Financial Markets Unit 1: The Financial System

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Questions and Answers

What are some examples of fixed income instruments?

Debt securities, loans

What is the term for loans and debt securities known as?

Fixed income securities

In a world with positive interest rates, what do borrowers have to pay back more than the borrowed amount?

Interest (correct)

Principal amount

Penalties

Taxes

The interest rate charged depends on the risks taken by the lender. (True/False)

True Signup and view all the answers

Who are considered as 'haves' in the economy?

Households Signup and view all the answers

Define net wealth in the context of a household's balance sheet.

Net wealth = assets - liabilities Signup and view all the answers

Real assets derive value from their _____ character and the utility they generate.

physical Signup and view all the answers

Financial assets are tangible assets.

False Signup and view all the answers

Match the following asset classes with their types: Common stock, Bonds, Real estate, Commodities

Common stock = Equity security Bonds = Fixed income security Real estate = Tangible asset Commodities = Physical goods used as inputs in the production of other goods or services Signup and view all the answers

What is the typical maturity at issuance for instruments traded in money markets?

1 year Signup and view all the answers

What are examples of wholesale money market instruments? (Select all that apply)

Commercial paper (CP) Signup and view all the answers

Household debt instruments include Consumer loans and ________.

Corporate debt instruments Signup and view all the answers

Debt securities involve the obligation of issuers-borrowers to make a promised stream of cash flows in the future.

True Signup and view all the answers

Match the bond identifier with its description:

CUSIP-code = Identifier for bonds ISIN-code = International Securities Identification Number for bonds Signup and view all the answers

What is the present value of receiving $105 within 6 months, given an interest rate of 10% per annum?

100 Signup and view all the answers

If you deposit $1,000 for one year at a rate of 10% per annum, how much will it amount to in one year?

1,100 Signup and view all the answers

What will be the amount after leaving the money in the account for another year?

1,210 Signup and view all the answers

To determine the present value of a future cash flow, we compute $VT = V0 \times (1 + rT)$ with ____(annual compounding).

annual compounding Signup and view all the answers

In annual compounding, the interest amount is added to the capital so that interest on interest can be earned.

True Signup and view all the answers

Which compounding frequency results in an amount of 110.38 for a principal of 100 after 1 year with a 10% interest rate?

Quarterly compounding Signup and view all the answers

What is the term used to describe the day on which parties exchange cash and securities?

Settlement day Signup and view all the answers

Which types of bonds are used in the US for maturities between 1 and 8-10 years?

Treasury (coupon) notes Signup and view all the answers

Sovereign bonds are issued by the highest level of government in a country.

True Signup and view all the answers

When a very large amount is issued, we refer to the bond as a ___ bond.

jumbo Signup and view all the answers

Match the following bond types with their descriptions:

Mortgage bond = Grants bond holders a lien against pledged assets Collateral = Pledge of personal property Debenture bond = Not secured by a specific pledge of property Guaranteed bond = Bond with cash flows guaranteed by a third party Signup and view all the answers

What is the formula for ordinary returns of an asset?

(Pt - P0 + C) / P0 Signup and view all the answers

Which of the following statements is true regarding ordinary returns?

Ordinary returns are multiplicative in nature. Signup and view all the answers

Returns from risky assets are considered to be random variables.

True Signup and view all the answers

_____ assign a probability to each possible outcome of a random variable.

Probability distributions Signup and view all the answers

What terminology is used to describe shares in companies according to Valdez and Molyneux?

Stocks Signup and view all the answers

What rights do shareholders have? (Select all that apply)

Membership rights Signup and view all the answers

Shareholders are entitled to the distributed profits of the firm.

True Signup and view all the answers

In Belgium, the withholding tax rate for retail investors is __%.

