1. Capital Markets

2. Introduction
Chapter 1
Lecture 1

3. Chapter 1 Introduction Learning Objectives
What a Financial Asset is
The distinction between Debt & an Equity instrument
The general purpose for determining the price of an Asset
Properties of Financial Assets
Principle Economic Functions of Financial Assets
What a Financial Market is & its principle Economic Functions
Different ways to classify Financial Markets
What is meant by Derivative Instruments
Globalization of financial Markets

4. Financial Assets

5. Financial Assets
An Asset is any possession that has value in exchange.
Assets can be classified as tangibles or intangibles.
Tangible Assets is one whose value depends on particular physical properties.
Intangible Asset represents legal claim to some future benefit.
For Financial Instruments, the typical Future benefit is a claim to future cash.
Issuer Vs Investor

6. Debt Vs Equity Claims

7. Debt Vs Equity Claims
In case of Debt instruments, the claim that the holder has is a fixed dollar amount.
An Equity claim (Residual Claim) obligates the issuer of the Financial Asset to pay the holder an amount based on earnings, if any, after holders of debt instruments have been paid.
Hybrid Financial Assets

8. The Value of a Financial Asset
Valuation is the process of determining the fair value or price of Financial Asset
The fundamental Principle of valuation is that the value of any financial Asset is the Present Value of the cash flow expected
The type of financial Asset, weather debt instrument or an equity instrument, and the characteristics of the issuer determines the degree of certainty of cash flows expected.
Inflation Effect
The appropriate interest rate for discounting the cash flows

9. Summary of the process for valuing a financial Asset
Estimate The Cash flow
(Cash flow = interest, principle, dividends, expected sale price of stock)
Determine the appropriate interest rate for discounting
Minimum interest rate on U.S Treasury Securities
Plus Premium required for perceived risk
Value of Financial Asset = Present Value of Expected Cash flows

10. The role of Financial Assets
The first is to transfer funds from those who have surplus funds to those who need funds to invest in tangible Assets.
The second function is transferring funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible Assets among those seeking & those providing for funds

11. Properties of Financial Assets
Moneyness
Divisibility
Reversibility
Term to maturity
Liquidity
Convertibility
Currency
Cash flow & return predictability
Complexity
Tax status

12. Properties of Financial Assets
Moneyness
Some financial Assets are used as medium of exchange or in settlement of transactions
Divisibility
Relates to the minimum size at which at which a financial Asset can be liquidated and exchanged for money
Reversibility
(round-trip cost) Depends on Price volatility & liquidity
Term to maturity
The term to maturity is the length of the interval until the date when the instrument is scheduled to make its final payment.
Liquidity
Liquidity depends not only on the financial asset but also on the quantity one wishes to buy & sell.

13. Properties of Financial Assets
Convertibility
An important property of some financial Assets is that they are convertible into other financial Assets
Currency
Most financial Assets are denominated in one currency but there are dual-currency securities as well.
Cash flow & return predictability
The return that an investor will realize by holding a financial asset depends on a cash flow that is expected to be received.
Complexity
(Convertible Bonds, callable Bonds, Putable Bonds)
Tax Status
Governmental codes for taxing the income form the ownership or sale of financial Assets vary widely.

14. Financial Markets

15. Financial Markets
A financial Market is a market where Financial Assets are exchanged.

16. Role of Financial Markets
Price Discovery Process
Liquidity
Reduction of search & information costs

17. Role of Financial Markets
Price Discovery Process
Interaction of buyers & sellers in a financial Market determines the price of the traded asset
Liquidity
Financial Markets provide a mechanism for an investor to sell financial Asset
Reduction of search & information costs
Search Costs include explicit (advertisement costs) & implicit costs (opportunity costs).
Information Costs are those entailed with assesing the amount & the likelihood of the cash flow expected to be generated

18. Classification of Financial Markets
Type of Claim
Maturity of Claim
New or Seasoned Issue

19. Classification of Financial Markets
Type of Claim
(Debt market, Stock Market)
Maturity of Claim
(Money Market, Capital Market)
New or Seasoned Issue
(Primary Market, Secondary Market)

20. Derivative Instruments

21. Derivative Instruments
Some Contracts give the contract holder either the obligation or the choice to buy or sell a financial asset.
Such contracts derive their value from the price of the underlying financial asset. Consequently, these contracts are called Derivative Instruments.
The array of Derivative Instruments include Options Contracts, Future Contracts & Forward Contracts.

22. Globalization of Financial Markets
Globalization means the integration of Financial Markets throughout the world into an international Financial Market.

23. Thank you for your Time & Patience 