Start with the claim, not the product name

An instrument is a contract or ownership claim, not merely a familiar label. For every instrument below, ask four questions: who issues the claim, who holds it, what payments or rights does it promise, and what event can change those payments? A loan and a bond can both transfer purchasing power now in return for future debt payments; an equity share instead conveys a residual ownership claim.

The same word changes balance-sheet meaning with the viewpoint. A bank’s deposit is the saver’s asset and the bank’s liability. A bank’s loan is its asset and the borrower’s liability. A bond purchased by a bank is an asset; a bond issued by that bank is its funding. The source’s “sources versus uses” table is the organizing logic of this page.

The notes supply market interest rates in most calculations; they do not identify a single instrument that sets every interest rate in the economy. The yield explorer below distinguishes a contractual coupon from a market discount rate and an implied yield solved from price. It does not claim to set the central bank’s policy rate. Where the source names a product without enough data to price it, an explicitly labelled teaching extension explains its cash-flow mechanism without pretending the missing inputs were supplied.

Continue in the source-order lesson: Direct and indirect finance →

Continue in the source-order lesson: Sources and uses →

The trading-book list on PDF 39 also names commodities. A physical commodity is an asset, not automatically a financial claim issued by a borrower. Exposure may be a physical holding or a derivative linked to its price. As an original holding-value example, 100 units rising from 50 to 53 create 100 × (53 − 50) = 300 gross value gain, before storage, funding and transaction costs. The source does not specify a commodity contract, delivery term or full pricing model. See the source trading-book classification →

Equity shares: finance without a fixed repayment promise

A company issues equity to obtain funds while giving investors an ownership interest. Unlike a conventional fixed-coupon bond, an ordinary share does not promise the same fixed interest payment and scheduled principal repayment. Shareholders receive the residual value after creditors’ claims; distributions and market value depend on the firm’s results and policy.

The source later writes E = A − L. As a teaching extension, if market-valued assets are 100 and liabilities 90, equity is 10. If assets fall to 94 while liabilities remain 90, equity becomes 4: a 6-unit asset loss consumes 60% of the original equity. The economic meaning is leverage: the residual claimant absorbs a larger proportional change than the asset portfolio.

This does not provide a complete equity pricing model. A market share price depends on expected distributions, risk and discounting; book equity is not automatically its market value. The relevant risks include business performance, leverage, dilution and loss of residual value. Compare a creditor’s contractual payment with a shareholder’s residual claim rather than calling both “interest.”

Continue in the source-order lesson: Market value of equity →

Coupon bonds: a timeline of promised payments

A bond issuer obtains funds today and promises coupons and principal under the contract. The buyer pays a market price and holds those claims. Face value F determines the principal and, for a conventional fixed-rate bond, the coupon C=cF. Price P is what the buyer pays today. Coupon rate c=C/F, current yield C/P and yield to maturity R are different quantities.

The source’s one-year bond has F=$100 and c=10%. The coupon is $10, and the only terminal payment is $110. At R=10%, P=110/1.10=$100. If the market yield rises to 11%, the same $110 is worth 110/1.11=$99.0991. The coupon does not become $11. The old fixed promise competes with the new required return through a lower price.

For n annual coupons, price is the sum of each cash flow discounted to its own date: P=Σ[C/(1+R)^t]+F/(1+R)^n. The first coupon is discounted once, the last coupon and principal n times. This derivation assumes annual payments, a flat yield used for every date, fixed promised cash flows and full payment. Actual default, taxes, fees or optional early redemption can change the valuation problem.

PDF 69 also contains a historical 500-franc, 6% certificate with semiannual 15-franc coupons and a scheduled redemption scheme. The separate handwritten calculation beside it uses annual 30 payments, 500 principal, 30 years and 10% yield, giving 311.461711. Do not combine the historical certificate’s semiannual schedule with the separate annual exercise. Turkish “tahvil” generally names the longer-term debt-security family; do not use “bono” as an automatic synonym for every coupon bond.

The issuer uses the instrument to obtain funding for a period; the buyer seeks compensation for waiting and risk. Main risks are default, changing market yields, reinvestment of coupons, liquidity and any currency exposure. Longer final maturity usually makes a comparable fixed-cash-flow price more sensitive, but maturity alone does not summarize every cash-flow difference.