30 Signup and view all the answers

Match the following terms with their descriptions:

Market order = Entered into an order book Stock dividend = Dividend paid in more shares of the issuing company Quote Driven Trading = Market makers provide bid and ask prices Settlement = Process of paying/receiving money and delivering the stock Signup and view all the answers

What are the different types of derivatives based on the underlying asset? (Select all that apply)

Equity derivatives Signup and view all the answers

What is the purpose of derivatives in transferring risks efficiently?

Transfer risks efficiently Signup and view all the answers

In capital budgeting, real options help calculate the Net Present Value (NPV) by including value creation through flexibility.

True Signup and view all the answers

Match the following terms related to users in financial markets with their descriptions:

Hedgers = Seek to reduce their risk exposures Speculators = Seek to profit from market movements Arbitrageurs = Seek to exploit price inefficiencies for profit Signup and view all the answers

A spot contract involves an agreement to buy or sell a well-specified asset at a certain price with an almost immediate delivery within ______ days.

3 Signup and view all the answers

What are the different market cap ranges for asset classes from Nano to Mega Caps?

Mega Cap: > 200 billion; Mid Cap: 1 billion to 10 billion; Small Cap: 300 million to 1 billion Signup and view all the answers

How are value and growth stocks differentiated based on Price/Book (P/B) ratios?

Value stocks have a low P/B ratio, while growth stocks have a high P/B ratio. Signup and view all the answers

In the context of asset classes, stocks with the lowest P/B ratios are identified and considered as ______ stocks.

value Signup and view all the answers

The concept of Market Efficiency suggests that all past information, both public and private, is reflected in stock prices. Is this statement true?

False Signup and view all the answers

Wat is de belangrijkste functie van een onderzoeksconceptuele framework?

Om de relatie tussen variabelen te analyseren Signup and view all the answers

Welke epistemologische stroming beweert dat kennis wordt bepaald door de sociale constructie?

Constructionisme Signup and view all the answers

Wat is de belangrijkste karakteristiek van een epistemologische stroming zoals positivisme?

Het beweert dat kennis objectief kan worden verkregen Signup and view all the answers

Wat is de relatie tussen het epistemologische en het ontologische niveau?

Het ontologische niveau bepaalt het epistemologische niveau Signup and view all the answers

Wat is de functie van een Research Orientation?

Om de richting van het onderzoek te bepalen Signup and view all the answers

Wat is de relatie tussen de epistemologische en de ontologische stromingen?

Er is een continuum tussen de epistemologische en de ontologische stromingen Signup and view all the answers

Waarom is het belangrijk om vroeg te beginnen met het nadenken over een onderzoeksthema?

Om false starts en veranderingen van richting te voorkomen Signup and view all the answers

Waarom is het belangrijk om verschillende perspectieven te overwegen bij het kiezen van een onderzoeksthema?

Om een holistische kijk op het onderwerp te kunnen verwerven Signup and view all the answers

Wat is het doel van een 'What, Why, and How' Framework?

Om een onderzoek te kunnen structureren Signup and view all the answers

Welke discipline is belangrijk voor het begrijpen van organisaties en hun interne processen?

Psychologie Signup and view all the answers

Waarom is het belangrijk om praktische overwegingen te maken bij het uitvoeren van een onderzoek?

Om tijd, budget, ethiek en wet te respecteren Signup and view all the answers

Wat is het gevaar van bias in een onderzoek?

Dat het onderzoek niet objectief is Signup and view all the answers

Waarom is het belangrijk om een researchdesign te ontwikkelen?

Om de kwaliteit van het onderzoek te verhogen Signup and view all the answers

Wat is het doel van een researchstrategie?

Om de applicabiliteit en effecten van een onderzoek te kunnen evalueren Signup and view all the answers

Wat is de naam van de variabele die in het onderzoek als moderator wordt gebruikt?

Job level Signup and view all the answers

Welke analyse wordt gebruikt om de interactie tussen autonomie en productiviteit te bestuderen?

Path analysis Signup and view all the answers

Wat is het doel van een mediatievariabele in een onderzoek?

