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Finance (Basics)
Petr Malek
Department of Finance
Office 533
malek.petr@seznam.cz
99563@mail.muni.cz

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Structure of lectures
n1.Introduction to finance - ok
n2.Financial markets - ok
n3.Banks and banking systems - ok
n4.Other financial institutions – now
n5.Current value of money;
n6.Private finance;
n7.Investments;
n8.Corporate finance;
n9.International finance;
n10.International financial system;
n11.Macroekonomic and financial indicators and informations;
n12.History of financial science;
n13.Latest trends on financial markets.
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n

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Banks (and other financial institutions)
nBanks are financial institutions that accept deposits and make loans.
qIncluded under the term banks are companies such as commercial banks, savings and loan
associations, mutual savings banks and credit unions.
nBanks are the financial intermediaries that the average person average with most frequently.
qA person who needs a loan to buy a house or a car usually obtains it from a local bank.

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Banks
nBanks are the largest financial intermediaries in our economy, they deserve the most careful
study.
qHowever, banks are not the only important financial institutions.
qIn recent years other financial institutions such as insurance companies, finance companies,
pension funds, mutual funds, and investment banks have been growing at the expense of banks, and so
we need to study them as well.

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The types of the financial institutions
nCommercial banks (clearing)
nMerchant banks
nBuilding societies (US: Thrifts)
nPension funds
nInsurance companies
nCredit Unions

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nCommercial banks accept deposits, make loans and provide services both to the members of the
public and to the corporate clients while
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nMerchant banks only cater for the corporate clients with the same services
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nBuilding societies take mortgage loans and deposits by offering current accounts to members

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nPension funds earn interests and dividends from the accumulated funds and sometimes part of banks
or
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nInsurance companies…loan out funds and invest in government securities or shares
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nCredit unions…co-operately owned by members who are given loans, chequebooks, life assurance etc.

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Bulding societies (building savings bank)
nDefinition
qBuilding society is a financial institution, owned by its members, that offers banking and other
financial services, especially mortgage lending.
q
qThe term building society first arose in the 19th century, in the United Kingdom, from
co-operative savings groups. In the UK today building societies actively compete with banks for
most personal banking services, especially mortgage lending and deposit accounts.
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Building societies – building savings bank
nPROCESS OF SAVING
nBuilding savings has two phases:
qSaving Phase
nThe person saving usually regularly puts money into their building savings account and the state
can give them support. Savings and support from the state on the building savings account gain
interest, and this interest is free from income taxes.
qLoan Phase
nFollowing the saving phase there is the loan phase which consists of the provision of an
advantageous loan from the building savings bank for housing needs. In this way building savings
provides an advantageous way to save money and then the possibility of acquiring a favorable loan
for housing needs.

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Building societies – building savings bank
in the Czech Republic
nSTATE FUNDING
nGaining access to state support
nContracts closed by 31 .12. 2003: Users of building savings have access to state support if they
are individuals with permanent residence in the Czech Republic and they have a family number
assigned by the Czech Republic. People who have more than one contract will only get state support
on one of the agreements.
nContracts closed after 1.1.2004 can get state support if:
qThey are a citizen of the Czech Republic
qThey are a citizen of the European Union who have permission to live in the Czech Republic and
have a family number assigned by the Czech Republic
qAn individual with permanent residence in the Czech Republic and a family number assigned by the
Czech Republic
qIf somebody fulfills all of the above requirements and has more than one contract signed in one
year, state support is only given on the agreement where there person signed asking for it. If
there are multiple requests for funding, state support is usually provided on the contract that is
signed first, but in the case of multiple contracts, state funding can not exceed a total amount of
3000 CZK on all contracts.

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Building societies – building savings
nRequirements for state funding
q
qContracts signed by 31.12.2003: State funding is provided to the client if for five years they
haven‘t withdrawn any money from their account.
qContracts signed after 1.1.2004: State funding is provided to the client if for six years they
haven‘t withdrawn any money from their account.
q
nAmounts of state support
q
qOn contracts signed by 31.12.2003 that requested state funding by 31.12.2004 (the original version
of the regulation): State funding accounts for 25% of the yearly saved amount for a maximum total
of 18,000 CZK.
qOn contracts signed before 31.12.2003 where state funding was requested after 1.1.2005 (according
to the new regulation): State funding can account for 15% of the saved amount in the respective
calendar year for a maximum of 20,000 CZK.
qFor contracts signed after 1.1.2004 (according to the new regulation) state funding can account
for 15% of the total amount saved in a calendar year up to a total amount of 20,000 CZK.