Continue in the source-order lesson: One-year bond →

Continue in the source-order lesson: Thirty-year handwritten example →

Treasury bills, notes and bonds: remaining maturity matters

Treasury instruments fund the sovereign; the investor holds a claim on the government. The source’s balance sheet names 3-month T-bills, 6-month T-notes and 3-year Treasury bonds. Its handwritten maturity categories refer broadly to original issue maturity, whereas an old security can have only six months or three years remaining today. Preserve that distinction rather than changing the source labels.

A Treasury bill is commonly a short-term discount instrument: the buyer pays less than the amount redeemed at maturity rather than receiving the same periodic-coupon pattern as a longer coupon bond. As an original annualized holding-return illustration, pay 98 for 100 redeemed after one year. The dollar gain is 2 and the return on invested money is 2/98=2.0408%. The discount relative to face is 2/100=2%. These denominators differ; calling both numbers the same yield is an error.

For less than one year, annualization also needs a day-count and compounding convention. No convention is supplied for this illustrative quote, so do not manufacture a unique annualized yield. In the source repricing model, the 3-month bill and 6-month note enter the one-year RSA total because their funds can be reinvested within the horizon; the fixed 3-year bond does not. Short maturity reduces some fixed-income price exposure but does not mean zero risk in all circumstances.

Continue in the source-order lesson: Rate-sensitive assets →

Demand deposits, savings, time deposits and CDs

A deposit claim supplies funds to a bank and gives the customer a contractual account claim. Demand deposits emphasize access and payments; passbook savings emphasize saving; time deposits have a stated term. A certificate of deposit (CD) evidences a deposit obligation, and a negotiable CD can be transferable. The source’s denomination example mentions a $100,000 negotiable-CD minimum; that is its teaching example, not a universal current product rule.

As an original simple annual contract illustration, a one-year 10,000 deposit at 5% pays 500 interest and 10,500 at maturity if fully paid and no fees/tax apply. The bank records interest expense; the saver records interest income. Do not read the same cash flow as income to both sides. A short deposit can be convenient to the saver while exposing a bank holding long assets to renewal costs.

In the one-year source repricing calculation, 3-month CDs and 1-year time deposits are included in RSL; 2-year time deposits are excluded. Demand deposits and passbook savings are treated as rate-insensitive in that baseline. This is a modeling assumption: administered rates, withdrawals and replacement funding can make actual behavior sensitive. Deposit insurance, legal terms and withdrawal penalties depend on the particular contract and rules; this lecture does not justify a blanket safety guarantee.

Continue in the source-order lesson: Deposit maturity →

Continue in the source-order lesson: RSL assumptions →

Loans and mortgages: fixed rate, floating rate and repayment

A loan transfers funds from a lender to a borrower under a repayment contract. Consumer and business loans differ in the financed activity; a mortgage is connected to property collateral. Collateral can improve recovery prospects but does not guarantee that every payment arrives on time or that the collateral value will cover the debt.

For a fixed-rate loan, the contractual rate stays fixed for the relevant period. A floating-rate contract resets under an agreed rule. In the source table, a 30-year floating mortgage reprices every 9 months and is therefore rate-sensitive within one year. A 10-year fixed mortgage is excluded under the simple baseline. Final maturity answers when the claim ends; next reset answers when its interest rate can change.

The source refinancing example earns 10% on a $100 million loan while funding initially costs 9%: annual interest margin 1 million. If funding renews at 11%, the fixed loan still earns 10 million but interest expense becomes 11 million, giving−1 million for that period before other costs. The borrower’s loan contract did not change; the bank’s funding did.

The source’s later maturity-matching example also pays principal early, showing that two one-year instruments can have different within-year cash-flow timing. A fully amortizing loan returns principal through its life; a bullet loan concentrates principal at the end. To price either, discount its actual scheduled payments, not a guessed terminal lump. Credit, prepayment, refinancing and interest-rate risks depend on this contract structure.

Continue in the source-order lesson: Refinancing example →

Continue in the source-order lesson: Floating mortgage →

Continue in the source-order lesson: Cash-flow timing counterexample →

Commercial paper: short-term market funding

Commercial paper is short-term corporate borrowing represented by a market instrument. The issuer obtains funding from investors rather than taking a household deposit. The source places it among finance-company funding instruments and in the bank example’s six-month liabilities. It is not a Treasury bill: a similar maturity does not make the issuer or credit risk identical.

