12.30M

4_2_4_1_Financial_Markets_Assets

2.

What is a financial
market?
FINANCIAL MARKETS
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Financial Markets
Financial markets are places where buyers and sellers
come together to trade financial assets, such as stocks,
bonds, currencies, and derivatives. These markets serve
as intermediaries between those who need capital
(borrowers) and those who have capital to lend
(investors). Financial markets help enable companies,
governments, and individuals to raise funds (financial
capital) and invest their savings / profits.
FINANCIAL MARKETS
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4.

EXAM GOLD: THE UK FINANCIAL SECTOR
In 2021, the financial services sector contributed £174 billion to
the UK economy, equivalent to 8.3% of GDP. The sector was
largest in London, where around half of the sector’s output was
generated. There were 1.08 million financial services jobs in the
UK in 2022, 3% of all jobs. Exports of UK financial services were
worth £61 billion in 2021 and imports were worth £17 billion, so
there was a trade surplus in financial services of £44 billion.
FINANCIAL MARKETS
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5.

KEY ROLES OF FINANCIAL MARKETS
• Allocation of Capital: Financial markets efficiently allocate capital to its most
productive uses. Investors allocate funds to projects with the highest expected
returns. Some projects are riskier than others.
• Risk Management: Financial markets offer a platform for risk transfer.
Participants can hedge against various risks, such as interest rate risk and
foreign exchange risk.
• Price Discovery: Financial markets determine the prices of financial assets,
reflecting available information and market expectations.
• Economic Growth: Well-functioning financial markets can spur growth by
providing firms with access to capital for investment and innovation
FINANCIAL MARKETS
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6.

THE MAIN ROLE OF FINANCIAL MARKETS
• The main goal of a financial
market is to match buyers and
sellers to efficiently allocate
financial capital to its most
productive uses.
• Financial markets have become
more complex over the years
and there are numerous causes
of financial market failure.
FINANCIAL MARKETS
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7.

BOND MARKET
STOCK MARKET
In 2021, it was estimated that the global
market for corporate bonds was worth $10
trillion, with most bonds issued by
companies in the USA, Europe, and Asia.
Overseas firms can list on the UK stock
market. Examples include Royal Dutch Shell
(Netherlands) and BNP Paribas (France).
FINANCIAL MARKETS
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8.

CURRENCY MARKET
MORTGAGE MARKET
Trading in currency markets reached $6.6
trillion per day in 2021.
There are 11 million outstanding mortgages
(home loans) in the UK (as of May 2021)
FINANCIAL MARKETS
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9.

BUSINESS USE OF FINANCIAL MARKETS
FINANCE A BUSINESS
START-UP
FINANCE A MERGER
OR A TAKEOVER
672,890 start ups founded in the UK
in 2019. That's 1,843 per day
In 2019, the value of global M&A
deals amounted to $3.7 trillion
FINANCIAL MARKETS
FINANCE CAPITAL
INVESTMENT
In 2019, business investment in the
UK economy grew by only 1.8%
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10.

MONEY MARKETS
• The money market is a financial market for short-term, highly
liquid debt securities.
• It includes instruments like Treasury bills, commercial paper, and
certificates of deposit.
• Participants include banks, financial institutions, and corporations
seeking short-term financing or investments.
FINANCIAL MARKETS
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11.

CAPITAL MARKETS
• The capital market deals with long-term debt and equity securities.
• It encompasses the primary market (where new securities are
issued – for example when a business floats on one or more stock
markets) and the secondary market (where existing securities such
as bonds and shares are traded).
• Securities in the capital market include stocks, bonds, and real
estate investments.
FINANCIAL MARKETS
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12.

