Scribd Logo
Upload

Welcome to Scribd!

  • 608 views

    Chap-1 Financial Markets & Institutions

    Uploaded by

    Farish Ahamed
    This document provides an overview of financial markets and institutions. It defines financial markets as places where financial assets such as stocks and bonds are bought and sold. Financial institutions help facilitate transactions in these markets by processing information, lowering costs, and resolving issues. The key types of financial institutions are depository institutions like banks, credit unions, and savings institutions, as well non-depository institutions such as insurance companies, mutual funds, and securities firms. Recent trends include increased consolidation in the industry and global expansion of financial institutions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Chap-1 Financial Markets & Institutions

    Uploaded by

    Farish Ahamed
    608 views24 pages
    This document provides an overview of financial markets and institutions. It defines financial markets as places where financial assets such as stocks and bonds are bought and sold. Financial institutions help facilitate transactions in these markets by processing information, lowering costs, and resolving issues. The key types of financial institutions are depository institutions like banks, credit unions, and savings institutions, as well non-depository institutions such as insurance companies, mutual funds, and securities firms. Recent trends include increased consolidation in the industry and global expansion of financial institutions.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document provides an overview of financial markets and institutions. It defines financial markets as places where financial assets such as stocks and bonds are bought and sold. Financial institutions help facilitate transactions in these markets by processing information, lowering costs, and resolving issues. The key types of financial institutions are depository institutions like banks, credit unions, and savings institutions, as well non-depository institutions such as insurance companies, mutual funds, and securities firms. Recent trends include increased consolidation in the industry and global expansion of financial institutions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    608 views24 pages

    Chap-1 Financial Markets & Institutions

    Uploaded by

    Farish Ahamed
    This document provides an overview of financial markets and institutions. It defines financial markets as places where financial assets such as stocks and bonds are bought and sold. Financial institutions help facilitate transactions in these markets by processing information, lowering costs, and resolving issues. The key types of financial institutions are depository institutions like banks, credit unions, and savings institutions, as well non-depository institutions such as insurance companies, mutual funds, and securities firms. Recent trends include increased consolidation in the industry and global expansion of financial institutions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 24
    At a glance
    Powered by AI
    The key takeaways are that financial markets and institutions play an important role in facilitating financial intermediation, providing payment systems, and allowing risk management. Various types of markets and institutions are discussed.

    The broad classifications of financial markets are money versus capital markets, primary versus secondary markets, and organized versus over-the-counter markets.

    Primary markets involve the new issue of securities in exchange for funds, while secondary markets involve the trading of previously issued securities with no new funds for the issuer.

    Financial Markets and Institutions By Jeff Madura

    Prepared by Nazmul H. Palash Lecturer-Finance & Banking, DIU.

    CHAPTER

    Role of Financial Markets and Institutions

    Chapter Objectives
    n

    Describe the types of financial markets


    Describe the role of financial institutions with financial markets Identify the types of financial institutions that facilitate transactions

    Overview of Financial Markets


    Financial Market: a market in which financial assets (securities) such as stocks and bonds can be purchased or sold
    n

    n
    n

    Financial markets provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units) Financial markets provide payments system Financial markets provide means to manage risk

    Overview of Financial Markets


    n

    Broad Classifications of Financial Markets


    Money versus Capital Markets Primary versus Secondary Markets

    Organized versus Over-the-Counter Markets

    Primary vs. Secondary Markets


    n

    PRIMARY
    l

    SECONDARY
    l

    New Issue of Securities

    Trading Previously Issued Securities

    Exchange of Funds for Financial Claim

    No New Funds for Issuer

    Funds for Borrower; an IOU for Lender

    Provides Liquidity for Seller

    Money vs. Capital Markets


    n

    Money
    l

    Capital
    l

    Short-Term, < 1 Year High Quality Issuers Debt Only

    Long-Term, >1Yr Range of Issuer Quality Debt and Equity

    Primary Market Focus


    Liquidity Market--Low Returns

    Secondary Market Focus


    Financing Investment-Higher Returns

    Organized vs. Over-the-Counter Markets


    n

    Organized
    l

    OTC
    l

    Visible Marketplace

    Wired Network of Dealers No Central, Physical Location All Securities Traded off the Exchanges

