1. „ Market Finance – Financial Theory“ Course at ESC Dijon
Chapter 1: Investments: Background and Issues
Chapter 2: Asset Classes and Financial Instruments
Chapter 3: Securities Markets
Chapter 4: The Market for Foreign Exchange
Chapter 5:The Efficient Market Hypothesis
Bibliography: Bodie, Z. / Kane, A. / Marcus, A. J. (2013): Essentials of Investments. 9th ed., New York.
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

2. Chapter 1: Investments: Background and Issues
1.1 Real Assets versus Financial Assets
1.2 Financial Assets
1.3 Financial Markets and the Economy
1.4 The Investment Process
1.5 Markets Are Competitive
1.6 The Players
Bibliography: Bodie, Z. / Kane, A. / Marcus, A. J. (2013): Essentials of Investments. 9th ed., New York, chapter 1.
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

3. Prof. Dr. Franke-Viebach
Investment = current commitment of resources in the expectation of reaping future benefits
1.1 Real Assets versus Financial Assets
Real Assets
= assets used to produce goods and services
→ they generate income and thus wealth (remember: wealth = PV of income)
examples: property, plants and equipment, human capital, etc.
(2) Financial assets
= claims on real assets or claims on real-asset income
→ they distribute income or wealth
examples: Toyota share, French government bond
Prof. Dr. Franke-Viebach

4. Prof. Dr. Franke-Viebach
Exercise: Are the following assets real or financial? a. Patents b. Lease obligations c. Customer goodwill d. College education e. U.S. treasury bill
Exercise: For each transaction, identify the real and/or financial assets that trade hands. Are
any financial assets created or destroyed in the transaction?
Toyota takes out a bank loan to finance the construction of a new factory.
Toyota pays off its loan.
Toyota uses $ 10 million of cash on hand to purchase additional inventory of spare auto parts.
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

5. Prof. Dr. Franke-Viebach
Exercise: Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $ 20,000 contributed by Lanni‘s owners. For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transactions? a. Lanni takes out a bank loan. It receives $ 50,000 in cash and signs a note promising to pay back the loan over three years. b. Lanni uses the cash from the bank plus $ 20,000 of its own funds to finance the development of new financial planning software. c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 5,000 shares of Microsoft stock. d. Lanni sells the shares of stock for $ 25 per share and uses part of the proceeds to pay off the bank loan.
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

6. (3) Saving – investment, financial and real
saving = that part of disposable income which is not used for present consumption but laid back
(„saved“) for future consumption
shift consumption to the future by a shift of purchasing power
do so by a financial investment: buy a financial asset!
example: buy a Toyota share
Toyota will then use the saver‘s purchasing power to make an investment in real assets
Remember: investment = current commitment of resources in the expectation of reaping future
benefits → hope to get back purchasing power in the future …!
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

7. Prof. Dr. Franke-Viebach7
(4) Individual/sectoral wealth versus aggregate/ national wealth (a) Household sector assets: real assets, financial assets liabilities (b) National wealth (neglecting international relations) consists of real assets only reason: all financial assets (owner of the claim) are offset by a financial liability (issuer of the claim) → when all balance sheets are aggregated, only real assets remain (c ) Example: USA 2011
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

8. Table 1.1 Balance Sheet, U.S. Households, 2011
Assets
$ Billion
% Total
Liabilities and Net Worth
Real assets
Real estate
18,117
25.2%
Mortgages
10,215
14.2%
Consumer durables
4,665
6.5%
Consumer credit
2,404
3.3%
Other
303
0.4%
Bank and other loans
384
0.5%
Total real assets
23,085
32.1%
Security credit
316
556
0.8%
Total liabilities
13,875
19.3%
Financial assets
Deposits
8,038
11.2%
Life insurance reserves
1,298
1.8%
Pension reserves
13,419
18.7%
Corporate equity
8,792
12.2%
Equity in noncorp. business
6,585
9.2%
Mutual fund shares
5,050
7.0%
Debt securities
4,129
5.7%
1,536
2.1%
Total financial assets
48,847
67.9%
Net worth
58,058
80.7%
TOTAL
71,932
100.0%
Note: Column sums may differ from total because of rounding error.
SOURCE: Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System, June 2011.

9. Table 1.2 Domestic Net Worth, 2011
Assets
$ Billion
Commercial real estate
14,248
Residential real estate
18,117
Equipment and software
4,413
Inventories
1,974
Consumer durables
4,665
TOTAL
43,417
Note: Column sums may differ from total because of rounding error.
SOURCE: Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System, June 2011.

10. Prof. Dr. Franke-Viebach
1010
Exercise: In a wave of pessimism, housing prices fall by 10% across the entire economy. a. Has the stock of real assets of the economy changed? b. Are individuals less wealthy? c. Can you reconcile your answers to a. and b.?
Prof. Dr. Franke-Viebach
Prof. Dr. Franke-Viebach

11. Prof. Dr. Franke-Viebach
1111
1.2 Financial Assets
Debt securities
(a) General feature:
pay a stream of income that is determined according to a specified formula
(b) Classification by maturity
- money-market debt securities: short-term
examples:
- capital-market debt securities: long-term
- in any case: a limited lifetime → the holder is entitled to get his money (the „face value“
of the debt security) back at maturity: this is part of his
claim because the holder is a creditor!
Prof. Dr. Franke-Viebach 11
Prof. Dr. Franke-Viebach