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PowerPoint Slides forFinancial Markets and Institutions
5th EditionBy
Jeff MaduraPrepared by
Ann M. Hackert and Steve ByersIdaho State University
© 2001 South-Western College Publishing Company
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Chapter 1
Role of Financial Markets and Institutions
© 2001 South-Western College Publishing Company
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Chapter Objectives
Describe the types of financial markets Describe the role of financial institutions with
financial markets Identify the types of financial institutions that
facilitate transactions
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Overview of Financial Markets
Financial Market: a market in which financial assets (securities) such as stocks and bonds can be purchased or sold
Provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units)
Provide payments system Provide means to manage risk
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Broad Classifications of Financial MarketsMoney versus Capital Markets Primary versus Secondary MarketsOrganized versus Over-the-Counter Markets
Overview of Financial Markets
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Primary vs. Secondary MarketsPrimary Market
• New issue of securities
• Exchange of funds for financial claim
• Funds for borrower; an IOU(I owe you,借据 ) for lender
Overview of Financial Markets
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Primary vs. Secondary MarketsSecondary Market
• Trading previously issued securities
• No new funds for issuer
• Provides liquidity for seller
Overview of Financial Markets
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Money vs. Capital MarketsMoney Market
• Short-term, < 1 year
• High quality issuers
• Debt only
• Primary market focus
• Liquid market--low returns
Overview of Financial Markets
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Money vs. Capital MarketsCapital Market
• Long-term, >1Yr
• Range of issuer quality
• Debt and equity
• Secondary market focus
• Financing investment--higher returns
Overview of Financial Markets
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Organized vs. OTC MarketsOrganized
• Visible marketplace
• Members trade
• Securities listed
• Example: New York Stock Exchange
Shanghai Stock Exchange
Shenzhen Stock Exchange
Overview of Financial Markets
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Organized vs. OTC MarketsOTC Market
• Wired network of dealers
• No central, physical location
Overview of Financial Markets
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Money market securities Capital market securities Derivative securities
Financial contracts whose value is derived from the values of underlying assets
Securities Traded in Financial Markets
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Securities: Debt or Equity?Debt Securities: Contractual obligations
(IOU) of Debtor (borrower) to Creditor (lender)Equity Securities: Claim with ownership
rights and responsibilities
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Security prices reflect available information New information is quickly included in security
prices Investors balance liquidity, risk, and return
needs
Financial Market Efficiency
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Financial Market Regulation
Why Government Regulation?To Promote Efficiency
• High level of competition
• Efficient payments mechanism
• Low cost risk management contracts
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Why Government Regulation?To Maintain Financial Market Stability
• Prevent market crashes–Circuit breakers(上限条款 )–Federal Reserve discount window
• Prevent Inflation--Monetary policy• Prevent Excessive Risk Taking by
Financial Institutions
Financial Market Regulation
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Why Government Regulation?To Provide Consumer Protection
• Provide adequate disclosure• Set rules for business conduct
To Pursue Social Policies• Transfer income and wealth• Allocate saving to socially desirable areas
–Housing–Student loans
Financial Market Regulation
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Financial Market Globalization
Increased international funds flow Increased disclosure of informationReduced transaction costsReduced foreign regulation on capital flows Increased privatization
Results: Increased financial integration--capital flows to highest expected risk-adjusted return
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Role of Financial Institutions in Financial Markets
Information processing Serve special needs of lenders (liabilities) and
borrowers (assets)By denomination and termBy risk and return
Lower transaction cost Serve to resolve problems of market
imperfection
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Role of Financial Institutions in Financial Markets
C O M M E R IC IA L B A N K S$ $ $ To ta l A sse ts
S A V IN G S IN S TITU TIO N S$ $ $ To ta l A sse ts
C R E D IT U N IO N S$ $ To ta l A sse ts
TY P E S O F D E P O S ITO R Y F IN A N C IA L IN S TITU TIO N S
Depository Financial Institutions
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Role of Financial Institutions in Financial Markets
Role of Depository InstitutionsOffer deposit accountsRepackage funds received from deposits to
provide loans of size and maturity desiredAccept the risk on the loans providedExpertise in evaluating creditworthinessDiversify loans among numerous borrowers
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Role of Financial Institutions in Financial Markets
Types of Nondepository Financial InstitutionsFinance Companies Mutual FundsSecurities Companies Insurance Companies Pension Funds
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Role of Financial Institutions in Financial Markets
Role of Nondepository Financial InstitutionsFocused on capital marketLonger-term, higher risk intermediationLess focus on liquidityLess regulation
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Comparison of Financial Institutions
Sources of funds Uses of funds Competition between financial institutions Consolidation of financial institutions
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Global Expansion by Financial Institutions
International expansion International mergers Impact of the single European currency Emerging markets
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