Om de relatie tussen twee variabelen te verklaren Signup and view all the answers

Wat is het verschil tussen een moderator en een mediatievariabele?

Een moderator beïnvloedt de relatie tussen twee variabelen, terwijl een mediatievariabele de relatie tussen twee variabelen verklaren Signup and view all the answers

Wat is het doel van een path analysis?

Om een causale relatie tussen twee variabelen te identificeren Signup and view all the answers

Wat is het voordeel van het gebruik van proxies in een lineaire regressie?

Het vermijden van multicollineariteit Signup and view all the answers

Wat is het doel van een SEM?

Om een estructuur van variabelen te identificeren Signup and view all the answers

Wat is het verschil tussen een ontology en een epistemology?

Een ontology richt zich op het bestuderen van de werkelijkheid, terwijl een epistemology richt zich op het bestuderen van kennis Signup and view all the answers

Hoe vertaal je een probleemstelling naar een onderzoeksvraag?

Door de belangrijkste variabelen te identificeren Signup and view all the answers

Welke benadering past het beste bij een onderzoeksvraag over de invloed van blockchain op bestaande businessmodellen?

Interpretivistische benadering Signup and view all the answers

Wat is het doel van een onderzoeksvraag?

Om kennis te vergaren over een specifiek onderwerp Signup and view all the answers

Wat is een voorbeeld van een probleemstelling die vertaald kan worden naar een onderzoeksvraag?

Hoe kan ik een succesvolle productlancering realiseren? Signup and view all the answers

Welke frase wordt gebruikt om het proces van het vertalen van een probleemstelling naar een onderzoeksvraag te beschrijven?

Van probleemstelling naar onderzoeksvraag Signup and view all the answers

Wat is het belangrijkste doel van het formuleren van een onderzoeksvraag?

Om kennis te vergaren over een specifiek onderwerp Signup and view all the answers

Welke benadering zou men gebruiken om de invloed van vertrouwen op OCB in creatieve bedrijven te bestuderen?

Interpretivistische benadering Signup and view all the answers

Wat is het doel van de Complication-stap in de 5C-Framework?

Het formuleren van een probleem of puzzel Signup and view all the answers

Wat is een voordeel van de positivistische benadering?

Snel, eenvoudig en rechttoe rechtaan Signup and view all the answers

Wat is een nadeel van de interpretivistische benadering?

Beperkte generaliseerbaarheid Signup and view all the answers

Wat is het doel van de Concern-stap in de 5C-Framework?

Het beschrijven van de belangrijkheid van het probleem Signup and view all the answers

Wat is een voorbeeld van een kwantitatieve onderzoeksvraag?

Wat is de relatie tussen online-onderwijs en motivatie? Signup and view all the answers

Wat is het doel van de Course of Action-stap in de 5C-Framework?

Het beschrijven van de aanpak om het probleem op te lossen Signup and view all the answers

Wat is een nadeel van de poll?

Grote meetfouten mogelijk Signup and view all the answers

Study Notes

Introduction to Financial Markets

The Actors

Haves and Have-Nots: individuals/organizations with capital (haves) and those without capital (have-nots) who borrow
Households, corporations, government, and financial industry are the main actors in the financial system
Net wealth = assets - liabilities

Balance Sheet of a Household

Assets: tangible (physical value), intangible (legal claim to future benefit), financial (claim to future cash)
Liabilities: mortgage loans, consumer loans, tax debt

Wealth Creation

Assets put money in your pocket, liabilities take money out
Value changes in assets and liabilities, net income from labor, capital, or transfers create wealth

Wealth Distribution

Uniformly distributed among households
Wealth inequality: not everyone has the same amount of wealth

The Financial System

Facilitates production, employment, and consumption
Resources are funneled through the system to their most efficient uses

Role of the Government

Regulation: disclosure, market conduct, financial institution regulation
Influence markets through monetary policy
Act as financial intermediary, provide bailouts, and maintain financial stability

