financial markets why study financial markets?. financial markets channel funds from savers to...
TRANSCRIPT
Financial Markets
Why Study Financial Markets?
Why Study Financial Markets?
• Financial markets channel funds from savers to investors, thereby, promoting economic efficiency.
• Financial markets also affect personal wealth and the behavior of business firms.
Overview of the Financial System
Borrowers-SpendersBusinesses
GovernmentHouseholdsForeigners
Lenders-SaversHouseholdsBusinesses
GovernmentForeigners
INDIRECT FINANCE
DIRECT FINANCE
Financial Intermediaries
Financial Markets
FUNDS
FUNDS
FUNDS FUNDS
FUNDS
Functions of the Financial System
• The financial system– Allows transfers of funds from a person or a
business without investment opportunities to one who has them.
– Improves economic efficiency.
Classification of Financial Markets
• Debt markets– Short-term (maturity < 1 year) Money Market
• U.S. Treasury bills, negotiable bank certificates of deposit (large denomination), commercial paper, etc.
– Long-term (maturity > 10 years) Capital Market• Residential mortgages, corporate bonds, U.S. government
securities, State and local bonds, bank commercial loans, etc.
• Equity markets– Long-term------Corporate stocks
Classification of Financial Markets
• Primary market– New security issues sold to initial buyers.
• Secondary market– Securities previously issued bought and sold.
• Exchanges– Trades conducted in central locations.
• Over-the-counter markets– Dealers at different locations buy and sell.
Internationalization of Financial Markets
• International Bond Market– Foreign bonds– Eurobonds
• Bond denominated in a currency other than the one of the country in which it is sold.
– Eurocurrencies• Foreign currencies deposited in banks outside the
home country.
• World Stock Markets
Some Regulatory Agencies• Securities and Exchange Commission
– Requires disclosure of information, restricts insider trading
• Office of the Comptroller of the Currency– Charters and examines the books of federally chartered
commercial banks and imposes restrictions on the assets they can hold.
• Federal Reserve– Examines the books of commercial banks that are members of the
system, sets reserve requirements.
• State Banking and Insurance Commissions– Charter and examine books of state chartered firms.
Regulation of Financial Markets
• Three Main Reasons for Regulation:– Increase information to investors
• SEC forces corporations to disclose information.– Decrease adverse selection and moral hazard problems.
– Ensure the soundness of financial intermediaries• Chartering, reporting requirements, restrictions on
assets and activities, deposit insurance– Prevents financial panics
– Improve monetary control