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Money & Banking
Summary of money and banking
Inhoud
WEEK 1......................................................................................................................................................... 2
Chapter 1....................................................................................................................................... 2
Chapter 4....................................................................................................................................... 3
Chapter 5....................................................................................................................................... 6
WEEK 2......................................................................................................................................................... 9
Inflation-Index Bonds..................................................................................................................... 9
Chapter 6..................................................................................................................................... 10
Chapter 7..................................................................................................................................... 12
WEEK 3....................................................................................................................................................... 16
Chapter 2..................................................................................................................................... 16
Chapter 8..................................................................................................................................... 19
Chapter 9..................................................................................................................................... 22
WEEK 5....................................................................................................................................................... 26
Securitization............................................................................................................................... 26
Chapter 12 & 13.......................................................................................................................... 28
WEEK 6....................................................................................................................................................... 34
Chapter 3..................................................................................................................................... 34
Chapter 14................................................................................................................................... 35
Chapter 15................................................................................................................................... 39
WEEK 7....................................................................................................................................................... 43
Chapter 16................................................................................................................................... 43
Chapter 17................................................................................................................................... 47
Chapter 10................................................................................................................................... 49
FORMULAS AND SYMBOLS...................................................................................................................... 51
Formulas...................................................................................................................................... 51
Symbols....................................................................................................................................... 52
TIMELINE CRISIS....................................................................................................................................... 53
RELATIONSHIPS BETWEEN VARIABLES.................................................................................................55
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Week 1
Chapter 1
Types of markets:
Financial market: markets where funds are transferred from people who have
an excess of available funds to people who have a shortage.
(example: people who loan money and people who save money)
Bond market: markets where bonds are traded
(bonds are a way for corporations to raise funds to finance activities)
Stock market: markets where common stocks are traded, which represent a
share of ownership in a corporation.
(stocks are a way for corporations to raise funds to finance activities)
Foreign exchange market: markets where funds are converted from one
currency to another (which in term, determines the foreign exchange rate).
(the foreign exchange rate affects the trade balance)
Interest rate: the cost of borrowing / the price paid for rental of funds
Effect high interest rate: deter from buying goods, encourage savings, postpone
investments
Effect low interest rate: buying goods, less savings, encourage investments
Exchange rate: the price of one currency in terms of another currency
Effect high exchange rate: less export, more import -> trade deficit
Effect low exchange rate: higher export, less import -> trade surplus
Financial institution: An establishment that completes and facilitates monetary
transactions, such as: loans, mortgages and deposits.
Types of financial institutions
Investment banks: institution that provides financial services and acts as an
intermediary in large and complex financial transactions.
Banks: institution that accepts deposits and makes loans.
Insurance companies: institution that provides and sells insurance.
Mutual funds: institution that pools money from many investors and invests
the money in securities.
Financial intermediaries :institutions that borrow funds from people who have
saved and make loans to others.
Pension funds: institution that pools money from which pensions are paid,
accumulated from contributions from employers, employees or both.
Others
Financial crises: (Major) disruptions in financial markets, characterized by a sharp
decline in asset prices and failures of financial and non-financial firms.
,\
Chapter 4
Understanding interest rates
Time value of money: A dollar paid to you a year from now is less valuable than a
dollar paid to you today
Factors:
A factor rate is another word for interest rate.
Discount factor: used to discount back from future value to present value.
Formula: / (1+i)n
Compound factor: used to compound into the future (value) from the present
value.
Formula: * (1+i)n
Other words for interest: yield-to-maturity (YTM), interest rate, factor rate
Other types of interest rates: discounted interest, compounded interest, effective
interest (EAR), fixed interest, variable interest, real interest (r), nominal interest (i) or
accrued interest.
There are two times that are used in calculating: the present value (PV) and future
value (FV).
Present value (PV):
Equation 1: present value formula
CF= cash flow
I = interest rate
N = periods
(note: future payments will be less, due to discounting)
Future value (FV):
Equation 2: Future value formula
Types of credit instruments
Simple loan:
One off payments, lender lends principal to be paid at maturity date with additional
interest.
Example: commercial loans
Formula:
Fixed payment loan (FP) / fully amortized:
Borrowed sum of money, repaid with same cash flow payment every period
throughout the life of the loan.
Constant payment of principal and interest
Example: installment and mortgages
Formula:
, \
Equation 3: fixed payment loan formula
Coupon bond:
The owner of the bond receives fixed interest payments (coupon payments) every
year. Both the face value (FV) of the bond and the coupon payments (CPN)
determine the price of the bond.
Formula:
Equation 4: Coupon bond formula
I = YTM (yield-to-maturity)
C = CPN (coupon payment)
P = bond price
F = par value / face value
Yield-to-maturity (YTM): interest rate of bonds ; the interest rate that equates the
present value of cash flow payments received from a debt instrument with its value
today.
A bond can be traded at either a discount, at par or premium
Discount, at par or premium
Discount YTM > coupon rate Bond price < par The longer the
value term to maturity,
the greater the
discount
At par YTM = coupon rate Bond price = par
value
premium YTM < coupon rate Bond price > par The longer the
value term to maturity,
the greater the
premium
A higher YTM means a lower bond price, and vice versa. (see formula)
Consol/perpetuity:
A constant stream of cash flows, that lasts forever.
Formula:
Equation 5: perpetuity formula
Discount bond / zero-coupon bond:
A bond that is (always) bought at a discount (the price is lower than the face value).