BIGGEST INITIAL PUBLIC OFFERINGS (APRIL 2023)
Deal value in US $s (billion)
0
Saudi Aramco* (2019)
Alibaba Group** (2014)
SoftBank Corp (2018)
NTT Mobile (1998)
Visa (2008)
AIA (2010)
ENEL SpA (1999)
Facebook (2012)
General Motors (2010)
ICBC Bank - H (2006)
Deutsche Telekom (1996)
Rivian Automotive (2021)
Alibaba Group - Hong Kong Exchange (2019)
Dai-ichi Mutual Life Insurance (2010)
LG Energy Solutions (2022)
FINANCIAL MARKETS
5
10
15
20
25
30
25,6
21,77
21,35
18,1
17,86
17,78
16,45
16,01
15,77
13,96
13,03
11,93
11,24
10,99
10,74
An initial public offering (IPO) is
the process by which a private
company offers shares of its
stock to the public for the first
time, through the stock market.
The main purpose of an IPO is
to raise capital for the
company, by selling a portion of
its ownership to the public.
TUTOR2U.NET/ECONOMICS

13.

LARGEST STOCK MARKETS GLOBALLY (JULY 2023)
Largest stock exchange operators worldwide 2023, by market cap of listed companies, US$ trillion
0
NYSE, United States
NASDAQ, United States
Shanghai Stock Exchange, China
Euronext, Europe
Japan Exchange Group
Shenzhen Stock Exchange, China
Hong Kong Exchanges
National Stock Exchange of India
LSE Group, UK
TMX Group, Canada
Saudi Stock Exchange (Tadawul)
Deutsche Boerse AG
SIX Swiss Exchange
Korea Exchange
Nasdaq Nordic and Baltics
FINANCIAL MARKETS
5
10
15
20
25
30
24,97
22,21
7,1
6,95
6,01
4,81
4,62
3,71
3,29
3,05
2,95
2,23
2,03
1,98
1,94
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14.

FOREIGN EXCHANGE (CURRENCY) MARKETS
• The foreign exchange market is where currencies are
bought and sold.
• It facilitates international trade and investment by enabling
the exchange of one currency for another.
• The forex market operates 24/5 and is decentralized.
• The most heavily traded currency is the US dollar ($)
FINANCIAL MARKETS
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15.

LEADING CURRENCY PAIRS TRADED IN 2022
% share of total currency trades
0%
USD/EUR
USD/JPY
USD/GBP
USD/CNY
USD/CAD
USD/AUD
USD/CHF
USD/HKD
USD/SGD
EUR/GBP
USD/KRW
USD/INR
USD/MXN
EUR/JPY
USD/NZD
5%
10%
15%
20%
25%
22,7%
13,5%
9,5%
6,6%
5,5%
5,1%
3,9%
2,4%
2,3%
2%
1,7%
1,6%
1,4%
1,4%
1,3%
FINANCIAL MARKETS
The U.S. dollar dominated the list of the most
traded currency pairs in 2022, being involved all of
the top nine currency pairs. The most common
forex transaction in that year was the euro and the
U.S. dollar, which accounted for almost 23 percent
of the average daily turnover of all currency
exchanges.
TUTOR2U.NET/ECONOMICS

16.

CHARACTERISTICS OF MONEY
• Medium of Exchange: Money serves as a widely accepted means of
facilitating transactions, making trade more efficient.
• Unit of Account: Money provides a common measure for valuing
goods and services, enabling price comparisons.
• Store of Value: Money retains its value over time, allowing
individuals to save wealth for future use.
• Standard of Deferred Payment: Money can be used to settle debts
and obligations in the future.
FINANCIAL MARKETS
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17.

KEY FUNCTIONS OF MONEY
• Facilitating Exchange: Money eases the exchange of goods and
services in an economy.
• Unit of Measurement: Money provides a common unit for
measuring value, simplifying economic transactions.
• Store of Value: Money allows individuals to save wealth and
transfer it across time.
• Standard for Debt Settlement: Money can be used to fulfill
financial commitments.
FINANCIAL MARKETS
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18.

