This document discusses key concepts in finance. It defines finance as the science of managing money, credit, and other financial matters. It also defines key terms like financial markets, where financial securities are traded, and financial systems, which connect those with excess funds to those with deficits. It discusses different types of financial markets like money markets for short-term assets and capital markets for long-term assets. It also outlines different national financial systems and provides examples of key concepts in finance like time value of money, risk and return, and price versus value.
A financial system is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national, global, and firm-specific levels.They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.
Financial Markets, Financial Institutions, Interest Rates. asset demand and determination of asset prices, role of information in financial markets, causes and consequences of financial crises.
A financial system is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national, global, and firm-specific levels.They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.
Financial Markets, Financial Institutions, Interest Rates. asset demand and determination of asset prices, role of information in financial markets, causes and consequences of financial crises.
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Fabozzi, F. J., Modigliani, F., Jones, F. J., & Ferri, M. Foundations of financial markets and institutions. Delhi: Dorling Kindersley (India) Pvt. Ltd.
Overview of financial assets: concept of financial assets, debt versus equity instruments, the price of financial assets and risk, financial assets versus tangible assets, the role of financial assets; Financial markets: concepts and role of financial markets, classification of financial markets, market participants, globalization of financial markets, classification of global financial markets, motivation for foreign market and Euromarkets; The role of the government in financial markets: justification for regulation, forms of regulation; and Financial innovation: categorization of financial innovations, and motivation for financial innovation.
The Commercial Bank of Ethiopia (CBE) is a public financial service provider founded in 1942. Named “State Bank of Ethiopia” then, it assumed both the roles of commercial and central banks. It introduced saving and new currency, and it could open 21 branches, including those in Khartoum and Djibouti.
The bank was renamed the Commercial Bank of Ethiopia in 1963 and entrusted with the functions of a commercial bank only.
During the past 80 years, CBE has been a prominent bank in Ethiopia and a significant provider of finance for the development endeavors of the nation.
According to data compiled by the National Bank of Ethiopia, CBE commands 52 percent share of deposit, 66 percent of loans and advances, and 21 percent share of branch networks in the local banking industry as at 30 June 2022.
CBE runs 1,824 branches (as at 30 June 2022) that cover almost all parts of the country. It has more than 69,000 permanent and contract employees, and it provides quality services to its customers through its branches and digital channels.
1.2. STATUS
Ownership: Public
Regulator: National Bank of Ethiopia
Membership: African Rural and Agricultural Credit Association, COMESA Banker’s Association, Ethiopian Bankers Association
Activities: Commercial banking
Services: Corporate Finance, Correspondent Banking, Documentary Credit, Financial Advisory, Foreign Exchange, Guarantees, International Settlements, Letters of Credit, Lines of Credit, Business, Money Markets, Savings Accounts …
Office Summary: 1,824 Domestic branches, 2 Overseas subsidiaries
Staff Strength: 69,820 (39,801 Permanent employees +30,019 Outsourced employees)
The Commercial Bank of Ethiopia (CBE) is a public financial service provider founded in 1942. Named “State Bank of Ethiopia” then, it assumed both the roles of commercial and central banks. It introduced saving and new currency, and it could open 21 branches, including those in Khartoum and Djibouti.
The bank was renamed the Commercial Bank of Ethiopia in 1963 and entrusted with the functions of a commercial bank only.
During the past 80 years, CBE has been a prominent bank in Ethiopia and a significant provider of finance for the development endeavors of the nation.
According to data compiled by the National Bank of Ethiopia, CBE commands 52 percent share of deposit, 66 percent of loans and advances, and 21 percent share of branch networks in the local banking industry as at 30 June 2022.
CBE runs 1,824 branches (as at 30 June 2022) that cover almost all parts of the country. It has more than 69,000 permanent and contract employees, and it provides quality services to its customers through its branches and digital channels.
1.2. STATUS
Ownership: Public
Regulator: National Bank of Ethiopia
Membership: African Rural and Agricultural Credit Association, COMESA Banker’s Association, Ethiopian Bankers Association
Activities: Commercial banking
Services: Corporate Finance, Correspondent Banking, Documentary Credit, Fi
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Fabozzi, F. J., Modigliani, F., Jones, F. J., & Ferri, M. Foundations of financial markets and institutions. Delhi: Dorling Kindersley (India) Pvt. Ltd.
Overview of financial assets: concept of financial assets, debt versus equity instruments, the price of financial assets and risk, financial assets versus tangible assets, the role of financial assets; Financial markets: concepts and role of financial markets, classification of financial markets, market participants, globalization of financial markets, classification of global financial markets, motivation for foreign market and Euromarkets; The role of the government in financial markets: justification for regulation, forms of regulation; and Financial innovation: categorization of financial innovations, and motivation for financial innovation.