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Building savings bank
nTHE CREATION OF THE BUILDING SAVINGS FUND
qBuilding savings is based on the principle of clients creating combined resources which they can
1. use for obtaining a favorable interest loan for a home, its reconstruction or 2. for the
specific housing needs of the client.
qEach client saves for a period of time (at least 24 months by law) and, after fulfilling set
conditions, can be granted a buildings savings loan.
qIf the savings bank has enough resources, the client get something called a bridging loan, which
allows the people to finance their housing needs sooner than they could get the full loan from the
building savings bank.
qThis type of financing is becoming more and more used amongst clients. The utilization of the so
called bridging loan allows for more flexibility within building savings.
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Building societies – building savings bank
nTHE ROLE OF SAVING CLIENTS
qAn important and necessary role in the building savings system are the clients who don‘t need
money for their housing needs, but use this product as an advantageous way to keep their savings.
qThe state support provided to all clients of building savings is given for two reasons.
nClients who use building savings to solve their housing needs get more money for specific needs.
nThe major reason for state support of the building savings system is the creation of motivation to
save.
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nTHE SAFETY OF BUILDING SAVINGS
qOne of the most important attributes of buildings savings is the high degree of its security. Only
specialized banks are allowed to provide buildings savings on the basis of a special license. The
law limits any high-risk commercial activities of buildings savings banks;
qBuildings savings thus can be considered one of the safest financial investments available.

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Building societies – building savings bank
nDIRECT AND INDIRECT EFFECTS OF BUILDING SAVINGS
qBuildings savings enables citizens to meet their individual housing needs, and increases interest
in housing modernization.
nPart of the funds invested in buildings savings are thus returned to the state in the form of a
higher volume of income taxes paid by construction companies and enterprises operating in related
areas, such as the production of construction materials and components, the production of
sanitation technology, etc.
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nAt the same time, the growth of production and sales influence employment and levels of income.
Higher income results in higher consumption, and consequently in higher state budgetary resources.
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nThe direct effects of buildings savings in the area of meeting housing needs, as well as the wider
indirect effects, clearly confirm the legitimate existence of buildings savings on the banking
market and the legitimacy of state assistance to this product.

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Building savings – CR - what is it?
nBuilding savings is an effective way to save where the person saving long-term can save at a
specialized bank. During the time that the person is saving, support can also be given by the
government, and at the end of the savings period, the person can have the right to a loan from the
building savings bank if they meet certain criteria.
qBuilding savings combines both savings and a loan in a compact package. The loan is characterized
by low and stable interest rates during the entire period of payment.
qIn its own way, building savings is a closed system, not influenced by the negative factors of the
capital market.
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nParticipants in building savings can be:
qa person
qa legal entity
nThis difference is important primarily in the case of getting state support. At the moment, a
legal entity is unable to gain state support, whereas a person is able to.
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nState support can be given to:
qcitizens of the Czech Republic
qEuropean Union citizens who have given permission to live in the Czech Republic and have been
given a Czech family number (after the accession of the Czech Republic into the European Union, as
of 1.5.2004)
qa person with permanent residence in the Czech Republic and is given a Czech family number

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Building savings
nBuilding savings began as a way to allow a wide array of people to solve their housing needs in
the form of a advantageous savings and loan program.
nThis product is advantageous anybody who is interested in a way to develop their financial
resources or whoever wants to help with funding housing related projects for themselves or somebody
close to them. In terms of building savings, somebody close is considered to be a direct relative
such as a sister, brother or wife or husband.
nOne of the advantages of building savings is its variability. Building savings banks are able to
create basically any kind of regime that responds to the needs of the client and allows them to
solve their housing needs and the reliance on their financial resources. Building savings is also
beneficial to those with lower incomes as well.

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Nonbank finance
nBanking is not the only type of financial intermediation you are likely to experience.
qYou might decide to purchase insurance, take out installment loan from a finance company, or buy a
share of stock.
nInsurance companies
nPension funds
nMutual funds

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Insurance
nEveryday we face the possibility of the occurrence of certain catastrophic events that could lead
to large financial losses.
qA spouse‘s earnings might disappear due to death or illness; a car accident might result in costly
repair bills or payments to an injured party.
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nLife insurance
qThe first life insurance company in the United States was established in 1759 and is still in
existence.

