Professional Documents
Culture Documents
Role of Financial Markets and Institutions
Role of Financial Markets and Institutions
Chapter Objectives
Describe
Describe
Identify
Financial markets provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units) Financial markets provide payments system Financial markets provide means to manage risk
You act as a Surplus Unit as you put money in your checking/savings account, buy stocks, bonds and shares in Mutual funds and/or have part of your pay put into a retirement account. You act as a Deficit Unit as you buy with your credit card, borrow to buy a house or car and take out Student loans to go to school.
Financial markets provide payments system that you use every day to buy gas with your credit card, a check or even cash. Financial markets is a system allows a company, a school, a city, a county and a state to issue stocks and bonds to get the funds needed for their future. Financial markets allows you and I a way to get money to pay for a house or a car.
Financial markets provide the means to manage risk by allowing one to fixed the rate of interest on their home loan for up to thirty years. Financial markets provide the means to manage risk for individuals and other investors to reduce their risk through the derivative market. Financial markets provide the means to manage risk by providing a safe haven for our funds, banks, savings and loans and credit unions.
PRIMARY
New
SECONDARY
Trading
Issue of Securities of Funds for Financial Claim for Borrower; an IOU for Lender
Exchange
No
Funds
Provides
for Seller
Money Short-Term, < 1 Year High Quality Issuers Debt Only Primary Market Focus Liquidity Market-Low Returns
Capital Long-Term, >1Yr Range of Issuer Quality Debt and Equity Secondary Market Focus Financing Investment--Higher Returns
Trade Listed Central, Physical Location Securities Traded off the Exchanges
Securities
New
All
Derivative Securities
Financial contracts whose value is derived from the values of underlying assets Used for hedging (risk reduction) and speculation (risk seeking)
Debt Securities:
Contractual obligations (IOU) of Debtor (borrower) to Creditor (lender)
Investor
Equity Securities:
Claim with ownership rights and responsibilities
Investor
receives dividends if declared Capital gain/loss when sold No maturity dateneed market to sell
Valuation of Securities
Present value of cash flows discounted at the market required rate of return Value determined by market demand/supply Value changes with new information
Economic Conditions
Industry Conditions
Exhibit 1.3
New
Investors
Promote Efficiency
High
level of competition Efficient payments mechanism Low cost risk management contracts
Prevent
market crashes Circuit breakers Federal Reserve discount window Prevent Inflation--Monetary policy Prevent Excessive Risk Taking by Financial Institutions
Provide
Transfer
loans
Increased
disclosure of information Reduced transaction costs Reduced foreign regulation on capital flows Increased privatization
Results: Increased financial integration--capital flows to highest expected risk-adjusted return
companies Mutual funds Pension funds Securities companies Finance companies Security pools