The source’s $250,000 package illustration explains why an investment fund can improve small-investor access. For an original discount example, an investor pays 245,000 and receives 250,000 after six months if the issuer pays. Gain=5,000; six-month holding return=5,000/245,000≈2.0408%. A simple doubling annualization gives 4.0816%, whereas repeating the identical six-month return twice gives(250/245)^2−1≈4.1233%. These are explicitly different conventions, not two different promised coupons.

For the issuer, the next question is rollover: what if funding is still needed when the paper matures? Renewal can cost more or become unavailable. For the investor, default and liquidity remain relevant. The source includes $60 million six-month paper in RSL because its funding cost can change within the one-year horizon.

Continue in the source-order lesson: Instrument table →

Continue in the source-order lesson: Denomination divisibility →

Bankers acceptances and trade payment promises

A bankers acceptance is a time draft whose payment obligation a bank has accepted. The bank’s undertaking can make a trade-related claim easier to finance because the holder relies on the bank’s accepted promise, not only the buyer’s payment ability. The handwritten source cue treats it as guarantee-like; it is not simply the same thing as pledged collateral.

An original cash-flow example: an accepted draft promises 100,000 in three months and is purchased today for 98,500. If paid, the holder receives 1,500 above the purchase price, a three-month return 1,500/98,500≈1.5228%. The accepting bank must meet its promise under the contract and then relies on its reimbursement arrangement with the customer. The quote alone does not provide a unique annualized yield without a convention.

In the source’s repricing table, $20 million of three-month bankers acceptances is a sensitive funding item within one year. Distinguish that balance-sheet exercise from a letter of credit described later as a contingent trade promise: they are related payment-support mechanisms, but contract triggers and timing must be read rather than assumed identical.

Continue in the source-order lesson: Acceptance annotation →

Continue in the source-order lesson: Trade commitments →

Repo and interbank funding: obtaining cash from other institutions

The Turkish balance sheet lists “due to banks” and repo funding as sources, not as investments owned by the bank. Interbank borrowing gives one institution a claim on another; the borrower obtains cash but assumes a repayment obligation. The source maturity buckets also identify very short funds, including the federal-funds context, when discussing rapid repricing.

A repo combines a sale of a security with an agreement to repurchase it on agreed terms. Economically it can provide secured funding: the cash supplier is protected by the security arrangement, while the cash user retains a repurchase obligation. In an original one-year simplified example, receiving 100 today and repurchasing for 105 implies 5 financing cost, or 5% of the cash received. Real short-term repo quotes also require a day-count convention and may involve haircuts and margin calls; these inputs are not supplied by the source chart.

Collateral does not remove every risk. A fall in collateral value can require more collateral or cash; funding may not be renewed; counterparty and settlement risks remain. The source’s liquidity chapter explains why replacing funds or selling assets under stress can damage equity even when the original need was only cash timing.

Continue in the source-order lesson: Sources of funds →

Continue in the source-order lesson: Liquidity mechanism →

Government bonds, eurobonds and sukuk in the portfolio

The source’s securities portfolio separates government bonds 61%, Treasury eurobonds 25%, sukuk 10% and other 4%. These are shares of the securities book, not of every asset or of all bank funding. The government-bond categories share a sovereign connection but can differ in currency, maturity and governing terms. “Eurobond” does not automatically mean the bond is denominated in euros; identify the actual contractual currency.

A foreign-currency bond adds conversion risk for an investor measuring wealth in another currency. The source’s US FI puts $100 million into lira bonds at 5 TL/$, obtaining TL 500 million. A 10% lira return produces TL 550 million. At 10 TL/$ the proceeds convert to $55 million:−45% in dollars despite+10% in lira. The relevant return is a chain of currency conversion and bond cash flows, not just the local coupon.

Sukuk appears as a separate source category. Its contractual rights are structured around the relevant asset/transaction arrangement rather than simply relabelling every instrument as a conventional interest bond. The lecture does not give a particular sukuk contract or cash-flow schedule, so an exact price cannot be derived from the 10% portfolio share. To value a specified instrument one would need the actual distributions, principal/redemption terms, risks and discounting assumptions. Preserving that missing-information boundary is more accurate than inventing a coupon formula for every sukuk.

