Professional Documents
Culture Documents
❖Finance
❖Economic System
❖Money Market
❖Capital Market
❖Stocks
❖Bonds
➢Finance:
The study of finance answers the following questions?
1) Where will you find fund?
2) How will you acquire it?
3) Where are you going to spend it?
- Finance is a broad term that describes activities associated with banking,
leverage or debt, credit, capital markets, money, and investments.
- Finance represents money management and the process of acquiring
needed funds.
What Are Financial Activities?
They are activities that involve the inflow or outflow of money. Examples
include buying and selling products (or assets), issuing stocks, initiating
loans, and maintaining accounts.
What Is Financing?
It is the process of providing funds for business activities, making purchases,
or investing.
There are two types of financing:
1) Debt Market:
- It is the arena in which investment in loans are bought and sold.
- Investments in debt securities typically involve less risk
than equity investments and offer a lower potential return
on investment.
2) Equity Market:
- It is the arena in which stocks are bought and sold.
- It gives company’s access to capital to grow their
business, and investors a piece of ownership in a
company.
➢Economic System:
In a society, the economic system answers three fundamental questions:
An economic system is a means by which societies or
governments organize and distribute available resources,
services, and goods across a geographic region or country,
economic systems regulate the factors of production.
Egyptian economic system:
Egypt has a mixed economic system which includes a variety of private
freedom, combined with centralized economic planning.
It’s divided into Banking sector and financial markets (non-banking
sector):
1) Financial Institutions (Banking) (Indirect):
It’s an establishment that conducts financial transactions such
as loan and deposits.
2) Financial markets (Non-banking) (Direct):
It refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, and others.
Government regulation. Financial markets include both: Money
market and Capital market.
➢Money Market:
The money market refers to trading in very short-term debt
investments; it’s characterized by a high degree of safety and
relatively low rates of return.
Characteristics of money market:
- High degree of safety
- Relatively low rates of return
- Short-term (not more than one year).
- High liquidity (it can be easily converted into cash).
- Doesn’t have a specific place where the seller and the buyer are traded.
Money market instruments:
1) Treasury bill:
- A Treasury bill (T-Bill) is a short-term U.S. government
debt obligation, they come in 3 different lengths of
maturity, 90, 180, 360 days. These securities are widely
regarded as low-risk and secure investments.
- A disadvantage of T-Bills, it offer low returns compared with other debt
instruments.
2) Certificates of deposits(CDs):
- The most familiar money market instruments are CDs,
usually issued by commercial banks.
- Offers a higher rate of return.
- Typically earns less than stocks and bonds can over time.
3) Commercial paper:
- Commonly used type of unsecured, short-term debt
instrument issued by corporations.
- Maturities on commercial paper typically last several
days, and rarely range longer than 270 days.
➢Capital Market:
Capital markets are venues where savings and investments are channeled between
the suppliers who have capital and those who are in need of capital.
Characteristics of Capital Market:
- Low liquidity: (it’s hardly to convert it into cash).
- Long term (more than one year).
- High risk / high return.
- It has a specified place where the buyer and seller are traded.
➢Stocks:
- A stock (also known as equity) is a security that represents the ownership of
a fraction of a corporation.
- For companies, issuing stock is a way to raise fund to
operate their businesses. For investors, stocks are a way to
grow their money.
- The more stock you own, the greater your ownership stake
in that company. Though technically stockholders do not
own companies, they own shares of the company's stock.
- For example, if a company has 1,000 shares of stock outstanding and one
person owns 100 shares, that person would own and have claim to 10% of
the company's assets and earnings.
Preferred Stocks:
These shares are called preferred because owners of preferred
stock will receive dividends before common shareholders and
are not entitled to voting rights and have no ownership or
residual claim on the company.
2) Non-cumulative:
Non-cumulative preferred stock does not require that missed
dividends be paid before dividends are paid to common
shareholders.
3) Participating shares:
They are entitled to a share of the profits, on top of the fixed
dividend, once the ordinary share dividend exceeds a certain
amount.
4) Callable shares:
This feature gives the company the right to buy back the preferred
stock on specific date at predetermined price. This feature is useful
for company than investor.
5) Convertible shares:
This feature gives the right to the holder of stock to convert the
shares into a fixed number of common stocks.
➢Bonds:
- A company issues bonds to raise money from investors. In
return, the company will pay the investor a stream of interest
payments plus an eventual return of capital.
- The amounts of interest and capital payments to be made
will be specified at outset (beginning). This contrasts with shares, where
dividends are paid at the discretion of the company’s directors.
Features of bonds:
1) The issue price: It is the price at which the bond issuer originally sells
the bonds.
2) The coupon rate: It is the rate of interest the bond issuer will pay on the
face value of the bond, expressed as a percentage. For example, a 5%
coupon rate means that bondholders will receive 5% x $1000 face value =
$50 every year.
3) Coupon dates: They are the dates on which the bond issuer will make
interest payments. Payments can be made in any interval, but the standard
is semiannual payments.
4) The maturity date: It is the date on which the bond will mature and the
bond issuer will pay the bondholder the face value of the bond.
5) Face value: It is the money amount the bond will be worth at maturity; it
is also the reference amount the bond issuer uses when calculating interest
payments.
There are many types of bonds according to:
• Security:
- Secured: It is backed with specific assets to bondholders. If the
company cannot repay the bond.
• Time of period:
- Short term (less than 5 years)
- Moderate (5 to 12 years)
- Long term (More than 12 years)
• Interest payment:
- Regular: you will take your interest at regular payments.
- Return of payment: You will take your interest at the end
period with your face value.
• Coupon rate:
- Fixed rate bonds:
A fixed rate bond is a bond that pays the same level of
interest over its entire term. An investor who wants to earn a
guaranteed interest rate for a specified term could purchase a
fixed rate bond in the form of a Treasury, corporate bond,
municipal bond, or certificate of deposit (CD).
- Variable bonds:
1) Floating coupons (floaters):
They are essentially identical to fixed-rate bonds except
that the coupon rate on floating rate bonds changes over
time. The coupon rate of a floating-rate bond is usually
linked to a reference rate. The calculation of the floating
rate reflects the reference rate and the riskiness (or
creditworthiness) of the issuer at the time of issue.
The floating rate is equal to the reference rate plus a percentage that
depends on the borrower’s (issuer’s) creditworthiness and the bond’s
features. The percentage paid above the reference rate is called the
spread and usually remains constant over the life of the bond.
Example: A bond has face value 1000 LE. The down is 5% and the up
is 20%. This means that the interest will vary between 5% and 20% but
not to be less than 5% or won’t exceed 20%.
2) Set up coupons:
The interest rate increases happen at periodic intervals.
Example: A bond has face value 1000 LE. You will get
interest rate at the first 10%, second year 11%, third year
12% and so on.