Review Questions

Unit 1 RQs: borrowers, lenders, net wealth, asset categorization, traditional and alternative investments, liabilities, money markets, capital markets, securities, primary and secondary markets, balance sheets, leverage, government role

Financing Sources

Equity and debt instruments (loans and debt securities)

Financial History

Debt instruments are the oldest financial instruments
Early loan concepts and insurance/risk sharing contracts

Interest Rates

Price of money, reward for postponing consumption
Depends on credit worthiness and maturity of debt
Term structure of interest rates: graph of interest rates vs. maturities
Shapes of the term structure: normal, inverted, flat### Interest Rates and Credit Spreads
Lenders charge borrowers a credit spread for expected credit losses, which also embeds a liquidity premium
Credit spreads vary by maturity and borrower quality, resulting in a term structure of nominal rates for risky assets

Fisher Equation

Relates nominal interest rates to real interest rates and expected inflation
Equation: (1 + rnominal) = (1 + rreal) (1 + ε) or rnominal ≈ rreal + ε

Time Value of Money

Preliminary remark: understanding the time value of money is crucial for fixed income instruments
Both simple and compounded interest rates are used in practice
Timeline: a linear representation of cash flows, with inflows (positive cash flows) and outflows (negative cash flows)

Single Cash Flow Compounding

Simple interest rate: Vt = V0 (1 + rT)
Compounded annually: Vt = V0 (1 + r)^T
Compounded m times a year: Vt = V0 (1 + r/m)^(mT)

Single Cash Flow Discounting

Simple interest rate: V0 = Vt / (1 + rT)
Compounded annually: V0 = Vt / (1 + r)^T
Compounded m times a year: V0 = Vt / (1 + r/m)^(mT)

Multiple Cash Flows

Value additivity: cash flows can be summed if their values are expressed at the same moment
Example: Paul Draper's crossword competition cash flows

Bond Pricing

A financial instrument can be seen as a portfolio of single cash flow instruments
Present values are additive
Each cash flow has to be discounted at its own interest rate

Yield

The return on a single cash flow received at the end of period T is called a T-year spot rate
Yield to maturity is the single return on a stream of cash flows

Institutional Aspects

Fixed income markets
Ratings and credit worthiness
Market taxonomy: money markets (maturity at issuance ≤ 1 year) and capital markets (maturity at issuance > 1 year)

Instruments

Money market instruments: private (call money, commercial paper) and public (T-bills)
Unsecured interbank funding/lending market
Secured lending using repurchase agreements (repo)Here are the study notes:

Commercial Paper

Definition: A short-term unsecured promissory note issued in the open market representing the obligation of the issuing company.
Used for seasonal financing of working capital and bridge financing.
Primary market based on best effort arrangements (no guaranteed placement).
Hardly any secondary trading; short-term (typically 90 days in the US).
Yields can be quoted on a discount basis or in interest-bearing form.

Certificates of Deposit (CDs)

Definition: A financial obligation issued by a depository institution indicating a specific sum of money deposited at the issuing institution for a specific time period.
Deposit insurance applies for small denominations.
Can be negotiable or non-negotiable (not resellable in the market).
Large-denomination negotiable CDs have denominations of $10 million and more.

Money Market Instruments

Household debt instruments
Corporate debt instruments
Intercompany loans
Trade credit
Straight loans
Overdrafts
Factoring and forfaiting

Public Money Market Instruments

Treasuries
- Names: T-Bills (US), T-bill (UK), Schatkistcertificaat (BE), Bon du Trésor (FR), Schatzwechsel (GE)
- Maturities: 3, 6, 12 months
- Fungibility
Primary market: Auctions (tenders)
American tender principle: Bid price auction (not uniform price auction, i.e., Dutch style)
On-the-run issues: Most recently issued; off-the-run issues: Less liquid, older issues

Capital Market Instruments

Long-term loans
Household debt
- Mortgage loans
- Credit lines
- Investment credit
- Revolving credits
- Leasing
Corporate debt
- Credit lines
- Investment credit
- Revolving credits
- Leasing
Debt securities
- Embed the obligation of issuers-borrowers to make a promised stream of cash flows in the future
- Determine cash flows, their size, and timing (at issuance)
- Debt markets (fixed-income markets) where debt securities trade

And so on... Let me know if you want me to continue!