Formula:
Money & Banking
Summary of money and banking
Inhoud
WEEK 1......................................................................................................................................................... 2
Chapter 1....................................................................................................................................... 2
Chapter 4....................................................................................................................................... 3
Chapter 5....................................................................................................................................... 6
WEEK 2......................................................................................................................................................... 9
Inflation-Index Bonds..................................................................................................................... 9
Chapter 6..................................................................................................................................... 10
Chapter 7..................................................................................................................................... 12
WEEK 3....................................................................................................................................................... 16
Chapter 2..................................................................................................................................... 16
Chapter 8..................................................................................................................................... 19
Chapter 9..................................................................................................................................... 22
WEEK 5....................................................................................................................................................... 26
Securitization............................................................................................................................... 26
Chapter 12 & 13.......................................................................................................................... 28
WEEK 6....................................................................................................................................................... 34
Chapter 3..................................................................................................................................... 34
Chapter 14................................................................................................................................... 35
Chapter 15................................................................................................................................... 39
WEEK 7....................................................................................................................................................... 43
Chapter 16................................................................................................................................... 43
Chapter 17................................................................................................................................... 47
Chapter 10................................................................................................................................... 49
FORMULAS AND SYMBOLS...................................................................................................................... 51
Formulas...................................................................................................................................... 51
Symbols....................................................................................................................................... 52
TIMELINE CRISIS....................................................................................................................................... 53
RELATIONSHIPS BETWEEN VARIABLES.................................................................................................55
,\
Week 1
Chapter 1
Types of markets:
Financial market: markets where funds are transferred from people who have
an excess of available funds to people who have a shortage.
(example: people who loan money and people who save money)
Bond market: markets where bonds are traded
(bonds are a way for corporations to raise funds to finance activities)
Stock market: markets where common stocks are traded, which represent a
share of ownership in a corporation.
(stocks are a way for corporations to raise funds to finance activities)
Foreign exchange market: markets where funds are converted from one
currency to another (which in term, determines the foreign exchange rate).
(the foreign exchange rate affects the trade balance)
Interest rate: the cost of borrowing / the price paid for rental of funds
Effect high interest rate: deter from buying goods, encourage savings, postpone
investments
Effect low interest rate: buying goods, less savings, encourage investments
Exchange rate: the price of one currency in terms of another currency
Effect high exchange rate: less export, more import -> trade deficit
Effect low exchange rate: higher export, less import -> trade surplus
Financial institution: An establishment that completes and facilitates monetary
transactions, such as: loans, mortgages and deposits.
Types of financial institutions
Investment banks: institution that provides financial services and acts as an
intermediary in large and complex financial transactions.
Banks: institution that accepts deposits and makes loans.
Insurance companies: institution that provides and sells insurance.
Mutual funds: institution that pools money from many investors and invests
the money in securities.
Financial intermediaries :institutions that borrow funds from people who have
saved and make loans to others.
Pension funds: institution that pools money from which pensions are paid,
accumulated from contributions from employers, employees or both.
Others
Financial crises: (Major) disruptions in financial markets, characterized by a sharp
decline in asset prices and failures of financial and non-financial firms.
,\
Chapter 4
Understanding interest rates
Time value of money: A dollar paid to you a year from now is less valuable than a
dollar paid to you today
Factors:
A factor rate is another word for interest rate.
Discount factor: used to discount back from future value to present value.
Formula: / (1+i)n
Compound factor: used to compound into the future (value) from the present
value.
Formula: * (1+i)n
Other words for interest: yield-to-maturity (YTM), interest rate, factor rate
Other types of interest rates: discounted interest, compounded interest, effective
interest (EAR), fixed interest, variable interest, real interest (r), nominal interest (i) or
accrued interest.
There are two times that are used in calculating: the present value (PV) and future
value (FV).
Present value (PV):
Equation 1: present value formula
CF= cash flow
I = interest rate
N = periods
(note: future payments will be less, due to discounting)
Future value (FV):
Equation 2: Future value formula
Types of credit instruments
Simple loan:
One off payments, lender lends principal to be paid at maturity date with additional
interest.
Example: commercial loans
Formula:
Fixed payment loan (FP) / fully amortized:
Borrowed sum of money, repaid with same cash flow payment every period
throughout the life of the loan.
Constant payment of principal and interest
Example: installment and mortgages
Formula:
, \
Equation 3: fixed payment loan formula
Coupon bond:
The owner of the bond receives fixed interest payments (coupon payments) every
year. Both the face value (FV) of the bond and the coupon payments (CPN)
determine the price of the bond.
Formula:
Equation 4: Coupon bond formula
I = YTM (yield-to-maturity)
C = CPN (coupon payment)
P = bond price
F = par value / face value
Yield-to-maturity (YTM): interest rate of bonds ; the interest rate that equates the
present value of cash flow payments received from a debt instrument with its value
today.
A bond can be traded at either a discount, at par or premium
Discount, at par or premium
Discount YTM > coupon rate Bond price < par The longer the
value term to maturity,
the greater the
discount
At par YTM = coupon rate Bond price = par
value
premium YTM < coupon rate Bond price > par The longer the
value term to maturity,
the greater the
premium
A higher YTM means a lower bond price, and vice versa. (see formula)
Consol/perpetuity:
A constant stream of cash flows, that lasts forever.
Formula:
Equation 5: perpetuity formula
Discount bond / zero-coupon bond:
A bond that is (always) bought at a discount (the price is lower than the face value).
Formula:
