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Erasmus School of Economics

Finance Group

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Erasmus

Education


The Finance Group organizes courses and seminars in several programs of the Rotterdam School of Economics.

 
Before you take a closer look at our programs (Bachelor, Master, PhD and Post Experience; you can find links in the menu on the left), we would like to explain what financial economics is all about.
 

What’s the big picture?

Let us therefore look at a schematic representation of the financial-economic environment and the most important decisions.

 

 

  

This graph depicts the following types of decisions (the numbers correspond to the numbers in the graph):


 

1. financial investment decision : individual investors and institutional investors invest money in financial instruments, such as bank deposits, government bonds, corporate bonds, shares of stock, or professional investment funds. They have to decide on the time horizon to invest over, what securities to include in the investment portfolio, and how to adjust the portfolio over time.

2. financing decision : part of the securities traded on the financial markets involve corporate bonds and shares of stock. Together with bank loans, these are the major sources of corporate financing. Since production processes take time, the firm’s activities need to be financed and the firm has to decide on what securities to issue and what bank loans to take. These are capital structure decisions. Except for its equity, the securities issued by the firm are liabilities to the firm.

3. capital investment decision : the money that has been raised from issuing securities and taking loans is invested in projects. These projects are the assets of the firm. Here the firm faces the problems of identifying investment projects, determining the profitability of investment projects (on basis of which a go/no-go decision is made), and managing the projects over time.

4.a. reinvestment decision : part of the money generated by the investment projects (the cash flow) can be reinvested in the firm (but what part?) either in the form of replacement investments or as growth investments.

4.b. financing decision : part of the cash flow can be used to pay interest over bonds (coupons) or bank loans, repay loans, pay dividends to shareholders (dividend policy), or buy back some portion of the shares outstanding. These are all financing decisions.

5. asset pricing : the trading activities in financial securities (buying and selling) will result in market prices of these securities. These prices can be used for valuing the (assets of the) firm and the impact of decisions.

 All education provided for by the Finance Group addresses in a greater or less degree the different but interrelated decision types and the pricing process in financial markets.