FINANCIAL MANAGEMENT Presented by Nijat Abbasli

STRUCTURE OF THE COURSE

Financial management and financial Working capital finance

objectives
Investment decisions
The economic environment for Investment appraisal using DCF
business methods
Financial markets, money markets
Allowing for inflation and taxation
and institutions
Project appraisal and risk
Working capital
Managing working capital
STRUCTURE OF THE COURSE
Specific investment decisions Capital structure
Sources of finance Business valuations
Dividend policy Market efficiency
Gearing and capital structure Foreign currency risk
The cost of capital Interest rate risk
 CHAPTER 3: FINANCIAL MARKETS, MONEY MARKETS AND
INSTITUTIONS
Financial intermediaries
Financial markets
International money and capital markets
Rates of interest and rates of return
Money market instruments
 FINANCIAL INTERMEDIARIES

A financial intermediary links those with surplus funds (eg lenders) to

those with fund deficits (eg potential borrowers) thus providing
aggregation and economies of scale, risk pooling and maturity
transformation.
A financial intermediary is an institution bringing together providers and
users of finance, either as broker or as principal.
Not all intermediation takes place between savers and investors. Some
institutions act mainly as intermediaries between other institutions.
Financial intermediaries may also lend abroad or borrow from abroad.
FINANCIAL INTERMEDIARIES
EXAMPLES OF FINANCIAL INTERMEDIARIES
Commercial banks
Finance houses
Mutual societies
Institutional investors eg pension funds and investment funds
 THE BENEFITS OF FINANCIAL INTERMEDIATION
They provide obvious and convenient ways in which a lender can save money.
Financial intermediaries also provide a ready source of funds for borrowers.
They can aggregate smaller savings deposited by savers and lend on to borrowers in larger
amounts.
Risk for individual lenders is reduced by pooling. Since financial intermediaries lend to a large
number of individuals and organizations, any losses suffered through default by borrowers or
capital losses are effectively pooled and borne as costs by the intermediary.
Some financial institutions are able to give investors access to diversified portfolios.
They bridge the gap between the wish of most lenders for liquidity and the desire of most
borrowers for loans over longer periods.
 FINANCIAL MARKETS
Financial markets are
the markets where
individuals and
organizations with
surplus funds lend funds
to other individuals and
organizations that want
to borrow.
CLASSIFICATION OF FINANCIAL MARKETS
Capital and money markets
Primary and secondary markets
Exchange-traded and over the counter markets
CAPITAL AND MONEY MARKETS
Capital markets are markets for medium-term and long-term capital.
Money markets are markets for short-term capital.
CAPITAL AND MONEY MARKETS
Money markets are markets for:
Trading short-term financial instruments
Short-term lending and borrowing
A stock market (in the UK: the main market plus the Alternative Investment Market
(AIM)) acts as a primary market for raising finance, and as a secondary market for
the trading of existing securities.
Securities are tradable financial instruments. They can take the form of equity (such
as shares), debt (such as bonds and loan notes) or derivatives.
Capital markets are markets for trading in long-term finance, in the form of long-
term financial instruments such as equities and corporate bonds.
 PRIMARY AND SECONDARY MARKETS
Primary markets enable organisations to raise new finance. Secondary markets enable
investors to buy and sell existing investments to each other. The financial markets serve two
main purposes.
(a) As primary markets they enable organisations to raise new finance, by issuing new
shares or new bonds. In the UK, a company must have public company status (be a publicly
listed company, or 'plc') to be allowed to raise finance from the public on a capital
market.
(b) As secondary markets they enable existing investors to buy and sell existing
investments, should they wish to do so. The marketability of securities is a very important
feature of the capital markets, because investors are more willing to buy stocks and
shares if they know that they could sell them easily, should they wish to.
 EXCHANGE-TRADED INSTRUMENTS AND OVER THE
COUNTER MARKETS
Secondary markets may be organized on exchanges or may consist of over the counter (OTC)
transactions. Secondary markets for financial securities can be organized on exchanges, where
buyers and sellers of securities buy and sell securities in one location, the exchange. Examples of
exchanges include the London Stock Exchange and the New York Stock Exchange for the trading of
shares, the Chicago Board of Trade for the trading of commodities and derivatives, and the London
International Financial Futures and Options Exchange (LIFFE) for the trading of derivatives.
Alternatively, secondary markets can operate as over the counter (OTC) markets, where
transactions do not involve buying and selling through an exchange, but customers negotiate
individual transactions, usually with a financial intermediary such as a bank. Securities that are
issued in an over the counter market can be negotiable or non-negotiable.
Negotiable securities can be resold.
Non-negotiable securities cannot be resold.
CAPITAL MARKET PARTICIPANTS
 RATES OF INTEREST AND RATES OF RETURN
Interest rates are effectively the 'prices' governing lending and borrowing. The
borrower pays interest to the lender at a certain percentage of the capital
sum, as the price for the use of the funds borrowed. As with other prices, supply
and demand effects apply. For example, the higher the rates of interest that
are charged, the lower the demand will be for funds from borrowers.
Interest rates on financial assets are influenced by the risk of the assets, the
duration of the lending and their maturity.
FACTORS WHICH AFFECT INTEREST RATE
Risk: Higher Risk  Higher interest rate
Duration of lending: Longer duration  Higher interest rate
Inflation rate: higher inflation  higher interest rate
Amount of money: higher amount  higher interest rate
Discount rate: higher discount rate  higher interest rate
Guarantee  higher interest rate
LIBOR or the London Interbank Offered Rate is the rate of interest at which
banks borrow from each other in the London interbank market.
 MONEY MARKET INSTRUMENTS

Interest-bearing instruments pay interest. The investor receives face value plus interest at maturity.
Discount instruments do not pay interest. They are issued and traded at a discount to the face
value and they are redeemed at their par value at maturity. The discount is equivalent to interest and
is the difference between the issue price of the instrument and the redemption price at maturity. For
example, if a bill is issued at a price of 98.50, it is issued at a discount of 1.50 and redeemed at
maturity at a price of 100.00. The discount of 1.50 represents interest on the investment of 98.50.
Derivatives allow the buyer and seller to agree today to buy or sell an asset at some time in the
future at an agreed fixed price.
MONEY MARKET DEPOSITS

The table quotes two rates. The first figure in each column shows the
interest rate at which a bank will lend money. This is called the offer
price. The second number is the rate at which the bank will pay to
borrow money. This is called the bid price. Note that while the
convention in London is to quote Offer/Bid, in most other markets
including the US what is quoted is Bid/Offer.
CERTIFICATES OF DEPOSIT
CERTIFICATES OF DEPOSIT
The coupon is expressed as an annual percentage rate and needs to be adjusted to
reflect the fact that its maturity is less than a year. Sterling CDs assume there are 365
days in the year, while US CDs assume 360 days. For example, if the coupon on three-
month US dollar CDs is 5.950%, this means that the interest payment after three months
will be (one quarter) 1.4875%. Converting this to an annual percentage yield:
CERTIFICATES OF DEPOSIT
REPOS
REPOS
REPOS
Thank you 