Begrippen Money and Capital Markets

Real assets: The assets that produce goods and services: land, buildings, machinery, knowledge. They generate an economy's wealth.
Financial assets: Claims on real assets or on the income they produce, such as stocks, bonds and deposits. They decide who receives the income of the real assets.
Timing of consumption: The essence of investing: shifting consumption from today to the future (saving) or from the future to today (borrowing).
Separation of ownership and management: Shareholders own a large company but hire managers to run it. This allows growth but creates the agency problem: managers may pursue their own interests.
Asset allocation: The decision how much of a portfolio goes into each asset class (stocks, bonds, cash, real estate). It explains most of the differences in portfolio returns.
Security selection: The choice of individual securities within each asset class.
Risk-return trade-off: Higher expected returns are only available by accepting more risk; safe assets pay low returns.
Active management: Trying to beat the market by picking securities or timing the market; more costly than passive management and on average not better after costs.
Passive management: Holding a broad, diversified portfolio that copies the market (for example an index fund) without trying to beat it.
Securitization: Bundling many loans (such as mortgages) into one security that is sold to investors, so the lender gets its money back and can lend again.
Financial engineering: Repackaging financial products and slicing cash flows into new securities, for example strips: the separate coupons and principal of a bond sold as individual zero-coupon securities.
Intermediary: An institution that stands between lenders and borrowers: banks, insurance companies, pension funds, mutual funds.
Central bank: The bank of the banks and of the government: supervision, issuing bank notes, currency reserves, lender of last resort, monetary policy and clearing.
Lender of last resort: The central bank's role of lending to a solvent bank that cannot borrow elsewhere, to prevent its collapse during a panic.
Commercial bank: A deposit-taking bank doing retail and wholesale banking; it intermediates, transforms maturities and provides liquidity.
Maturity transformation: Funding long-term loans (30-year mortgages) with short-term deposits that can be withdrawn at any time; useful but the source of bank runs.
Investment bank: A bank that serves companies and large investors: corporate finance, accepting, security trading, investment management, loan arrangement and foreign exchange. It does not take retail deposits.
Open-end fund (mutual fund): An investment company whose size varies with investor demand; it has a specific investment policy and buys back its own shares at the net asset value.
Closed-end fund: An investment company that pools a fixed amount once, accepts no additional funds, has an expiration date, and whose shares trade on the stock exchange.
Net asset value (NAV): Market value of a fund's assets minus its liabilities, divided by the number of shares outstanding; the price at which open-end fund shares are bought and sold.
Load fund: A fund that charges a commission: a front-end load when you buy or a back-end load when you sell. A no-load fund charges none.
Management fee: The yearly fee, as a percentage of assets, paid to the fund's managers; together with administration fees it is deducted from the fund's assets.
Money market: The market for short-term debt securities (less than a year): Treasury bills, certificates of deposit, commercial paper, repos and interbank loans.
Treasury bill (T-bill): Short-term government debt (91 days, 182 days or 52 weeks) sold at a discount to face value and paying no coupon; sold in auctions with competitive and non-competitive bids.
Holding-period yield: The return over the life of a bill: (face value minus price) divided by the price. For a 182-day bill priced at 9,600 paying 10,000: 4.17%.
Effective annual yield (EAY): The annual return with compounding: (1 plus the holding-period yield) raised to the number of periods per year, minus 1. A 4.17% half-year yield is 8.51% a year.
Bank discount yield (BDY): The US quoting convention for T-bills: the discount divided by the face value, scaled with a 360-day year. It understates the true return.
Certificate of deposit (CD): A bank deposit for a fixed term at a fixed rate, in a form that can be sold to another investor before it matures.
Commercial paper: Short-term unsecured IOUs issued by large, creditworthy companies to borrow for weeks or months without a bank.
Bankers' acceptance: A payment order guaranteed (accepted) by a bank, used in international trade; the holder can sell it for cash before the payment date.
Eurodollars: Dollar deposits held in banks outside the United States; unrelated to the euro.
Repo (repurchase agreement): A short-term loan secured by a bond: the borrower sells the bond and agrees to buy it back later at a slightly higher price. From the lender's side it is a reverse repo.
Federal funds: Overnight loans of reserves between US banks; the federal funds rate is the Fed's policy rate.
EURIBOR: Euro Interbank Offered Rate: the benchmark rate at which euro-area banks lend to each other, used to price many loans. LIBOR was its London equivalent, discontinued in 2023.
Fixed income market: The market for long-term debt: Treasury notes and bonds, agency debt, municipal bonds, corporate bonds and mortgage-backed securities.
Mortgage-backed security (MBS): A bond backed by a pool of home loans; the product of securitizing mortgages.
Primary and secondary market: In the primary market a company sells new securities and receives the money; in the secondary market (the stock exchange) investors trade existing securities among themselves.
Price discovery: The process by which trading among many buyers and sellers produces a price that reflects the available information about a security.
Market maker: A dealer who always quotes a bid price (to buy) and an ask price (to sell) for a security and earns the spread; the main supplier of liquidity.
Broker: An agent who executes clients' orders for a commission without taking positions of his own.
Arbitrageur: A trader who buys an asset where it is cheap and sells it where it is expensive, earning a riskless profit and pushing prices back in line.
Hedger: A participant who uses the market to reduce a risk he already has, such as an airline fixing its fuel costs.
Speculator: A participant who deliberately takes on risk by betting on the direction of prices in exchange for the chance of profit.
Future value: What an amount invested today grows to after n periods at rate i: A times (1 + i) to the power n.
Compounding: Earning interest on previously earned interest, because interest is reinvested. It makes money grow exponentially: 1,000 at 10% becomes 1,210 after two years, not 1,200.
