Ch.2 Overview of the Financial System - mishkin.ppt
- 1. Chapter 2 An Overview of the Financial System
- 2. © 2013 Pearson Education, Inc. All rights reserved. 2-2 Topics include: 1. Meaning of Financial System. 2. Function of financial Markets. 3. Structure of Financial Markets Chapter Preview
- 3. © 2013 Pearson Education, Inc. All rights reserved. 2-3 Why Study Financial Markets? • Financial System: is a set of Financial Markets, Financial institutions, and Regulatory and supervisory bodies. • Financial markets: are markets in which funds are transferred from people and Firms who have an excess of available funds to people and Firms who have a need of funds.
- 4. © 2013 Pearson Education, Inc. All rights reserved. 2-4 2. Function of Financial Markets • Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds. • Promotes economic efficiency by producing an efficient allocation of capital, which increases production. • Directly improve the well-being of consumers by allowing them to time purchases better.
- 5. © 2013 Pearson Education, Inc. All rights reserved. 2-5 Figure 1 Flows of Funds Through the Financial System
- 6. © 2013 Pearson Education, Inc. All rights reserved. 2-6 Segments of Financial Markets Direct Finance • Borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrower’s future income or assets. Indirect Finance • Borrowers borrow indirectly from lenders via financial intermediaries (established to source both loanable funds and loan opportunities) by issuing financial instruments which are claims on the borrower’s future income or assets.
- 7. © 2013 Pearson Education, Inc. All rights reserved. 2-7 3. Structure of Financial Markets There are several basis for classification of Financial Markets: 3.1 Financial instrument • Debt instrument. • Equity instrument. 3.2 Maturity Date • Capital Market. • Money Market. 3.3 Security Issue • Primary Market. • Secondary Market.
- 8. © 2013 Pearson Education, Inc. All rights reserved. 2-8 3.1 Financial instruments consisted of: Debt Instruments: is a contractual agreement by the borrow to pay the holder of instrument fixed amount (interest *principal payment) at regular interval until a specific date, then final payment is made. Types of Debt instruments: ─ Short-Term (maturity < 1 year) ─ Long-Term (maturity > 10 year) ─ Intermediate term (1-10). 3. Structure of Financial Markets (cont’d)
- 9. © 2013 Pearson Education, Inc. All rights reserved. 2-9 3.1 Financial instruments consisted of: Equity Instruments: •Example: common stock. •Definition: are claims to share in the net income (income after expenses and taxes) and the assets of a business. •Periodic payments: (dividends). •No maturity date. •Adv.: Owning stock means that you own a portion of the firm and thus have the right to vote on issues important to the firm and to elect its directors. 3. Structure of Financial Markets (cont’d)
- 10. © 2013 Pearson Education, Inc. All rights reserved. 2-10 3.2 Classifying Markets by Maturity of the Securities: Money Market: Short-Term (<= 1 year) Is financial market in which short –term debt instrument are traded. Capital Market: Long-Term (> 1 year). Is financial market in which long–term equity and debt instrument are traded. Such as stock and long-terms bonds are held by financial intermediaries such insurance and pension funds. 3. Structure of Financial Markets (cont’d)
- 11. © 2013 Pearson Education, Inc. All rights reserved. 2-11 3.3 Classifying Markets by Security Issue. Primary Markets: (New securities). –is a financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds. –Investment Banks: underwrite securities in primary markets, advising company about market timing, administrative functions as in help with all legal paper and registration statements with stock market. 3. Structure of Financial Markets (cont’d)
- 12. © 2013 Pearson Education, Inc. All rights reserved. 2-12 3.3 Classifying Markets by Security Issue. Secondary Market: (Previously issued). – is a financial market in which securities that have been previously issued can be resold. – Brokers and dealers work in secondary markets. Brokers: are agents of investors who make trade on behave of others. Dealers: are person who trade business on their own. 3. Structure of Financial Markets (cont’d)