Research Strategies and Design

Evaluating the applicability and effects of a research strategy is a key learning outcome.
Understanding the difference between correlation and causation is crucial.
Research topics should be explored from different perspectives.
It is essential to start designing one's own research project with a clear understanding of the research area.

The Field of Management Research

Management research is a discipline-based field that draws from various disciplines, including psychology, sociology, anthropology, and economics.
Subfields within management research include organizational behavior, human resources, information systems, accounting, and finance.
Industrial relations and strategy are also essential components of management research.

Influences on Research

Practical considerations, such as time, budget, ethics, law, and finance, influence research.
Theory and epistemology also play a significant role in shaping research.
Social research and values are essential considerations in research.
Ontology is a critical aspect of research, as it examines the nature of social entities.

Designing Research

A 'What, Why, and How' framework is useful for designing research.
What: identifying the research question or topic.
Why: understanding the significance and relevance of the research.
How: conceptualizing and practically implementing the research.
The Research Turtle framework is a helpful tool for guiding research.

Epistemology and Ontology

Epistemology examines how we can know something.
Positivism and interpretivism are two approaches to epistemology.
Ontology, on the other hand, examines what can be known.
Objectivism and constructionism are two approaches to ontology.

Problem Statement and Research Question

Translating a problem statement into a research question is a critical step in the research process.
Research questions can be formulated using a positivist or interpretivist approach.
A conceptual model can be developed to guide research.

Research Approaches

Positivist approaches involve large sample sizes, statistical tests, and generalizability.
Interpretivist approaches involve in-depth interviews, focus groups, and a holistic approach.
Each approach has advantages and disadvantages.

5C Framework

The 5C framework consists of common ground, complication, concern, course of action, and contribution.
It is a useful tool for developing research questions and guiding the research process.

Moderator and Mediating Variables

Moderator variables affect the relationship between variables.
Mediating variables explain the relationship between variables.
Path analysis and structural equation modeling are used to analyze moderator and mediating variables.

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Description

Learn about the financial system and its key actors in this introductory quiz. Understand the roles and responsibilities of different entities in the financial market. Get started with your finance education!

Financial Markets Unit 1: The Financial System

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Questions and Answers

What are some examples of fixed income instruments?

What is the term for loans and debt securities known as?

In a world with positive interest rates, what do borrowers have to pay back more than the borrowed amount?

The interest rate charged depends on the risks taken by the lender. (True/False)

Who are considered as 'haves' in the economy?

Define net wealth in the context of a household's balance sheet.

Real assets derive value from their _____ character and the utility they generate.

Financial assets are tangible assets.

Match the following asset classes with their types: Common stock, Bonds, Real estate, Commodities

What is the typical maturity at issuance for instruments traded in money markets?

What are examples of wholesale money market instruments? (Select all that apply)

Household debt instruments include Consumer loans and ________.

Debt securities involve the obligation of issuers-borrowers to make a promised stream of cash flows in the future.

Match the bond identifier with its description:

What is the present value of receiving $105 within 6 months, given an interest rate of 10% per annum?

If you deposit $1,000 for one year at a rate of 10% per annum, how much will it amount to in one year?

What will be the amount after leaving the money in the account for another year?

To determine the present value of a future cash flow, we compute $VT = V0 \times (1 + rT)$ with ____(annual compounding).

In annual compounding, the interest amount is added to the capital so that interest on interest can be earned.

Which compounding frequency results in an amount of 110.38 for a principal of 100 after 1 year with a 10% interest rate?

What is the term used to describe the day on which parties exchange cash and securities?