Present value: What a future amount is worth today: the amount divided by (1 + i) to the power n. The reverse of compounding.
Discounting: Dividing a future cash flow by (1 + i) to the power n to express it in today's money; i is then called the discount rate.
Time value of money: A euro today is worth more than a euro tomorrow because it can be invested and earn interest; cash flows at different dates can only be compared after moving them to the same date.
Cost of capital: The rate at which an investor can invest or borrow; the discount rate used to compare money at different dates.
Net present value (NPV): The present value of a project's cash inflows minus its cost today. A project is worth doing when the NPV is positive.
Perpetuity: A constant payment T every period forever; its present value is T / i.
Growing perpetuity: A payment that starts at T and grows at rate d every period forever; its present value is T / (i minus d), valid when d is below i.
Annuity: An equal payment every period for a fixed number of periods, such as a mortgage or car loan. PV = (T / i) times (1 minus 1 / (1 + i) to the power n).
Annuity due: An annuity whose first payment is today instead of one period from now; worth (1 + i) times the ordinary annuity.
Future value of an annuity: What equal deposits A at the end of each of n periods grow to: A times ((1 + i) to the power n minus 1) / i.
Nominal (simple) interest rate: A quoted annual rate that ignores compounding within the year; divide it by the number of periods to get the rate per period.
Effective annual rate: The true annual rate including compounding within the year: (1 + i/m) to the power m, minus 1. A nominal 10% compounded semiannually is 10.25%.
Continuous compounding: Interest credited continuously; an amount grows by the factor e to the power r times t, where r is the continuous annual rate and t the time in years.
Common share: A share with voting rights and a dividend that varies with profits; the owner is a residual claimant on the company.
Preferred share: A share paying a fixed dividend that has priority over the common dividend, usually without voting rights.
Earnings per share (EPS): Total profit divided by the number of shares.
Dividend per share (DPS): Total dividends divided by the number of shares.
Retained earnings per share (REPS): EPS minus DPS: the profit per share kept in the company.
Dividend yield: Dividend per share divided by the share price; the cash return on the share.
Return on equity (ROE): Profit divided by the value of equity; on the slides computed on the market value of the shares.
Price to book value (PTBV): Market value of the company divided by its book value; above 1 when the market values the company at more than its accounting value.
Expected return of a stock: (DIV1 + P1 minus P0) / P0: expected dividend yield plus expected capital gain.
Required rate of return (k): The return investors demand for holding a share given its risk; the discount rate in the dividend discount model.
Dividend discount model (DDM): The price of a share equals the present value of all its future dividends discounted at k.
Plowback ratio (b): The fraction of earnings reinvested in the company; 1 minus b is the payout ratio.
Return on reinvested earnings (r): The return the company earns on the profits it reinvests. Together with b it determines growth: g = r times b.
Gordon growth model: For dividends growing at a constant rate g forever: P0 = DIV1 / (k minus g), and k = DIV1 / P0 + g. Requires g below k.
Growth stock: A stock whose growth rate exceeds its expected dividend yield: most of the return comes from capital gains.
Income stock: A stock whose expected dividend yield exceeds its growth rate: most of the return comes from dividends.
Two-stage growth model: A valuation where dividends of the fast-growth years are discounted one by one and the Gordon model values all later dividends as a terminal price.
Present value of growth opportunities (PVGO): The part of the share price above the no-growth value EPS1 / k; the value of future profitable investments. Positive only when r exceeds k.
Theoretical price: The value of a stock from a dividend discount model; compared with the current price: buy if higher, sell if lower.
Price-earnings ratio (P/E): Share price divided by EPS. For a static company it equals 1 / k; a high P/E signals high growth prospects, a low k, or temporarily low profits.
Earnings yield: EPS divided by price, the inverse of the P/E ratio; equals k for a static company.
Bond: A tradable loan with fixed payments: coupons on fixed dates and the nominal value at maturity.
Nominal value (face value): The amount repaid at maturity, on which the coupons are calculated; usually 1,000.
Coupon rate: The yearly interest as a percentage of the nominal value; the coupon is the resulting payment.
Yield to maturity (YTM): The discount rate that equates the present value of a bond's payments to its price; the return from holding the bond to maturity. Set by the market according to the bond's risk.
Discount, par and premium: A bond trades at a discount (below nominal) when the YTM exceeds the coupon rate, at par when they are equal, and at a premium when the YTM is lower.
Accrued interest: The coupon interest earned since the last coupon date, paid by the buyer to the seller: coupon times days elapsed over 360.
Clean price: The quoted bond price, excluding accrued interest.
Dirty price: The full price actually paid for a bond: clean price plus accrued interest; equal to the present value of the remaining payments.
Duration: The weighted average time to a bond's payments, with weights equal to each payment's present value as a share of the price; a measure of interest rate sensitivity.
Modified duration: Duration divided by (1 + YTM); the approximate percentage price change for a one-point change in yield. The bond market's main risk indicator.
Convexity: The curvature of the price-yield relation. Because of it, the true price is above the straight-line duration estimate, and the error grows with the size of the yield change.
Zero-coupon bond: A bond with no coupons, sold at a discount and repaying the nominal value at maturity; its duration equals its maturity.
Interest rate risk: The risk that rising market yields lower a bond's price; larger for bonds with longer duration.
Credit risk: The risk that the issuer does not pay; assessed by rating agencies such as S&P and Moody's.
Reinvestment risk: The risk that coupons cannot be reinvested at the YTM because rates have fallen, so the realised return is below the YTM.
Call risk: The risk that an issuer repays a bond early under a call provision, typically after rates have fallen.
Investment grade: Bonds rated Baa/BBB or better by Moody's/S&P; below that, bonds are speculative (junk) and must pay higher yields.