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    Saunders PPT Chapter 01

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    Abigail Valencia Mañalac
    This document provides an introduction to financial markets and institutions. It defines key terms like primary and secondary markets, as well as money and capital markets. It also distinguishes between depository institutions like banks and non-depository institutions. Financial institutions benefit both suppliers and users of funds by facilitating the flow of funds between them in a safer and more efficient manner than without institutions. They are regulated to balance social welfare and the costs imposed on institutions.

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    Saunders PPT Chapter 01

    Uploaded by

    Abigail Valencia Mañalac
    955 views19 pages
    This document provides an introduction to financial markets and institutions. It defines key terms like primary and secondary markets, as well as money and capital markets. It also distinguishes between depository institutions like banks and non-depository institutions. Financial institutions benefit both suppliers and users of funds by facilitating the flow of funds between them in a safer and more efficient manner than without institutions. They are regulated to balance social welfare and the costs imposed on institutions.

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    Saunder PPT Chapter 01

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    This document provides an introduction to financial markets and institutions. It defines key terms like primary and secondary markets, as well as money and capital markets. It also distinguishes between depository institutions like banks and non-depository institutions. Financial institutions benefit both suppliers and users of funds by facilitating the flow of funds between them in a safer and more efficient manner than without institutions. They are regulated to balance social welfare and the costs imposed on institutions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    955 views19 pages

    Saunders PPT Chapter 01

    Uploaded by

    Abigail Valencia Mañalac
    This document provides an introduction to financial markets and institutions. It defines key terms like primary and secondary markets, as well as money and capital markets. It also distinguishes between depository institutions like banks and non-depository institutions. Financial institutions benefit both suppliers and users of funds by facilitating the flow of funds between them in a safer and more efficient manner than without institutions. They are regulated to balance social welfare and the costs imposed on institutions.

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    You are on page 1of 19

    Chapter One

    Introduction

    2009, The McGraw-Hill Companies, All Rights Reserved

    Why study Financial Markets and Institutions?


    Prudent investment and financing requires a thorough understanding of
    the structure of domestic and international markets the flow of funds through domestic and international markets the strategies used to manage risks faced by investors and savers
    McGraw-Hill/Irwin

    1-2

    2009, The McGraw-Hill Companies, All Rights Reserved

    Financial Markets
    Financial markets are structures through which funds flow Financial markets can be distinguished along two dimensions
    primary versus secondary markets money versus capital markets

    McGraw-Hill/Irwin

    1-3

    2009, The McGraw-Hill Companies, All Rights Reserved

    Primary versus Secondary Markets


    Primary markets
    markets in which users of funds (e.g., corporations and governments) raise funds by issuing financial instruments (e.g., stocks and bonds)

    Secondary markets
    markets where financial instruments are traded among investors (e.g., NYSE and Nasdaq)
    McGraw-Hill/Irwin

    1-4

    2009, The McGraw-Hill Companies, All Rights Reserved

    Money versus Capital Markets


    Money markets
    markets that trade debt securities with maturities of one year or less (e.g., CDs and U.S. Treasury bills)

    Capital markets
    markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
    McGraw-Hill/Irwin

    1-5

    2009, The McGraw-Hill Companies, All Rights Reserved

    Money Market Instruments Outstanding, ($Bn)


    3000 2500 2000 1500 1000 500 0 1990q4 Fed funds and repos U.S. Treasury bills
    McGraw-Hill/Irwin

    2000q4 Commercial paper Banker's accept.