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Insurance
nTerm insurance is matched every year to the amount needed to insure against death (life insurance)
during the period of the term (such as one year or five years).
nInsurance is in the financial intermediation business of transforming one type of asset into
another for the public.
nInsurance providers use the premiums paid on policies to invest in assets (bonds, stocks,
mortgages, loans); the earnings from these assets are then used to pay out claims on the policies
nInsurance providers, which are regulated by the countries, acquire funds by selling policies that
pay out benefits if catastrophic events occur. Property and casualty insurance companies hold more
liquid assets than life insurance companies because of greater uncertainty regarding the benefits
they will have to pay out.
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Insurance
nInsurance market and its concentration (www.cap.cz)

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Insurance - Fundamental of insurance (all insurance is subject to several basic principles):
1.There must be a relationship between the insured (the party covered by insurance) and the
beneficiary (the party who receives the payment should a loss occur). Beneficiary must be someone
who may suffer potential harm. The reason for this rule is that insurance companies do not want
people to buy policies as a way of gambling.
2.The insured must provide full and accurate information to the insurance company.
3.The insured is not to profit as a result of insurance coverage.
4.If a third party compensates the insured for the loss, the insurance company‘s obligation is
reduced by the amount of the compensation.
5.The insurance company must have a large number of insured so that the risk can be spread out
among many different policies.
6.The loss must be quantifiable.
7.The insurance company must be able to compute the probability of the loss occuring.

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Pension funds
nIn performing the financial intermediation function of asset transformation, pension funds provide
the public with another kind of protection: income payments on retirement.
nAlthough the purpose of all pension plans is the same, they can differ in a number of attributes.
qFirst is the method by which payments are made: if the benefits are determined by the
contributions into the plan and their earnings, the pension is a defined-contribution plan; if
future income payments (benefits) are set in advance, the pension is a defined-benefit plan.

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Pension funds
nPension plans provide income payments to people when they retire after contributing to the plans
for many years.
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nMany pension plans are underfunded, which means that in future years they will have to pay out
higher benefits than the value of their contributions and earnings.

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 The Association of Pension Funds of the Czech Republic
Pension Fund
Market share (%)
PF České pojišťovny, a.s.
23,49
AXA penzijní fond, a.s.
17,41
PF České spořitelny, a.s.
16,23
PF Komerční banky, a.s.
13,58
ING Penzijní fond, a.s.
11,22
ČSOB PF Stabilita, a. s.
8,61
ČSOB PF Progres, a. s.
4,08
Allianz penzijní fond, a.s.
3,74
Generali penzijní fond a.s.
0,99
AEGON Penzijní fond, a.s.
0,65

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Pension insurance - age spread of participants in %

18 - 29 years
30 – 39 years
40 – 49 years
50 – 59 years
60
and over
on 31.12.2009
12,61
21,11
19,10
22,94
24,23
on 31.12.2008
12,70
20,60
19,20
24,20
23,40
on 31.12.2007
12,63
19,98
19,74
25,31
22,32
on 31.12.2006
12,60
19,09
20,46
26,91
21,38
on 31.12.2006
11,63
18,35
21,50
28,38
20,14

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Pension funds - advantage
Your monthly contribution (CZK)
State support in the Czech Republic
100 - 199
  50 CZK –   89 CZK
200 – 299
  90 CZK – 119 CZK
300 - 399
120 CZK – 139 CZK
400 – 499
140 CZK – 149 CZK
 Over 500
                  150 CZK

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Pension funds – selected economic indicator
nThe assets of pension funds (as at 31 December 2009) were CZK 215.9 billion, which is CZK 24.2
billion more than at the end of the previous year (CZK 191.7 billion).
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nThe average assets per participant in 2009 exceeded CZK 48,000, as against almost CZK 45,000 in
2008, approximately CZK 44,000 in 2007, and around CZK 40,000 in 2006.
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nThe profits of pension funds as at 31 December 2009 stood at almost CZK 2.6 billion. This is CZK
1.9 billion (3.7x) more than the year before.
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Pension Funds etc.
qPrivate Pension Plans
qPublic Pension Plans
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nMutual Funds
nMoney Market Mutual Funds
nHedge Funds

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Pension funds etc.
nFinance companies raise funds by issuing commercial paper and stocks and bonds and use the
proceeds to make loans that are particularly suited to consumer and business needs.
nMutual funds sell shares and use the proceeds to buy securities.
qOpen end funds issue shares that can be redeemed at any time at a price tied to the asset value of
the company.
qClosed end funds issue nonredeemable shares, which are traded like common stock.

