Analysis of Financial Markets

Syllabus

Thematic definition of seminars: 1. Theoretical part: Introduction to Financial market. Characteristics of the financial market. Financial market intermediaries, financial instruments and the financial market mechanism. Legislation and basic definitions. Dividing the financial market into its basic segments. Financial market basic functions and current trends. International financial market. Market failures. Introduction to the valuation of financial instruments and their intrinsic value. Basics of time value of money. Future value. The basics of simple and compound interest and their differences. Interest earned on a single amount and annuity payments. Practical part: Discussion about the financial market, its individual segments. Gaining an overview of students' current knowledge of the financial market and financial instruments about which they already have theoretical knowledge or practical experience with them. Discussion about financial market failures and the reasons why it is necessary to learn how to evaluate financial instruments correctly. Exercises for calculating the interest and future value for a single deposit or regular payments. 2. Theoretical part: Present value. Discounting a single amount and annuity payments. Formulas used to calculate the present value. Relationship between present value and future value. Specific situations we can encounter when calculating the present value (growing annuity, perpetuity, growing perpetuity). Net present value. Practical part: Exercises for calculating the present value – of a single amount as well as of regular annuity payments. Variations in the calculations of the present value for cash flows with limited and unlimited maturity – exercises for calculating the present value of growing annuity, perpetuity, growing perpetuity. 3. Theoretical part: Timeline, its creation and moving on it. Basic rules for working with the timeline and formulas for calculating the time value of money. Variations of ordinary annuity - annuity due, deferred annuity, sparse annuity. Combinations of annuities, drawing specific situations on the timeline and ways of solving them. Summary of the basics and relationship between present and future value and application of acquired knowledge for financial decisions. Practical part: Working with the timeline. Calculating the present and future value to any point in time on the timeline. After mastering the timeline and rules, it is possible to solve specific problems of present and future value calculations, as well as their connection to real financial issues in practice. 4. Theoretical part: Interest and interest rates. Different types of interest rates used in the financial market. Nominal, after-tax, real, spot, forward, effective interest rates. Day count conventions used in the financial market. Theory and methods of calculating the present and future value in case of higher frequency of deposits and interest than only once a year. Practical part: Working with different types of interest rates. Conversion of nominal rate to after-tax interest rate, to real interest rate, to real after-tax interest rate. Calculation of forward rates from known spot rates and the explanation of their correlation. Conversion of the nominal interest rate to the annual effective interest rate. Calculation of future and present value in case of higher frequency of deposits and interest than only once a year. 5. Theoretical part: Money market. Definition and characteristics of the money market. Legislation. Money market price - interest and discount. Money market institutions. Basic financial instruments of the money market - Certificates of deposit, Treasury bills, Bills of exchange, Checks, etc. Certificates of deposit. Characteristics and specifics of Certificates of deposit. Formulas used in the evaluation of Certificates of deposit. Practical part: Calculations related to Certificates of deposit. Calculation of interest and future value. Annual effective interest rate (annual percentage yield). Intrinsic value of the Certificates of deposit on the secondary market. Calculation of the accrued interest and the principal. The actual rate of return for an investor and its relationship to the current market price in the secondary market. Calculation of the holding return for an investor who held the Certificate of deposit only for a certain period of time. 6. Theoretical part: Treasury bills. Characteristics and definition of Treasury bills. Specifics of Treasury bills in Slovakia and abroad. American and Dutch auctions of Treasury bills. The difference between the discount rate, the rate of return and the investment return. Formulas used in the evaluation of Treasury bills. Practical part: Calculations related to Treasury bills. The price of Treasury bills, on the primary and secondary markets, if they are issued with the rate of return. The price of Treasury bills on both the primary and secondary markets, if they are issued with the discount rate. Calculation the discount amount for the investor - with a known rate of return as well as with known discount rate. Conversion between discount rate, rate of return and investment return. Holding return for Treasury bills. 