KEY FUNCTIONS OF MONEY
Medium of
exchange
Store of
value
Unit of
account
Standard of
deferred
payment
FINANCIAL MARKETS
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19.

LIQUIDITY SPECTRUM
Where do these assets sit on this liquidity spectrum?
MOST LIQUID
1
A) CASH IN
HAND
LEAST LIQUID
2
3
B) A HOUSE
E) TREASURY
BILL
4
5
C) INFRASTRUCTURE
F) SIGHT
DEPOSIT
6
D) 2yr
CORPORATE
BOND

20.

LIQUIDITY SPECTRUM
Where do these assets sit on this liquidity spectrum?
MOST LIQUID
1
2
A) CASH IN
HAND
LEAST LIQUID
3
4
E) TREASURY
BILL
F) SIGHT
DEPOSIT
5
6
B) A HOUSE
D) 2yr
CORPORATE
BOND
C) INFRASTRUCTURE

21.

MEASURING THE MONEY SUPPLY
• The money supply refers to the total quantity of money that is available for
transactions. It is typically categorized into different monetary aggregates based
on liquidity and accessibility.
• Narrow Money (M1): M1 represents the most liquid components of the money
supply. It includes physical currency (coins and notes) and checking deposits in
banks. M1 is used for day-to-day transactions.
• Broad Money (M2, M3, etc.): Broader monetary aggregates include M2, M3, and
beyond, which incorporate illiquid assets. These aggregates encompass a wider
range of savings and time deposits, as well as other near-money substitutes.
• Broad money includes savings accounts, time deposits, and other forms of nearmoney assets.
FINANCIAL MARKETS
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22.

WHAT IS DIGITAL MONEY?
• Digital money, also known as electronic money or digital currency, refers
to a form of currency that exists solely in electronic or digital form.
• It does not have a physical counterpart like paper money or coins.
• Digital money is used for various types of transactions, including online
purchases, electronic fund transfers, digital payments, and peer-to-peer
transfers.
• It has become increasingly prevalent with the growth of e-commerce,
digital banking, and the development of new financial technologies.
FINANCIAL MARKETS
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23.

EXAMPLES OF DIGITAL MONEY
• Digital Wallets: Mobile payment apps and digital wallets, like PayPal,
Apple Pay, Google Pay, and digital banking apps, allow users to store
digital money balances and make secure online payments.
• Cryptocurrencies: Cryptocurrencies, such as Bitcoin & Ethereum
• Central Bank Digital Currencies (CBDCs): Some central banks are
exploring the idea of issuing digital versions of their national currencies.
• Prepaid Cards: Prepaid debit or gift cards issued by financial institutions
are a form of digital money. Users load funds onto the card, and the card
can be used for transactions until the balance is depleted.
FINANCIAL MARKETS
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24.

WHAT EXPLAINS THE GROWTH OF DIGITAL MONEY?
• Convenience: Digital money provides unparalleled convenience for
conducting transactions. Eliminating the need for physical cash or inperson visits to banks. Mobile money technologies have accelerated.
• Globalization: Digital money facilitates rapid cross-border payments.
• Security: Many digital money systems incorporate robust security
measures, including encryption and authentication, to protect users'
financial information. These security features reduce the risk of fraud,
theft, and counterfeiting.
• COVID-19 Pandemic: The pandemic prompted more people to embrace
contactless payment methods to reduce the risk of virus transmission.
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25.

A
B
C
1
Liquid
Coins and notes
Asset on a balance
sheet
2
Medium of
exchange
Standard of
deferred payment
To use in a
supermarket trolley
Measure of value
As a return on an
investment
Store of value
3
Which of these are the main functions of money?

26.

27.

What is the difference
between debt and
equity?
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28.

DIFFERENCE BETWEEN DEBT AND EQUITY
EQUITY FINANCE
Finance from shareholders through the issue
of new shares / stock which carry voting rights.
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29.

