Download - Chapter 16: Financial System
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The Financial System
Chapter
16
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Outline the structure and importance of the financial system.
List the various types of securities.
Define financial market, and distinguish between primary and secondary financial markets.
Describe the characteristics of the major stock exchanges.
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Learning Objectives
Discuss the organization and functioning of financial institutions.
Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit.
Evaluate the major features of regulations and laws affecting the financial system.
Describe the global financial system.
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The financial system is the process by which money flows from savers to users.
The Financial System
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Financial System Savers Users Financial Institutions Financial Markets
Savings is a function of many variables.
Funds can be transferred between users and savers directly or indirectly.
Understanding the Financial System
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Securities Financial instruments Obligations on the part of the issuer
Businesses and governments
Provide rate of return to purchasers
Types of Securities
Money market instruments
Bonds
Stock
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Short-term debt securities Issued by governments, financial institutions, and corporations
Investors are paid interest for the use of their funds
Generally low-risk U.S. Treasury bills, commercial paper, and bank certificates of deposit
Money Market Instruments
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Government Bonds Bonds sold by the U.S. Department of the Treasury
Municipal Bonds Bonds issued by state or local governments
Revenue bonds are used toward a project that
will produce revenue, general obligation bonds
are not
Corporate Bonds A diverse group and often vary based on the collateral
Bonds
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Types of Bonds
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Price is determined by risk and interest rate.
Several firms rate bonds Standard & Poor’s (S&P) Moody’s
Investment-grade Speculative/Junk
Bond Ratings
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Bond Ratings
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Common stock– ownership claims in corporations Vote on major company decisions Cash dividends Price appreciation
Preferred stock– stockholders who receive preference in the payment of dividends
Stocks
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Stockholder has the right to exchange the bond or preferred stock for a fixed number of shares of common stock.
Convertible Securities
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Primary market– firms and governments issue securities and sell them initially to the public When a firm offers a stock for sale to the general public for the first time
Secondary market– collection of financial markets in which previously issued securities are traded among investors
Financial Markets
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Stock market (exchange)– market in which shares are bought and sold by investors, such as the New York Stock Exchange.
Understanding Stock Markets
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The New York Stock Exchange– the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are listed on the NYSE.
The Nasdaq Stock Market– the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq, but many are smaller firms.
Other U.S. Stock Markets: The American Stock Exchange/AMEX Regional stock exchanges Foreign markets
Stock Exchanges
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ECNs– Electronic Communication Networks The 4th market Buyers and sellers meet in a virtual
market and exchange with one another Take place on INET or Archipelago
INET and Archipelago have been purchased by Nasdaq and the NYSE
ECNs and the Future of Stock Markets
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Investors use brokerage firms to:1. Establish an account2. Enter orders3. Trade stock
The brokerage firm executes the trade on behalf of the investor, charging a fee for the order.
Market order Limit order
Investor Participation in the Stock Market
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Commercial Banks
Savings Banks and Credit Unions
Non-depository Institutions
Financial Institutions
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Financial Institutions
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An increasing amount of funds move through electronic funds transfers (EFTs).
Millions of businesses and consumers now pay bills and receive payments electronically.
Most employers directly deposit employee paychecks.
Social Security and other federal payments are made each year electronically.
Most banks now offer customers debit cards More than 1/3 of American households use some online banking.
Electronic Banking
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Enacted by the Banking Act of 1933 Restored public confidence in the banking system
Before deposit insurance, runs were common as people rushed to withdraw their money from the bank
Deposit insurance shifts the risk of bank failures from individuals to the FDIC
Federal Deposit Insurance Corporation
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Offer a variety of consumer services 80+% of their loans are real estate loans
Credit unions are cooperative financial institutions owned by depositors/members
Credit unions are created to serve consumers Insured by National Credit Union Administration (NCUA), which functions the same as the FDIC
Savings Banks and Credit Unions
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Insurance Companies
Pension Funds
Finance Companies
Mutual Funds
Nondepository Financial Institutions
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The Federal Reserve Created In 1913 Central bank of the United States Regulates commercial banks Performs banking-related activities for the U.S. Department of Treasury
Provides services for banks Sets monetary policy
The Role of the Federal Reserve
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12 Federal reserve districts Own federal reserve bank
District banks are run by a nine-member board of directors
The board of governors is the governing body
Politically independent Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates
Organization of the Federal Reserve
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Americans still write billions of paper checks.
The process by which funds are transferred from the check writer to receiver is a multiple-step process managed and cleared by the Fed.
The Check Clearing for the 21st Century Act is making this process more electronic.
Check Clearing and the Fed
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Controlling supply of money and credit
Measures of the money supply: M1 & M2
The Fed requires banks to maintain reserves
Set the discount rate Open market operations
Monetary Policy
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M1 & M2
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Bank regulation Government regulation of the financial markets (SEC)
Industry self-regulation Rules of conduct by professional organizations like National Association of Securities Dealers
Market surveillance
Regulation of the Financial System
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The financial system is more connected.
Financial institutions are more global.
Only 3 of the 30 largest banks in the world are U.S. institutions.
Most nations have a central bank.
The Financial System: A Global Perspective
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