Which types of bonds are used in the US for maturities between 1 and 8-10 years?

Sovereign bonds are issued by the highest level of government in a country.

When a very large amount is issued, we refer to the bond as a ___ bond.

Match the following bond types with their descriptions:

What is the formula for ordinary returns of an asset?

Which of the following statements is true regarding ordinary returns?

Returns from risky assets are considered to be random variables.

_____ assign a probability to each possible outcome of a random variable.

What terminology is used to describe shares in companies according to Valdez and Molyneux?

What rights do shareholders have? (Select all that apply)

Shareholders are entitled to the distributed profits of the firm.

In Belgium, the withholding tax rate for retail investors is __%.

Match the following terms with their descriptions:

What are the different types of derivatives based on the underlying asset? (Select all that apply)

What is the purpose of derivatives in transferring risks efficiently?

In capital budgeting, real options help calculate the Net Present Value (NPV) by including value creation through flexibility.

Match the following terms related to users in financial markets with their descriptions:

A spot contract involves an agreement to buy or sell a well-specified asset at a certain price with an almost immediate delivery within ______ days.

What are the different market cap ranges for asset classes from Nano to Mega Caps?

How are value and growth stocks differentiated based on Price/Book (P/B) ratios?

In the context of asset classes, stocks with the lowest P/B ratios are identified and considered as ______ stocks.

The concept of Market Efficiency suggests that all past information, both public and private, is reflected in stock prices. Is this statement true?

Wat is de belangrijkste functie van een onderzoeksconceptuele framework?

Welke epistemologische stroming beweert dat kennis wordt bepaald door de sociale constructie?

Wat is de belangrijkste karakteristiek van een epistemologische stroming zoals positivisme?

Wat is de relatie tussen het epistemologische en het ontologische niveau?

Wat is de functie van een Research Orientation?

Wat is de relatie tussen de epistemologische en de ontologische stromingen?

Waarom is het belangrijk om vroeg te beginnen met het nadenken over een onderzoeksthema?

Waarom is het belangrijk om verschillende perspectieven te overwegen bij het kiezen van een onderzoeksthema?

Wat is het doel van een 'What, Why, and How' Framework?

Welke discipline is belangrijk voor het begrijpen van organisaties en hun interne processen?

Waarom is het belangrijk om praktische overwegingen te maken bij het uitvoeren van een onderzoek?

Wat is het gevaar van bias in een onderzoek?

Waarom is het belangrijk om een researchdesign te ontwikkelen?

Wat is het doel van een researchstrategie?

Wat is de naam van de variabele die in het onderzoek als moderator wordt gebruikt?

Welke analyse wordt gebruikt om de interactie tussen autonomie en productiviteit te bestuderen?

Wat is het doel van een mediatievariabele in een onderzoek?

Wat is het verschil tussen een moderator en een mediatievariabele?

Wat is het doel van een path analysis?

Wat is het voordeel van het gebruik van proxies in een lineaire regressie?

Wat is het doel van een SEM?

Wat is het verschil tussen een ontology en een epistemology?

Hoe vertaal je een probleemstelling naar een onderzoeksvraag?

Welke benadering past het beste bij een onderzoeksvraag over de invloed van blockchain op bestaande businessmodellen?

Wat is het doel van een onderzoeksvraag?

Wat is een voorbeeld van een probleemstelling die vertaald kan worden naar een onderzoeksvraag?

Welke frase wordt gebruikt om het proces van het vertalen van een probleemstelling naar een onderzoeksvraag te beschrijven?

Wat is het belangrijkste doel van het formuleren van een onderzoeksvraag?

Welke benadering zou men gebruiken om de invloed van vertrouwen op OCB in creatieve bedrijven te bestuderen?

Wat is het doel van de Complication-stap in de 5C-Framework?

Wat is een voordeel van de positivistische benadering?

Wat is een nadeel van de interpretivistische benadering?

Wat is het doel van de Concern-stap in de 5C-Framework?