DIFFERENCE BETWEEN DEBT AND EQUITY
EQUITY FINANCE
DEBT FINANCE
Finance from shareholders through the issue
of new shares / stock which carry voting rights.
Borrowing money – requires paying interest
(on loans) and may also need security.
FINANCIAL MARKETS
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30.

DIFFERENCE BETWEEN DEBT AND EQUITY
• Debt: Debt represents borrowing by individuals or organizations.
• It involves periodic interest payments and repayment of the principal
amount at maturity.
• Bondholders are creditors with a claim on the issuer's assets but no
ownership stake.
• Equity: Equity represents ownership in a business or an asset.
• Equity holders are shareholders or owners who have a residual claim on
the assets and earnings of a company.
• Equity securities include common stock and preferred stock.
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31.

FINANCIAL MARKETS
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32.

WHAT ARE LEVERAGED LOANS?
Leveraged loans are loans provided to companies with a high level of debt
compared to their equity. These loans are typically used by companies with
lower credit ratings and are issued by private equity firms or hedge funds
rather than traditional banks. The key characteristics of leveraged loans are:
1.
High debt-to-equity ratio: The company borrowing the loan has a high
amount of debt compared to its equity, making it riskier for lenders.
2.
Floating interest rates: The interest rates on leveraged loans are often
variable, which means they can change over time.
3.
Higher risk: Leveraged loans carry a higher risk of default, which is why they
often have higher interest rates and fees than traditional loans.
FINANCIAL MARKETS
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33.

Mar '00
Dec '00
Sep '01
Jun '02
Mar '03
Dec '03
Sep '04
Jun '05
Mar '06
Dec '06
Sep '07
Jun '08
Mar '09
Dec '09
Sep '10
Jun '11
Mar '12
Dec '12
Sep '13
Jun '14
Mar '15
Dec '15
Sep '16
Jun '17
Mar '18
Dec '18
Sep '19
Jun '20
Mar '21
Dec '21
Sep '22
May '23
Average interest rate
MORTGAGE INTEREST RATES IN THE UK
2 year fixed rate mortgages
3 year fixed mortgage
10 year fixed
2 year variable
FINANCIAL MARKETS
5 year fixed mortgage
7,5%
6,5%
5,5%
4,5%
3,5%
2,5%
1,5%
0,5%
TUTOR2U.NET/ECONOMICS

34.

OUTSTANDING VALUE OF UK CORPORATE DEBT
Financial corporations
Non-financial corporations
Outstanding debt securities in billion U.S. dollars
3 500
3 000
639
560
2 500
540
525
514
525
521
521
554
558
585
617
623
597
588
527
500
451
2 000
1 500
2 466
1 000
2 355
2 327
2 282
2 296
2 315
2 384
2 495
2 275
2 400
2 474
2 600
2 553
2 611
2 499
2 542
2 296
2 018
500
0
Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022
FINANCIAL MARKETS
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35.

FINANCIAL MARKET COMPLEXITY
1.
Derivatives market: Derivatives are financial instruments whose value
is derived from an underlying asset, such as a stock, bond,
commodity, or currency. Examples include options, futures, and
swaps.
2.
Credit derivatives market: Credit derivatives are financial contracts
that allow investors to transfer credit risk from one party to another.
3.
Cryptocurrency market: Crypto-assets or digital currencies, like
Bitcoin, Ethereum, and others, are decentralized digital assets that
operate on a blockchain, which is a decentralized public ledger that
records all transactions.
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36.

What are bonds?
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37.

Bonds
In the world of finance, bonds are basically IOUs that
allow companies or governments to borrow money
from investors. When you buy a bond, you're lending
money to the issuer in exchange for regular interest
payments and the promise of getting your principal
back at a set time in the future.
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38.

CORPORATE AND GOVERNMENT BONDS
CORPORATE BONDS
FINANCIAL MARKETS
GOVERNMENT BONDS
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39.

