MONEY AND CAPITAL MARKETS
Course Content
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Money and Capital Markets: an overview
Compounding, Present and Future Value
Bonds and Interest Rates
Stocks
Portfolio Theory
Futures
Options
Instructor:
Telephone:
Email:
Address:
Konstantinos Kassimatis
210 8203923
kkassima@aueb.gr
28 Ydras street, 2nd floor
Textbook: Investments, 4th edition, by Zvi Bodie, Alex Kane and Alan J. Marcus
Assessment: 2 hour final exam
THE INVESTMENT ENVIRONMENT
Nature of investment: timing of consumption
Real assets: land, buildings, machinery, etc.
Financial Assets: stocks, bonds, etc.
Separation of Ownership and Management
THE INVESTMENT PROCESS
Asset allocation
Security selection
Risk – Return trade off
Active vs. Passive Management
Trends in Money and Capital Markets
Technology
- Computer advancements
- More timely and accurate information
Globalization
- Domestic firms compete in world markets
- National economies affect each other
- Foreign exchange risk
- Diversification to improve performance
Securitization
- Opportunity for innovators and investors
- Changes in regulation and supervision
Financial Engineering
- Repackaging services and products
- Slicing and dicing of cash flows, e.g strips
MONEY AND CAPITAL MARKETS
Money and capital markets match those who need capital with those who have capital.
Those who need capital are borrowers or investors and those who have it are lenders or investors.
Lenders
- Individuals
- Companies
Intermediaries - Banks
- Insurance companies
- Pension funds
- Mutual funds
Markets
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Interbank
Stock exchanges
Money market
Bond market
Borrowers
- Individuals
- Companies
- Governments
INTERMEDIARIES
Banks
Central bank
- supervision of banks + deposits
- issue of bank notes
- currency reserves
- raising money for the government
- banker to the government
- lender of last resort
- setting monetary policy
- clearing
Commercial banks
- retail and wholesale banking
- intermediation
- maturity transformation
- providers of liquidity
Investment banks
- corporate finance
- accepting
- security trading
- investment management
- loan arrangement
- foreign exchange
- miscellaneous activities
Savings banks, cooperative banks, mortgage banks
Investment Companies
Open-end funds (mutual funds)
- They invest funds provided by investors
- Managed funds may vary based on supply
- Mutual funds have specific investment policies
- Investors may liquidate their shares
Closed-end funds
-They invest an amount initially pooled
-They do not accept additional funds
-They have an expiration date
- Investors can only sell their shares
Functions of investment funds
Record keeping and administration
Diversification and divisibility
Professional management
Low transaction costs
Value of a fund
Net asset value is the market value of net assets divided by shares outstanding.
Example: Funds manages assets with market value of €100 million. The fund owes €3 million to
investment advisors and €1 million for expenses. It has issued 20 million shares.
NAV =
100  3  1
= €4,80 per share
20
Commissions
- no-load funds
- load funds
front-end-load funds
back-end-load funds
Administration fees
Management fees
Fund categories
Equity funds
Money market funds
Fixed incomes funds
Balanced and income funds
Asset allocation funds
Index funds
Specialized sector funds
MARKETS
Interbank Market
Electronic market where banks and investment companies trade with each other
The platform for trading is provided by private companies, e.g. Bloomberg, Reuters
The Money Market
Short term debt securities
Treasury Bills
- Government debt
- Maturity of 91 days, 182 days or 52 weeks
- Competitive or non-competitive bids
Yield of a T-bill
Example: A T-bill is priced today at $9,600 and pays $10,000 in 182 days.
182 day yield: 400 / 9,600 = 4.17% semiannually
Effective Annual Yield: 1.04172 – 1 = 8.51%
Bank Discount Yield: 400 x (360 / 182) = 791.21
791.21 / 10.000 = 7.912%
Certificates of Deposit
Commercial Paper
Bankers’ Acceptances
Eurodollars
Repos and Reverse Repos
Federal Funds
LIBOR and EURIBOR
The Fixed Income (Bond) Market
Treasury Notes and Bonds
Federal Agency Debt (USA)
Municipal Bonds
Corporate Bonds
Mortgages and Mortgage Backed Securities (MBS)
Stock exchanges
Organized secondary market for securities
Why create a stock market?
- price discovery
- raise capital
- acquisitions (market discipline)
- choice of investment
- liquidity
- motive to save money
Participants in the stock market
- Brokers
- Market makers
- Institutional and individual investors
- Arbitrageurs
- Hedgers
- Speculators