The Commercial Bank of Ethiopia (CBE) is a public financial service provider founded in 1942. Named “State Bank of Ethiopia” then, it assumed both the roles of commercial and central banks. It introduced saving and new currency, and it could open 21 branches, including those in Khartoum and Djibouti.
The bank was renamed the Commercial Bank of Ethiopia in 1963 and entrusted with the functions of a commercial bank only.
During the past 80 years, CBE has been a prominent bank in Ethiopia and a significant provider of finance for the development endeavors of the nation.
According to data compiled by the National Bank of Ethiopia, CBE commands 52 percent share of deposit, 66 percent of loans and advances, and 21 percent share of branch networks in the local banking industry as at 30 June 2022.
CBE runs 1,824 branches (as at 30 June 2022) that cover almost all parts of the country. It has more than 69,000 permanent and contract employees, and it provides quality services to its customers through its branches and digital channels.
1.2. STATUS
Ownership: Public
Regulator: National Bank of Ethiopia
Membership: African Rural and Agricultural Credit Association, COMESA Banker’s Association, Ethiopian Bankers Association
Activities: Commercial banking
Services: Corporate Finance, Correspondent Banking, Documentary Credit, Financial Advisory, Foreign Exchange, Guarantees, International Settlements, Letters of Credit, Lines of Credit, Business, Money Markets, Savings Accounts …
Office Summary: 1,824 Domestic branches, 2 Overseas subsidiaries
Staff Strength: 69,820 (39,801 Permanent employees +30,019 Outsourced employees)
The Commercial Bank of Ethiopia (CBE) is a public financial service provider founded in 1942. Named “State Bank of Ethiopia” then, it assumed both the roles of commercial and central banks. It introduced saving and new currency, and it could open 21 branches, including those in Khartoum and Djibouti.
The bank was renamed the Commercial Bank of Ethiopia in 1963 and entrusted with the functions of a commercial bank only.
During the past 80 years, CBE has been a prominent bank in Ethiopia and a significant provider of finance for the development endeavors of the nation.
According to data compiled by the National Bank of Ethiopia, CBE commands 52 percent share of deposit, 66 percent of loans and advances, and 21 percent share of branch networks in the local banking industry as at 30 June 2022.
CBE runs 1,824 branches (as at 30 June 2022) that cover almost all parts of the country. It has more than 69,000 permanent and contract employees, and it provides quality services to its customers through its branches and digital channels.
1.2. STATUS
Ownership: Public
Regulator: National Bank of Ethiopia
Membership: African Rural and Agricultural Credit Association, COMESA Banker’s Association, Ethiopian Bankers Association
Activities: Commercial banking
Services: Corporate Finance, Correspondent Banking, Documentary Credit, Fi
Financial Market is the market where financial securities like stocks and bonds and commodities like valuable metals are exchanged at efficient market prices. Here, by efficient market prices we mean the unbiased price that reflects belief at collective speculation of all investors about the future prospect. The trading of stocks and bonds in the Financial Market can take place directly between buyers and sellers or by the medium of Stock Exchange. Financial Markets can be domestic or international.
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1. Basic Finance – Basic Concepts in Finance
1.1. What does finance mean ?
Finance = f (money)
Money = anything that is generally accepted as payment for goods and services
and repayment of debts
Meanings of “Finance”: - Financial Markets,
1
- Investments,
- Corporate and Public Finance,
- Insurance and Banks,
- Monetary and Fiscal Policy,
- Valuation of Tangible and Financial Assets,
- Business Valuation
Finance = science of managing money matters, credit (loan), etc…
Finance = science of managing the issues related to Financial
Markets and Financial Systems
2. 2
Basic Finance – Basic Concepts in Finance
Corporate Finance vs. Public Finance
Corporate finance is an area of finance dealing with the financial decisions
made by corporations and the tools and analysis used to make these decisions.
* Investment = real investment/financial investment
Public finance is the field of economics that studies government activities and
the alternative means of financing government expenditures.
3. 1.2. Financial Systems and Financial Markets
Financial Markets = the mechanisms that allow people and companies to easily
trade financial securities, commodities and other fungible
items of value.
*Examples of financial securities: shares (stocks) and bonds
Financial System = the set of financial institutions and the relationships
between these, which serve to money transfer between
persons/ companies/institutions that have excess
funds to the persons/ companies/institutions that have deficits of
funds
3
Basic Finance – Basic Concepts in Finance
EXCESS
FUNDS
(CREDITORS /
LENDERS)
DEFICIT OF
FUNDS
(DEBTORS /
BORRWERS)
FINANCIAL
SYSTEM
FUNDS FUNDS
4. 4
Basic Finance – Basic Concepts in Finance
Different financial systems
The Anglo-Saxon System, typical for UK and US, based on capital markets (Stock
Exchanges).
