Economia finanziaria, dal calcolo degli interessi su strumenti finanziari alla valutazione di azienda attraverso i vari indici

INTRODUCTION: OVERVIEW OF FINANCIAL MARKETS & FINANCIAL

INSTITUTIONS

Financial Markets are structures through which funds flow.

Types of Financial Markets:

Primary markets are markets in which users of funds (Corporations) raise funds through

new issues of financial instruments, such as stocks and bonds.

Secondary Markets are markets that trade financial instruments once they are issued.

Money Markets are markets that trade debt securities or instruments with maturities of

less than one year.

Capital Markets are markets that trade debt and equity instruments with maturities of

more than one year.

Foreign Exchange Markets are markets in which cash flows from the sale of products or

assets denominated in a foreign currency are transacted.

Derivative Markets are markets in which derivative securities trade.

Primary and Secondary Market Transfer of Funds Time

Line:

Initial Public Offerings (IPOs): The first public issue of

financial instruments by a firm.

Money Vs Capital Market Maturities:

Over-The-Counter (OTC) markets are markets that do not

operate in a specific fixed location. The transactions

occur via telephones, wire transfers, and computer trading.

MONEY MARKET INSTRUMENTS:

Treasury bills - Short-term obligations issued by the U.S. government.

Federal funds - Short-term funds transferred between financial institutions usually for no

more than one day.

Repurchase Agreements - Agreements involving the sale of securities by one party to

another with a promise by the seller to repurchase the same securities from the buyer at

a specified date and price.

Commercial paper - Short-term unsecured promissory notes issued by a company to

raise short-term cash.

Negotiable certificate of deposit - Bank-Issued time deposit that specifies an interest rate

and maturity date and is negotiable that can be sold by the holder to another party.

Banker’s Acceptance - Time draft payable to a seller of goods, with payment guaranteed

by a bank.

CAPITAL MARKET INSTRUMENTS

Corporate Stock - The fundamental ownership claim in a public corporation.

Mortgages - Loans to individuals or businesses to purchase a home, land, or other real

property.

Corporate Bonds - Long-term bonds issued by corporations.

Treasury bonds - Long-term bonds issued by the U.S. Treasury.

State & Local Government Bonds - Long-term bonds issued by state and local

governments.

U.S. government agencies - Long-term bonds collateralized by a pool of assets and

issued by agencies of the U.S. government.

Bank and Consumer loans - Loans to commercial banks and individuals.

Derivative Security is an agreement between two parties to exchange a standard

quantity of an asset at a predetermined price on a specified date in the future.

Financial Institutions are institutions that perform the essential function of channeling

funds from those with surplus funds to those with shortages of funds. Ex. Commercial

and Savings Banks, Credit Unions, Insurance Companies, Mutual Funds.

Direct Transfer - A corporation sells its stock or debt directly to investors without going

through a financial institution.

Indirect Transfer - A transfer of funds between suppliers and users of funds through a

financial intermediary.

Liquidity is the ease with which an asset can be converted into cash at its fair market

value.

Price risk is the risk that an asset’s sale price will be lower than its purchase price.

Flow of Funds in a World without Financial

Intermediaries:

Flow of Funds

in a World with Financial Intermediaries:

Economies of Scale:

The concept that cost reduction in trading and

other transaction services results from increased efficiency when Financial Intermediaries

perform these services.

INTEREST RATES & SECURITY VALUATION

VARIOUS INTEREST RATE MEASURES:

Coupon rate is the interest rate on a bond instrument used to calculate the annual cash

flows the bond issuer promises to pay the bond holder.

Required rate of return is the interest rate an investor should receive on a security given

its risk. It is used to calculate the fair present value on a security.

Expected rate of return is the interest rate an investor expects to receive on a security if

he or she buys the security at its current market price, receives all expected payments,

and sells the security at the end of his or her investment horizon.

Realized rate of return is the actual interest rate earned on an investment in a financial

security. It is a historical measure of the interest rate.

The present value (PV) is determined

by the following formula:

Once a PV is calculated, compare it

with the current market price.

If Current Market Price < Present Value, the security is currently undervalued and

 we want to buy more.

If the Current Market Price > Present Value, the security is overvalued and we do

 not want to buy it.

If the Current Market Price = Present Value, the security is said to be fairly priced.



The Current Market Price is determined by the

following formula:

We can also

find the expected rate of return and realized rate

of return from these formulas.

Market Efficiency: The process by which financial security prices move to a new

equilibrium when interest rates or a security-specific characteristic changes.

BOND VALUATION:

Coupon Bonds - Bonds that pay interest based

on a stated coupon rate. The interest or

coupon payments per year are generally

constant over the life of the bond. This one on

the right is with payments every 6 months.

Zero-Coupon Bonds - Bonds that do not pay

interest.

Premium bond - A bond in which the present

value of the bond is greater than its face

value.

Discount bond - A bond in which the present value of the bond is less than its face value.

Par Bond - A bond in which the present value of the bond is equal to its face value.

Yield to maturity - The return or yield the bond holder will earn on the bond if he or she

buys it at its current market price, receives all coupon and principal payments as

promised, and holds the bond until maturity. This can be calculated by rewriting the

Value of Bond formula:

EQUITY VALUATION:

D - Dividend paid out to stockholders at the end of the year t.

t

P - Price of a firm’s common stock at the end of the year t.

t

P - Current price of a firm’s common stock.

0

r - Interest rate used to discount cash flows on an investment in a stock.

s

Present Value:

Assumptions on Dividends:

Zero Growth in Dividends

 Constant Growth in Dividends

 Supernormal (Or Non-constant) Growth in Dividends



Zero gr