Continue in the source-order lesson: Securities composition →

Continue in the source-order lesson: Foreign-currency return →

Fund shares, insurance policies and pension claims

A mutual fund pools subscriptions and issues shares backed by a portfolio. The source distinguishes stock/bond mutual funds from money-market mutual funds. If a fund holds assets worth 1,000,000 with no liabilities and has 10,000 shares, an original net-asset-value illustration gives 100 per share. If the assets fall to 950,000 with the same share count, NAV becomes 95. Pooling changes access and management; it does not guarantee a fixed share price.

An insurance policy is different: a premium purchases specified contingent protection. Its payment depends on the insured event and contractual conditions, not merely on the market value of a fund portfolio. A simple illustration is a 1,000 premium for an agreed 100,000 covered loss payment. The premium is not a 1% investment return: it is the price of a contingent risk-transfer promise. Exact pricing needs event probabilities, severity, expenses, capital and contract terms that the opening source does not supply.

Pension and government retirement funds receive employer/employee contributions and hold investments to meet retirement-related obligations. Today’s contribution and later benefit occur at different dates. The source’s role is transfer across time/generations; whether an individual benefit is fixed or linked to asset performance depends on the actual pension arrangement. Do not silently impose a defined-benefit or defined-contribution contract where the source provides only a broad institutional row.

Compare the risks: fund holders bear portfolio-value risk; policyholders rely on valid coverage and insurer performance; pension outcomes depend on funding, investment and benefit rules. All three can use pooled assets but do not promise the same cash flows.

Continue in the source-order lesson: All source/funding rows →

Continue in the source-order lesson: Insurance failure →

Letters of credit and loan commitments

A letter of credit supports a trade payment under specified contractual/documentary conditions. The bank’s promise can make an exporter willing to ship when it would otherwise hesitate to rely only on the importer. A loan commitment instead promises financing up to an agreed amount when the customer draws under its terms. Before drawing, an unused commitment is not the same as a funded loan principal.

An original mechanism example: a customer draws 40 from an unused 100 credit line. The bank must supply 40 cash and obtains a 40 loan claim. It has not automatically lost 40. If the resulting loan later recovers only 30, the 10 shortfall is a credit-loss issue under that simplified assumption. Liquidity demand at drawdown and ultimate credit loss are different quantities.

The source’s true-net-worth discussion asks you to include contingent assets and liabilities, not just reported funded positions. Fees compensate for providing availability or guarantees, but notional commitment size, fee revenue, fair value and possible loss are not the same. A guarantee can become costly when the customer fails, making an apparently off-balance-sheet promise a real cash and capital problem.

Continue in the source-order lesson: Contingent instruments →

Continue in the source-order lesson: True net worth →

Forwards and futures: a price agreed for a later exchange

A forward is a bilateral agreement to exchange an asset or currency later on specified terms. It can fix a future transaction price and reduce uncertainty for a hedger, while creating counterparty exposure. A futures contract is standardized and generally uses margin and daily settlement arrangements. Daily cash demands can matter even when the ultimate hedge is economically sensible.

An original currency example assumes—not derives—a forward rate of 30 TL/$ for buying $1,000. At settlement the contracted lira payment is 30,000. If spot is 32 TL/$ then obtaining $1,000 at spot would cost 32,000; the forward gives a 2,000 TL favorable difference relative to that spot alternative. If spot is 28, the same contract is 2,000 TL unfavorable. A forward fixes a price, not a guaranteed profit; the initial underlying exposure determines whether this is a hedge.

For an otherwise comparable futures position, the total economic direction can be similar, but gains and losses may be paid through margin before final settlement. Do not use a terminal-payoff diagram to conclude that there can be no earlier cash problem. The MFI slides name these contracts and illustrate uncontrolled trading through Barings; they do not supply a full arbitrage-based forward-pricing derivation. The assumed 30 is a contractual exercise input, not a forecast or a rate supposedly read from those slides.