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Mutual funds
nA mutual fund is a professionally managed type of collective investment scheme that pools money
from many investors and invests typically in investment securities (stocks, bonds, short-term money
market instruments, other mutual funds, other securities, and/or commodities such as precious
metals).
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nThe mutual fund will have a fund manager that trades (buys and sells) the fund's investments in
accordance with the fund's investment objective.
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nMutual funds may invest in many kinds of securities (subject to its investment objective as set
forth in the fund's prospectus, which is the legal document which offers the funds for sale and
contains a wealth of information about the fund).
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nThe most common securities purchased are "cash" or money market instruments, stocks, bonds, other
mutual fund shares and more „exotic“ instruments such as derivatives like forwards, futures,
options and swaps.

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Types of mutual funds
nOpen-end fund, forms of organization, other funds
qThe term mutual fund is the common name for what is classified as an open-end investment company.
Being open-ended that, at the end of every day, the fund continually issues new shares to investors
buying into the fund and must stand ready to buy back shares from investors redeeming their shares
at the then current net asset value per share.
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qMutual funds must be structured as corporations or trusts, such as business trusts, and any
corporation or trust will be classified as an investment company if it issues securities and
primarily invests in non-government securities.
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nAn investment company will be classified as an open-end investment company if they do not issue
undivided interests in specified securities and if they issue redeemable securities.
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nClosed-end funds are like open end except they are more like a company which sells its shares a
single time to the public under an initial public offering or "IPO".

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Types of mutual funds
nExchange-traded funds
nA relatively recent innovation, the exchange-traded fund or ETF, is often structured as an
open-end investment company.
qETFs combine characteristics of both mutual funds and closed-end funds.
qETFs are traded throughout the day on a stock exchange, just like closed-end funds, but at prices
generally approximating the ETF's net asset value. Most ETFs are index funds and track stock market
indexes.
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nExchange-traded funds are also valuable for foreign investors who are often able to buy and sell
securities traded on a stock market, but who, for regulatory reasons, are limited in their ability
to participate in traditional U.S. mutual funds.
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nEquity funds
nEquity funds, which consist mainly of stock investments, are the most common type of mutual fund.
Equity funds hold 50 percent of all amounts invested in mutual funds in the United States. Often
equity funds focus investments on particular strategies and certain types of issuers.
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Types of mutual funds II.
nBond funds
nBond funds account for 18% of mutual fund assets. Types of bond funds include term funds, which
have a fixed set of time (short-, medium-, or long-term) before they mature.
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nMoney market funds
nMoney market funds hold 26% of mutual fund assets in the United States. Money market funds
generally entail the least risk, as well as lower rates of return.
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Mutual funds – types III.
nFunds of funds
nFunds of funds are mutual funds which invest in other mutual funds (i.e., they are funds composed
of other funds).
qA fund of funds will typically charge a much lower management fee than that of a fund investing in
direct securities because it is considered a fee charged for asset allocation services which is
presumably less demanding than active direct securities research and management.
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nMost FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although
some invest in unaffilated funds (those managed by other advisors) or both.
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nThe design of FoFs is structured in such a way as to provide a ready mix of mutual funds for
investors who are unable to or unwilling to determine their own asset allocation model.
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nHedge funds
nHedge funds in the United States are pooled investment funds with loose regulation, unlike mutual
funds.
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Credit Unions
nFinancial institution that focuses on servicing the banking and lending needs of its members.
qThese institutions are also designed to service the needs of consumers, not businesses, and are
distinguished by their ownership structure and their „common bond“ membership requirement.
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nMost credit unions are relatively small.
qCredit Unions were established to serve the public‘s demand for consumer-type loans. They are
unique because members must satisfy a common bond requirement to join.

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Finance (Basics)
nNext lecture – 1st test
qMultiple choice and open questions
q25 points (together 30 points/50 points)
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nThank you for your attention