7. Theoretical part: Capital market. Characteristics of the capital market and the main differences from the money market. Legislation. Institutions of the capital market. Capital market instruments. Bonds. Definition and specifics of bonds. Maturity of bonds and their guarantees. The relationship between the coupon rate and the investor’s expected rate of return when evaluating bonds. Changes in interest rates and its impact on the bonds prices in the market. Theory of creating the investor’s expected rate of return. Basics of bond evaluation. Zero coupon bonds. Perpetuity bonds. Straight bonds with a fixed coupon and a nominal value paid at the maturity. Practical part: Calculation of the investor’s expected rate of return for discounting the future cash flows. Calculation of the intrinsic value of zero-coupon bonds, perpetual bonds and straight bonds with a fixed coupon and a nominal value paid at the maturity. 8. Theoretical part: Basic variations of straight bonds with a fixed coupon rate and nominal value paid at the maturity. Bonds with more frequent coupons, bonds with growing coupons and growing nominal value, bonds with skipped coupons. Rules for evaluating bonds to any day between two coupons payment. Practical part: Evaluating basic variations of straight bonds with a fixed coupon and nominal value paid at the maturity - bonds with higher frequency of coupon payments, bonds with growing coupons and a growing nominal value, bonds with skipped coupons. Evaluation of bonds to any date on a timeline. 9. Theoretical part: Bond innovations and the specifics of their evaluation. Stripped bonds, Floating rate bonds, Inverse bonds and others. Methods of measuring the bond yields. Bond risk, duration. Practical part: Exercises for the evaluation of selected bond innovations - floating rate bonds, stripped bonds, inverse bonds, and others. Measuring bond yields. Measuring the risk of bonds by calculating the duration. 10. Theoretical part: Equity shares. Stock market definitions and specifics. Legal framework for joint stock companies, rights and obligations of shareholders. Ordinary and preference equity shares. Advantages and disadvantages of issuing the equity shares for the issuer. Advantages and disadvantages of equity shares for the investor. Approaches to shares valuation and basic models. The basics of income methods applied in the valuation of shares. Models of discounted dividends for zero, constant and unequal dividend growth. Practical part: Basic calculations in income methods and application of the model of discounted dividends. Valuation of equity shares with constant and even growth based on perpetuity and growing perpetuity. Calculations and changes in the equity share value when moving on the timeline. Calculation of the equity shares value in the event of deferred dividend payments. 11. Theoretical part: Income methods of equity share evaluation – change in growth of the company's dividends. Valuation of shares with two-stage and three-stage dividend growth. Specifics of calculating the intrinsic value of shares with increasing and changing dividends to a particular year, moving on the timeline. Practical part: Application of the model of discounted dividends for unequal growth - two-stage and three-stage growth of dividends. Moving on the timeline and calculating the intrinsic value of equity shares to a specific point in time. Taking into account the changing dividends when calculating the intrinsic value. 12. Theoretical part: Net Present Value of Growth Opportunities (NPVGO) model. Model of discounted Free Cash Flows (Entity and Equity). Model of Capitalized Net Income. Model of discounted Economic Value Added (EVA). Alternative methods and options for equity shares valuation - asset approach, market approach etc. Determining the expected rate of return and the expected rate of growth for equity shares evaluation. Practical part: Calculation of equity shares value using the model of Net Present Value of Growth Opportunities, the model of discounted Free Cash Flows, the model of capitalized Net Incomes and the model of discounted Economic Value Added. Practical examples of calculating the expected rate of return and expected rate of growth for the equity shares. 13. Theoretical part: Foreign exchange market, its basics, exchange rate systems, factors influencing the exchange rate and trading on the foreign exchange market. Gold and precious metals market, ways to invest in precious metals and gold. Insurance market, specifics, supervision of the insurance market, managing the business risks. Derivatives market and its financial instruments. Practical part: Calculations related to remaining markets. Currency trading in the foreign exchange market, bid and ask prices, profit calculation. Different ways of investing in precious metals and gold, commodity market, calculations of gold purity. Insurance market and insurance premiums, selected insurance products for businesses.