    Members Trade
    l

    Securities Listed New York Stock Exchange


    l

    Securities Traded in Financial Markets


    n

    Money Market Securities


    l

    Debt securities Only

    Capital market securities


    l

    Debt and equity securities

    Derivative Securities
    l l

    Financial contracts whose value is derived from the values of underlying assets Used for hedging (risk reduction) and speculation (risk seeking)

    Debt vs. Equity Securities


    Debt Securities: Contractual obligations (IOU) of Debtor (borrower) to Creditor (lender)
    u u u

    Investor receives interest Capital gain/loss when sold Maturity date

    Debt vs. Equity Securities


    Equity Securities: Claim with ownership rights and responsibilities
    u u u

    Investor receives dividends if declared Capital gain/loss when sold No maturity dateneed market to sell

    Valuation of Securities
    n

    Value a function of:


    l l l

    Future cash flows When cash flows are received Risk of cash flows

    n
    n

    Present value of cash flows discounted at the market required rate of return Value determined by market demand/supply Value changes with new information

    Investor Assessment of New Information

    Economic Conditions

    Industry Conditions

    Impact of Future Cash Flows

    Evaluation of Security Pricing

    Investor Decision to Trade

    Firm Specific Information

    Exhibit 1.3

    Financial Market Efficiency


    n

    Security prices reflect available information


    New information is quickly included in security prices Investors balance liquidity, risk, and return needs

    Financial Market Regulation

    Why Government Regulation?


    l

    To Promote Efficiency
    u

    High level of competition Efficient payments mechanism

    Low cost risk management contracts

    Financial Market Regulation


    Why Government Regulation?
    l

    To Maintain Financial Market Stability


    u

    Prevent market crashes


    n n

    Circuit breakers Federal Reserve discount window

    Prevent Inflation--Monetary policy Prevent Excessive Risk Taking by Financial Institutions

    Financial Market Regulation


    Why Government Regulation?
    l

    To Provide Consumer Protection


    u u

    Provide adequate disclosure Set rules for business conduct Transfer income and wealth Allocate saving to socially desirable areas
    n

    To Pursue Social Policies


    u u

    Housing Student loans

    Financial Market Globalization


    n

    Increased international funds flow


    Increased disclosure of information l Reduced transaction costs l Reduced foreign regulation on capital flows l Increased privatization Results: Increased financial integration--capital flows to highest expected risk-adjusted return
    l

    Role of Financial Institutions in Financial Markets


    n n

    Information processing Serve special needs of lenders (liabilities) and borrowers (assets)
    l
    l

    By denomination and term By risk and return

    Lower transaction cost Serve to resolve problems of market imperfection

    Role of Financial Institutions in Financial Markets


    Types of Depository Financial Institutions
    Savings Institutions $1.3 Trillion Total Assets Credit Unions $.5 Trillion Total Assets

    Commercial Banks $5 Trillion Total Assets

    Types of Nondepository Financial Institutions


    n n

    n
    n n n

    Insurance companies Mutual funds Pension funds Securities companies Finance companies Security pools

    Role of Nondepository Financial Institutions


    n
    n n n n

    Focused on capital market Longer-term, higher risk intermediation Less focus on liquidity Less regulation Greater focus on equity investments

    Trends in Financial Institutions


    n

    Rapid growth of mutual funds and pension funds Increased consolidation of financial institutions via mergers Increased competition between financial Institutions Growth of financial conglomerates

    Global Expansion by Financial Institutions


    n n n

    International expansion International mergers Impact of the single European currency Emerging markets

    You might also like