Continue in the source-order lesson: Derivative list →

Continue in the source-order lesson: Trading-risk case →

Swaps and options: streams versus rights

A swap exchanges specified cash-flow streams. In a simple fixed-for-floating interest-rate swap, one side pays a fixed rate and receives a floating rate on a reference notional. The notional scales the interest calculation; it is not automatically the amount exchanged or the loss. Different swap types, including currency swaps, can have different principal-exchange terms.

An original one-period illustration uses notional 1 million, one year, fixed 5% paid and floating 6% received. The net interest receipt is 1,000,000×(0.06−0.05)=10,000 if payments net and the counterparty performs. At floating 4%, the net payment is 10,000. A fixed-paying swap can offset some floating-rate funding exposure; whether it does so requires matching the actual balance-sheet exposure, reset dates and notional.

An option gives its buyer a right, not the same symmetric obligation. For an original call example, strike 100 and terminal asset price 120 give exercise payoff max(120−100,0)=20. If the premium was 5, ignoring financing and fees, net profit is 15. At terminal price 90, the payoff is 0 and the buyer loses the 5 premium. Payoff and profit differ because the option costs money initially.

The option seller faces the opposite contingent payoff, and its risk depends on the position and hedge. A premium cannot be computed from strike alone: price, volatility, time, rates and contractual features matter. The source lists options without supplying that full pricing model; these examples explain contract mechanics rather than inventing a complete valuation calibration.

Continue in the source-order lesson: Swap and option definitions →

Credit default swaps: paying for credit-event protection

A CDS transfers specified credit-event exposure between a protection buyer and seller. The buyer pays a contractual spread; the seller owes the specified protection payment if a qualifying credit event occurs, subject to settlement terms. The source’s sovereign-CDS table uses spreads as a risk-pricing indicator. A larger quoted spread is not the same unit as a literal default probability.

An original simplified annual-fee illustration uses a 200 basis-point spread on 1 million notional:200 bp=2%, so an unchanged full-year premium basis would imply 20,000 before accrual/default-timing adjustments. If a credit event produces a simplified loss of 60% of notional, the protection payoff would be 600,000 under that assumed loss-settlement rule. The 20,000 fee is not 600,000 and the 1 million notional is not an automatic loss.

The actual relationship between spread and default probability depends on recovery, term structure, risk premia, liquidity and contract assumptions. The source table also contains PD estimates; read them as model-dependent, dated estimates, not a mechanically guaranteed event frequency. Protection introduces counterparty and basis risks: the hedge only helps if the contract responds to the relevant event and the seller performs.

Continue in the source-order lesson: Dated CDS map →

Continue in the source-order lesson: Full source table →

Municipal bonds and issued notes: the Gunnison cash flows

A municipal bond is debt issued by a municipal/public-sector entity; in Gunnison it is an asset held by the insurer. A note issued by Gunnison is the opposite side: it obtains funding for the company and is a liability to its investors. “Bond” and “note” labels alone do not tell you whether the FI owns or owes the claim.

The source’s fifteen-year munis have face 165 ($000) and 9% annual coupon. Coupon C=165×0.09=14.85. After a 200 bp yield increase from 9% to 11%, value is 14.85[1−1.11^−15]/0.11+165/1.11^15=141.270130 ($000). The original coupons and principal are unchanged; they are now discounted more heavily. The loss is 23.729870, about 14.3817% of 165.

The five-year issued notes have face 160 and 8% coupon, so C=12.8. At the new 10% yield, their market liability value is 12.8[1−1.10^−5]/0.10+160/1.10^5=147.869482. The liability decline 12.130518 offsets part of the asset loss when computing ΔE=ΔA−ΔL. It does not cancel the issuer’s contractual future payments.

The same case’s two-year Treasury notes have face 175, coupon 8.75 and newyield 7%: value 8.75/1.07+183.75/1.07²=168.671936. Its one-year commercial paper promises 135×1.045=141.075 and discounts at 6.5%, giving 132.464789. All amounts are in thousands of dollars; multiply by 1,000 only when converting to dollars. No tax treatment, ratings or call provisions are stated for the munis, so they are not silently inserted into the example.

Continue in the source-order lesson: Gunnison asset prices →

Continue in the source-order lesson: Gunnison liabilities →

Zero-coupon debt: one payment, no intermediate coupon

A zero-coupon bond has no interim coupon stream. Its specified terminal redemption is the central cash flow. If the contract promises F after n years and a single annual discount yield R is appropriate, P=F/(1+R)^n. This is the general present-value equation with all earlier cash flows set to zero.