    1-6

    2007q1 Negotiable CDs

    2009, The McGraw-Hill Companies, All Rights Reserved

    Capital Market Instruments Outstanding, ($Bn)


    25000 20000 15000 10000 5000 0 1990q4
    Corporate stocks U.S. gov't agencies Bank and consumer loans
    McGraw-Hill/Irwin

    2000q4
    Mortgages Treasury securities

    2007q1
    Corporate bonds State & local gov't bonds

    1-7

    2009, The McGraw-Hill Companies, All Rights Reserved

    Foreign Exchange (FX) Markets


    FX markets
    trading one currency for another (e.g., dollar for yen)

    Spot FX
    the immediate exchange of currencies at current exchange rates

    Forward FX
    the exchange of currencies in the future on a specific date and at a pre-specified exchange rate

    McGraw-Hill/Irwin

    1-8

    2009, The McGraw-Hill Companies, All Rights Reserved

    Derivative Security Markets


    Derivative security
    a financial security whose payoff is linked to (i.e., derived from) another security or commodity generally an agreement to exchange a standard quantity of assets at a set price on a specific date in the future

    McGraw-Hill/Irwin

    1-9

    2009, The McGraw-Hill Companies, All Rights Reserved

    Financial Market Regulation


    The Securities Act of 1933
    full and fair disclosure and securities registration

    The Securities Exchange Act of 1934


    Securities and Exchange Commission (SEC) is the main regulator of securities markets

    McGraw-Hill/Irwin

    1-10

    2009, The McGraw-Hill Companies, All Rights Reserved

    Financial Institutions (FIs)


    Financial Institutions
    institutions through which suppliers channel money to users of funds

    Financial Institutions are distinguished by whether they accept deposits


    depository versus non-depository financial institutions

    McGraw-Hill/Irwin

    1-11

    2009, The McGraw-Hill Companies, All Rights Reserved

    Flow of Funds in a World without FIs


    Financial Claims (equity and debt instruments)
    Users of Funds (corporations)

    Suppliers of Funds (households)

    Cash

    McGraw-Hill/Irwin

    1-12

    2009, The McGraw-Hill Companies, All Rights Reserved

    Flow Flow ofof Funds Funds inin aa World World without with FIs FIs

    Users of Funds

    FIs (brokers)

    Suppliers of Funds

    Cash

    Financial Claims (equity and debt securities)

    FIs (asset transformers)

    Cash

    Financial Claims (deposits and insurance policies)

    McGraw-Hill/Irwin

    1-13

    2009, The McGraw-Hill Companies, All Rights Reserved

    Depository versus Non-Depository FIs


    Depository institutions
    commercial banks, savings associations, savings banks, credit unions

    Non-depository institutions
    insurance companies, securities firms and investment banks, mutual funds, pension funds

    McGraw-Hill/Irwin

    1-14

    2009, The McGraw-Hill Companies, All Rights Reserved

    FIs Benefit Suppliers of Funds


    Reduce monitoring costs Increase liquidity and lower price risk Reduce transaction costs Provide maturity intermediation Provide denomination intermediation

    McGraw-Hill/Irwin

    1-15

    2009, The McGraw-Hill Companies, All Rights Reserved

    FIs Benefit the Overall Economy


    Conduit through which Federal Reserve conducts monetary policy Provides efficient credit allocation Provide for intergenerational wealth transfers Provide payment services

    McGraw-Hill/Irwin

    1-16

    2009, The McGraw-Hill Companies, All Rights Reserved

    Risks Faced by Financial Institutions


    Credit Foreign exchange Country or sovereign Interest rate Market Off-balance-sheet Liquidity Technology Operational Insolvency

    McGraw-Hill/Irwin

    1-17

    2009, The McGraw-Hill Companies, All Rights Reserved

    Regulation of Financial Institutions


    FIs are heavily regulated to protect society at large from market failures Regulations impose a burden on FIs and recent U.S. regulatory changes have been deregulatory in nature Regulators attempt to maximize social welfare while minimizing the burden imposed by regulation

    McGraw-Hill/Irwin

    1-18

    2009, The McGraw-Hill Companies, All Rights Reserved

    Globalization of Financial Markets and Institutions


    The pool of savings from foreign investors is increasing and investors look to diversify globally now more than ever before Information on foreign markets and investments is becoming readily accessible and deregulation across the globe is allowing even greater access International mutual funds allow diversified foreign investment with low transactions costs

    McGraw-Hill/Irwin

    1-19

    2009, The McGraw-Hill Companies, All Rights Reserved

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