5 Inv-FinanSystem
5 Inv-FinanSystem
5 Inv-FinanSystem
2
Saving
Economic Investment
Growth
Foreign
borrowing
3
FINANCIAL SYSTEM
Financial Financial
markets intermediaries
4
Financial
markets are the institutions through
which savers can directly provide funds to
borrowers.
Financial
intermediaries are financial institutions
through which savers can indirectly provide funds
to borrowers.
5
OU
I
6
The Bond Market
A bond is a certificate of indebtedness that specifies
obligations of the borrower to
the holder of the bond.
Characteristics of a Bond
Term: The length of time until the bond matures.
Credit Risk: The probability that the borrower will fail to
pay some of the interest or principal.
Normally, bonds have a fixed interest rate
7
How can we calculate the present value of a bond, which promises to pay
$1,000 in 20 years, assume interest rate now is 10%?
$1, 000 =
Present value = = $148.64
(1 + 0.10) 20
How can we calculate the present value of a bond, which promises to pay $100
each year for next 20 years, assume interest rate now is 10%?
8
Now assume interest rate is 2%, other things being equal. What would happen
to the answers of two cases above?
$1, 000
Present value = = $673
(1 + 0.02) 20
9
The Stock Market
10
Returns to stockholder are expressed in two types:
Dividends (divided profits)
11
The market value, or price, of the stock can be explained in terms of
investors’ forecasts of dividends and price and the expected return
offered by other equally risky stocks.
12
When the risk is higher, the required rate of return
should be higher to compensate for risk-taker
Whenthe rate of return offered is higher, it should be
remembered that you are exposed to higher risk
13
The Stock Market
14
A lot of challenges for partners when undertaking transactions
through financial markets!!!
15
That explains why we need financial intermediaries!!!
16
Banks
take deposits from people who want to save and use the deposits to
make loans to people who want to borrow.
pay depositors interest on their deposits and charge borrowers
slightly higher interest on their loans.
Mutual Funds
A mutual fund is an institution that sells shares to the public and
uses the proceeds to buy a portfolio, of various types of stocks,
bonds, or both.
They allow people with small amounts of money to easily diversify.
17
Diversification into a portfolio of financial assets – or not
putting all the eggs in one basket – can reduce the risk.
18
To veil the risk of individual financial assets and
enhance its liquidity, financial intermediaries can
purchase loans, re-package them, and sell them to the
financial markets
19
Leverage, which means using borrowed funds to
purchase assets, also increase the risk that financial
intermediaries undertake.
20
Other Financial Institutions
Credit unions
Pension funds
Insurance companies
Loan sharks
Recall that GDP is both total income in an
economy and total expenditure on the
economy’s output of goods and services:
Y = C + I + G + NX
• In a simple economy: Y = C + I
• In a closed economy: Y = C + I + G
• In an open economy: as above
Assume a closed economy – i.e., the
one that does not engage in
international trade:
Y=C+I+G
Now, subtract C and G from both sides of the
equation:
Y – C – G =I
(Y – T – C) + (T – G) = I
(Yd – C) + (T - G) = I
Sp + Sg = I
S=I
T: net taxes = Total tax revenue - TR; Yd: disposable income; Sp:
personal saving; Sg: public saving = government budget balance;
S: national saving
National Saving
National saving is the total income in the economy
that remains after paying for consumption and
government purchases.
Private Saving
Private saving is the amount of income that
households have left after paying their taxes and
paying for their consumption.
Private saving = (Y – T – C)
Public Saving
Public saving is the amount of tax revenue
that the government has left after paying
for its spending.
Sg (Public saving) = (T – G)
Surplus and Deficit
If T > G, the government runs a budget surplus
(thặng dư ngân sách) because it receives more
money than it spends.
→ The surplus of T - G represents public saving.
If G > T, the government runs a budget deficit
(thâm hụt ngân sách) because it spends more
money than it receives in tax revenue.
→ The deficit of T - G represents public dissaving
For the economy as a whole, saving
must be equal to investment.
S=I
• Financial markets coordinate the economy’s
saving and investment in the market for
loanable funds.
• The market for loanable funds is the
market in which those who want to save
supply funds and those who want to borrow
to invest demand funds.
• Loanable funds refers to all income that
people have chosen to save and lend out,
rather than use for their own consumption.
The supply of loanable funds comes
from people who have extra income
they want to save and lend out.
The demand for loanable funds
comes from households and firms
that wish to borrow to make
investments.
The interest rate is the price of the loan.
It represents the amount that borrowers
pay for loans and the amount that lenders
receive on their saving.
The interest rate in the market for loanable
funds is the real interest rate.
r = i – β, in which
r = real interest rate; i: nominal interest rate; β: inflation rate
Financialmarkets work much like
other markets in the economy.
The equilibrium of the supply and
demand for loanable funds determines
the real interest rate.
Interest
Rate Supply
5%
Demand
2. . . . which Demand
reduces the
equilibrium
interest rate . . .
2. . . . which
raises the D2
equilibrium
interest rate . . . Demand, D1
1. A budget deficit
6%
decreases the
5% supply of loanable
funds . . .
2. . . . which
raises the
equilibrium Demand
interest rate . . .
www.oecd.org/corporate/Corporate-Bond-Market-
Trends-Emerging-Risks-and-Monetary-Policy.htm
56
Çelik, S., G. Demirtaş and M. Isaksson (2020), “Corporate Bond Market Trends, Emerging Risks and Monetary
Policy”, OECD Capital Market Series. www.oecd.org/corporate/Corporate-Bond-Market-Trends-Emerging-Risks-
and-Monetary-Policy.htm
57