BASICS OF A BOND
A bond is a
loan
FINANCIAL MARKETS
Repaid when
the bond
matures
Also pays
annual
interest
Market trades
the bond after
issue
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40.

BASICS OF A BOND
Tutor2u issues a
£1,000 bond
• Offers £80
annual interest
to investors
• Repaid in 2028
• 2028 is the
date of
maturity
FINANCIAL MARKETS
Yield on this bond
= 8%
• Yield = £80
interest /
market value
of bond
• Interest is paid
annually on a
set date such
as June 1st to
bond holders
Interest is fixed
per year
• Bonds are
traded in the
market so the
price can and
does change
• This changes
the implied %
yield on a
bond
TUTOR2U.NET/ECONOMICS

41.

What is the relationship
between bond prices and
bond yields?
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42.

BOND PRICES AND INTEREST RATES
• Bonds have fixed coupon payments, and their prices are inversely
related to market interest rates.
• When market interest rates rise above a bond's coupon rate, the
bond's price falls because its fixed interest payments are less
attractive compared to newer bonds with higher yields.
• Conversely, when market interest rates decline, bond prices rise
because their fixed payments become more appealing compared to
new bonds with lower yields.
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43.

BOND YIELDS
• Government bonds are issued to fund state borrowing.
• They pay a fixed rate of interest – a coupon – and most have
a fixed maturity date when the lender will be repaid.
• Bonds are traded on a stock exchange, which means their
prices fluctuate according to demand and supply.
• The yield on a bond is the coupon as a percentage of its
current market price.
• For example, if the coupon is £1 000 and the current market
price is £20 000, then the yield is 5 per cent.
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44.

60 SECOND CALCULATION
“The yield on a bond is the annual
coupon as a percentage of its market
price. For example, if the coupon is
£1,000 and the price is £20,000, then
the yield is 5 per cent.
If the bond’s market price falls to
£14,000, calculate its new yield. Give
your answer to one decimal place.
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45.

60 SECOND CALCULATION
Yield = (Coupon /
“The yield on a bond is the annual
coupon as a percentage of its market Market Price) x 100
price. For example, if the coupon is
£1,000 and the price is £20,000, then
the yield is 5 per cent.
If the bond’s market price falls to
£14,000, calculate its new yield. Give
your answer to one decimal place.
FINANCIAL MARKETS
Yield = (£1 000 /
£14,000) x 100
= 7.14%, or 7.1% to 1dp
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46.

GIVE ME TWO
Economic
reasons why 10year bond yields
differ between
countries
Yield on ten-year government bonds of selected countries
worldwide as of May 2022 (per cent)
4,00
3,53
3,50
2,96
3,00
2,50
2,08
1,90
2,00
1,64
1,52
1,50
1
1,00
0,50
0,24
0,00
Greece
FINANCIAL MARKETS
2,89
Italy
United
States
Spain
UK
Ireland France Germany Japan
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47.

GIVE ME 2…
Reasons why 10-year bond yields differ between countries
1
Inflation risk: Countries with higher actual and expected
inflation will have higher bond yields to compensate
investors for the expected loss of real purchasing power.
2
Default risk: Countries with higher national debt or
and/or persistently large fiscal deficits will usually have
higher bond yields as investors demand compensation
for the increased risk of default.
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48.

FINANCIAL MARKETS
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49.

GIVE ME TWO
Likely economic effects of a rise in
bond yields on government debt for a
country such as the UK
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50.

GIVE ME 2…
Likely economic effects of a rise in bond yields on
government debt for a country such as the UK
1
Debt service costs: The government will have to pay more in
interest payments on its outstanding debt. This might reduce
the financial resources available for spending on education,
NHS and other priority areas.
2
Currency appreciation: High bond yields might attract inflows
of financial capital (hot money) from overseas which could
then cause a currency appreciation. This will help control
imported inflation but might worsen the price
competitiveness of export sectors.
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