The source uses a one-year zero-coupon liability paying 100 at the end, contrasted with an asset returning 99.99 very soon and 0.01 at year-end. Both have the same last payment date, but almost all asset cash arrives earlier. The asset funds must be reinvested, so equal final maturity is not full immunization.

For a separately labelled pricing illustration,100 due after one year at 10% is worth 100/1.10=90.9091 today. At 11% it is 90.0901. These are original inputs, not prices printed for the source’s counterexample, which supplies no exact initial yield or early-payment date. The mechanism is that a fixed terminal sum has a changing present value; “zero coupon” does not mean zero return or zero interest-rate risk.

Continue in the source-order lesson: Equal maturity, different timing →

Credit-card loans and mortgage-backed securities

The source compares credit performance across credit-card, commercial and real-estate lending. A credit-card balance is a borrower’s debt to the lender; the contractual interest and fees do not guarantee collection. The basic asymmetry is important: on a 100 loan promising 110, full performance supplies 10 above principal, while failure can put a substantial part of the 100 at risk. This illustrative upside/downside comparison is not a prediction of a particular recovery rate.

A mortgage-backed security represents claims linked to a pool of mortgage cash flows. Securitization packages underlying loan payments into tradable claims; it does not erase the borrower’s ability-to-pay problem. Different structures can allocate payments and losses differently, so the precise security must be identified before assigning a payoff or a valuation formula.

The source’s 2008 discussion warns that tradability in normal conditions can coexist with severe market illiquidity under stress. Mortgage defaults can reduce expected cash flows, while widening required spreads and a lack of buyers reduce market prices. Borrower prepayments can also alter timing. The notes do not supply a specific MBS tranche, prepayment model or waterfall, so a numerically exact MBS price cannot responsibly be inferred from the label alone.

Continue in the source-order lesson: Credit-performance comparison →

Continue in the source-order lesson: Market liquidity and 2008 →

Foreign currency: a position measured in another unit

Foreign currency can be an asset or an obligation; “holding dollars” and “owing dollars” respond in opposite directions to the same exchange-rate movement when measured in lira. Define the measurement currency first, then net assets and liabilities within each foreign currency rather than mixing incompatible units.

For an original example, a lira-reporting institution holds $10 million and owes $7 million, giving a net long $3 million. At 30 TL/$ its net currency value isTL 90 million; at 32 it isTL 96 million, aTL 6 million gain if the dollar quantities stay fixed. A net short $3 million would move from−TL 90 million to−TL 96 million, aTL 6 million loss. These are valuation changes of the net position, not gross cash earned on every asset.

The source’s short-dollar wording on PDF 37 is ambiguous for a US bank reporting in dollars. A dollar amount does not change its dollar value merely because a foreign exchange quote moves. The lesson therefore labels the numeraire issue instead of repeating an unqualified rule. Funding, hedges, counterparties and maturity can leave risks even when the aggregate net currency position is close to zero.

Continue in the source-order lesson: Measurement-currency caveat →

Leasing, factoring and reinsurance: financing or transferring a specific claim

The Turkish financial-system map includes services that should not be confused with deposit-taking. Leasing finances the use of a tangible asset through a leasing contract; the source distinguishes the lessor’s ownership from the lessee’s risks and rewards. The exact payment and end-of-term ownership terms determine the economic comparison with borrowing to buy.

Factoring advances cash against unpaid invoices and can provide collection services. In an original simplified example, a firm transfers a 100 invoice for an immediate 98 payment: it gives up 2 to obtain earlier cash and the specified service. Whether the factor also bears the customer’s non-payment risk depends on recourse and contract terms. The 2 difference is not automatically a full annual interest rate; the waiting period and service components must be known.

Reinsurance transfers agreed insurance exposure from an insurer to a reinsurer. It can help an insurer manage concentrations or large losses, but its value depends on the covered events, limits and counterparty performance. The source map names insurance/reinsurance together; it does not supply a specific premium allocation or loss-sharing treaty. For all three services, a proper cash-flow model starts with the actual contract rather than treating a broad institution label as enough information.

Continue in the source-order lesson: All institution boxes →