Understand the relationship between
financial institutions and markets
Describe the role of money and capital
flow in the financial system
Define the money and its functions
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Materials to learn from
 Stephen Valdez: An Introduction to Global Financial
Markets,Macmillan Press Ltd.1997 – chapter 1
 György Székely: The Essence of Money and Banking
A Handbook for Financial Managers. KJK-Kerszöv Kft. 2002. CH 1
 Lawrence J. Gitman: Principles of Managerial Finance, Addison -
Wesley 10th Edition – see sharepoint: CH1:21-28old.
 Sharepoint: Keown CH2 Financial Markets and Interest rates
 Lecture ppt.
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Indicative aim
Link theory with the ‘real’ world.
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"In my whole life, I have known no wise people
(over a broad subject matter area) who didn't
read all the time - none, zero."-- Charlie
Munger
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Money = Happiness?
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Power of Money and Finance
"We witnessed the collapse of the financial
system,' said Mr. Soros. "There's no sign we
are anywhere near the bottom."
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Securities
FINANCIAL MARKETS
-Money and Capital
markets
-OTC, Stock- exchanges
?
Funds
LENDERS
Funds
-HOUSEHOLDS
priv.placement
-Government
?
Deposits
Funds
Funds
BORROWERS
-COMPANIES
-Government
-Municipalities
Loans
FINANCIAL
INSTITUTIONS
-Commercial
banks,Investment banks,
Funds
Mutual funds,Leasing
comp.,etc.
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Investment decision
„All there is to investing is picking good
stocks at good times and staying with them
as long as they remain good companies„
Warren Buffett
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Money evolution
 I. Direct interchange of commodities (barter trade)
 II. The general equivalents (salt, slaves etc.)
– Served as a basis of comparison
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Criteria of money
Physical essentials:
–
–
–
–
–
–
Cheap to produce
Homogeneously equal
Highly divisible
Convenient to carry
Universally acceptable
Stability in value
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III. Functions of money
– Measure of value (értékmérő)
– Means of turnover (forgalmi eszköz)
– Medium of payment, medium of exchange (fizetési
eszköz) –standard of deferred payment (halasztott
fizetési eszköz)
– Store of wealth (kincsképző)
– World money – if accepted internationally
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When did money first appear?
All equivalents are money
Karl Marx – only gold
Today?
–credit money system
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Think About That!:
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Era of metals
Monometallism
Bimetallism
Greshams axiom. The good money was
crowded out by the worse
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Money substitutes
Growing
turnover
Need to
increase
rotation
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Appearance
of
substitutes
21
Money substitutes 2
Acceptability
Discounting papers
Commercial papers, trade bills
(kereskedelmi váltó)
Today –e-money
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 Pyramid shape
analysis
company
 For long term
 Fundemental analysis
 Economic variables
and the exchange rate
country
world economy
 Q?
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Participants
 bearish and bullish
traders and
speculators
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A VERY Bad Bear!
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Market terminologies
– Secondary and primary
– Money and bond market,
domestic and international
markets
– Wholesale and retail
market
– Open and closed ( open
offer for sale and private
placing
– Claim for the interest
(Bearer and registered
securities)
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Money market
 Short term instruments
 Pure discount securities
 Contracts up to 1 year
 Huge volume and vigorous competition
 No physical place
 Essentially for professionals ( banks, fin. institutional
investors, brokerage firms, companies)
 Liquidity ( fine spreads based on interest rate of lending
and borrowing)
 Creditworthiness (risk and return)
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Financial instruments
Money market instruments
–
–
–
–
–
–
–
Treasury bills (T-bill)
Local authority/ public utility bills
Certificate of deposit (CD)
Commercial paper (CP)
Bill of exchange
Bankers` acceptance (BA)
Federal agency securities (Fannie Mae)
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Financial instruments
 Other possibilities
–
–
–
–
Call money
Interbank market
Repurchase agreement /repo/
- Time deposit
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Call money
– Call money
– Term: very short period of time
• Overnight(12p.m-12p.m. next day)
• 3 or 7 days notice
– Negotiable: no
– Money is lent by one bank to another
and may be called back anytime
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Money market securities
 T-bills
– Domestic instruments issued by governments to raise short term finance
balancing cashflow
– Non-interest bearing and interest-bearing, sold at discount in auction
– Negotiable
– Generally 13,26,52 weeks
 Certificate of deposit - CD
– Usually issued by banks, is simple the evidence of time deposit
– Negotiable not as time deposit
– Sold at discount or pay coupon
– Interest payed at maturity
– 30 days to 3 month or could be longer
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Money market securities 2
 Commercial paper- CP
– Issued by large, safe and well-known
companies bypassing banks to achieve lower
borrowing rates (sometimes below the bank’s
prime rate)
– Very short term (max 270 days, most 60days
or less)
– Issued at discount
– Unsecured security
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Money market securities
 Trade bill, bills of exchange,
bankers’acceptance
– Used by companies for trade purposes
– The seller draws up a bill to the buyer to pay
and asks to sign it
– Could be sold at a discount to the bank
– Bank’s signature is a guaranty ( eligible bills
in UK the Bank of England is the guarantor)
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Capital market
 Instruments
– Bonds
– Government bonds
– Local authority papers
– Mortgage or other assets backed bonds
– Corporate
– Foreign
– Junk
– Shares
– Preferred
– Normal
 Innovations
– Convertibles
– Variables
 Investment notes
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Thanks for your attention!
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