*stock exchange = a place where security trading is conducted on an organized system.
The Continental European System, typical for Germany and based on banks
(commercial banks).
*bank = a financial institution licensed as a receiver of deposits.
(Generally, there are two types of banks: commercial/retail banks - regulated by the Central
Bank and investment banks – regulated by the Security and Exchange Commission)
*The Japanese System, representative for Japan and South Korea, based on entities
known as keiretsu (in Japan) or chobol (in South Korea).
*keiretsu = a powerful alliance of Japanese businesses often linked by cross-shareholding
.
5. Financial Markets
The money market, which refer to the short term financial market, related to
banks and monetary instruments (money orders, cashier’s checks, traveller’s
checks), including, exchange rate markets.
The capital market, which refer to the long term financial market, respectively
the market of shares and bonds (primary securities).
By extension, in the capital market are included also futures and options contracts,
even if these are on short term (derivative securities).
*futures contract = a standardized contract to buy or sell a certain underlying instrument
(usually primary security) at a certain date in the future, at a specified price.
*options are financial instruments that convey the right, but not the obligation, to engage in a
future transaction on some underlying security, or in a futures contract.
The insurance market – ins. companies intermediate funds based on risk transfer
The real estate & other alternative investments markets (special markets):
on this market traders act as investors, but also as consumers. (include investments
in real estate, in platinum, gold, silver, etc.)
5
Basic Finance – Basic Concepts in Finance
6. 6
Basic Finance – Basic Concepts in Finance
Example (for Time Value of Money basic concept):
Mary
Michael
Yearly Income (Y) € 100.000
€ 100.000
Consumption (C) € 50.000
€ 100.000 € 50.000
€ - 50.000
Savings (S) € 50.000
1. - Opportunity cost (sacrifice of
renouncing to consumption &
any other alternative)
2. - Risks (incertitude of
reimbursement, loss of
purchasing power)
Year I
Year II
Loan reimbursement
(10% interest included)
COMPENSATE
10 % interest rate (i)
€ - 55.000 € 55.000
7. 7
Basic Finance – Basic Concepts in Finance
I. Time value of money
Future value
0=present 1 2……………………….……………………….. n time (t)
A0 A0(1+i) A0(1+i)2 A0(1+i)n
FV(A0, i, n) = A0(1+i)n;
i = interest rate
Present value (discounting)
0=present 1 2……………………….……………………….. n time (t)
An
An
(1+i)n
PV(An, i, n) =
i = discount rate
An
(1+i)n
PV = FV-1
8. 8
Basic Finance – Basic Concepts in Finance
II. Risk and Return
Return (rate) = classical measure of earning
RT = (IF + Σ(Bi) - II) / II – hhoollddiinngg ppeerriioodd rreettuurrnn
Ry = (In + Bn – In-1) / In -1 – yearly return
Annualized return:
(1+RA) = (1+RT)1/n
*example (E(R) - also for frequency series)
Risk = the probability that an investment's actual return will be different than expected.
σ(R) = [E (R - E (R))2] (1/2)
Risk = standard deviation of the historical returns from the average return
*example (also for frequency series)
9. Basic Finance – Basic Concepts in Finance
III. Price, Value and Valuation. Efficiency of the markets
Price = the amount of money paid for something.
(*Transaction => Price)
Value = the utility of having something.
*utility = measure of the relative satisfaction from consumption of various goods and services
9
I. Value 1. - utility
2. - value of exchange / rarity
II. Value = Cost of assets; Adam Smith (1776) - Objective Value Theory (theory of Work-based
value).
III.Value = marginal utility - Subjective Value Theory
Value is a subjective variable. (Each person sets a value for assets, related to his or her
own perceptions.)
10. Basic Finance – Basic Concepts in Finance
Fair market value = an estimate of what a willing buyer would pay to a willing seller, in a
free market.
Fair market value = Price - conditions:
I. rational agents (which choose the project that will generate the higher level of satisfaction)
II. fair transaction:
- well informed buyer and seller (there is not an asymmetrical information)*;
- buyer and seller have equal ability in negotiation;
- buyer and seller are interested in that transaction.
10
*Informational Efficiency – features (EMH):
- the price equals the fair market value;
- nobody can obtain systematic abnormal earnings (abnormal returns). *
*Earnings are proportional with the risk took over by investor.