Powerpoint Slides For

PowerPoint Slides for

Financial Markets and Institutions 5th Edition By

Jeff Madura Prepared by

Ann M. Hackert and Steve Byers Idaho State University

© 2001 South-Western College Publishing Company

1

Chapter 1 Role of Financial Markets and Institutions

© 2001 South-Western College Publishing Company

2

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

3

Overview of Financial Markets ■ Financial Market: a market in which financial assets (securities) such as stocks and bonds can be purchased or sold ■ Provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units) ■ Provide payments system ■ Provide means to manage risk 4

Overview of Financial Markets ■ Broad Classifications of Financial Markets ✔Money versus Capital Markets ✔Primary versus Secondary Markets ✔Organized versus Over-the-Counter Markets

5

Overview of Financial Markets ■ Primary vs. Secondary Markets ✔Primary Market • New issue of securities • Exchange of funds for financial claim • Funds for borrower; an IOU(I owe you, 借据 ) for lender

6

Overview of Financial Markets ■ Primary vs. Secondary Markets ✔Secondary Market • Trading previously issued securities • No new funds for issuer • Provides liquidity for seller

7

Overview of Financial Markets ■ Money vs. Capital Markets ✔Money Market • Short-term, < 1 year • High quality issuers • Debt only • Primary market focus • Liquid market--low returns

8

Overview of Financial Markets ■ Money vs. Capital Markets ✔Capital Market • Long-term, >1Yr • Range of issuer quality • Debt and equity • Secondary market focus • Financing investment--higher returns

9

10

Overview of Financial Markets ■ Organized vs. OTC Markets ✔Organized • Visible marketplace • Members trade • Securities listed • Example: New York Stock Exchange Shanghai Stock Exchange Shenzhen Stock Exchange 11

Overview of Financial Markets ■ Organized vs. OTC Markets ✔OTC Market • Wired network of dealers • No central, physical location

12

Securities Traded in Financial Markets ■ Money market securities ■ Capital market securities ■ Derivative securities ✔Financial contracts whose value is derived from the values of underlying assets

13

■ Securities: Debt or Equity? ✔Debt Securities: Contractual obligations (IOU) of Debtor (borrower) to Creditor (lender) ✔Equity Securities: Claim with ownership rights and responsibilities

14

Financial Market Efficiency ■ Security prices reflect available information ■ New information is quickly included in security prices ■ Investors balance liquidity, risk, and return needs

15

Financial Market Regulation ■ Why Government Regulation? ✔To Promote Efficiency • High level of competition • Efficient payments mechanism • Low cost risk management contracts

16

Financial Market Regulation ■ Why Government Regulation? ✔To Maintain Financial Market Stability • Prevent market crashes – Circuit breakers( 上限条款 ) – Federal Reserve discount window • Prevent Inflation--Monetary policy • Prevent Excessive Risk Taking by Financial Institutions

17

Financial Market Regulation ■ Why Government Regulation? ✔To Provide Consumer Protection • Provide adequate disclosure • Set rules for business conduct ✔To Pursue Social Policies • Transfer income and wealth • Allocate saving to socially desirable areas – Housing – Student loans 18

Financial Market Globalization ■ Increased international funds flow ✔Increased disclosure of information ✔Reduced transaction costs ✔Reduced foreign regulation on capital flows ✔Increased privatization Results: Increased financial integration--capital flows to highest expected risk-adjusted return

19

Role of Financial Institutions in Financial Markets ■ Information processing ■ Serve special needs of lenders (liabilities) and borrowers (assets) ✔By denomination and term ✔By risk and return ■ Lower transaction cost ■ Serve to resolve problems of market imperfection

20

Role of Financial Institutions in Financial Markets Depository Financial Institutions T

C

O $

M $

M $

E T

Y

P

E

S

O

F

D

E

P

O

S

I T

O

R

Y

F

I N

A

R I C I AS LA VB I A N N G K S S I N S T CI T R U E T DI O I T N US o t a l A s s $e t$ s $ T o t a l A s s e$ t $ s T o t a l A

N

C

I A

L

N I O N s s e t s

21

S

Role of Financial Institutions in Financial Markets ■ Role of Depository Institutions ✔Offer deposit accounts ✔Repackage funds received from deposits to provide loans of size and maturity desired ✔Accept the risk on the loans provided ✔Expertise in evaluating creditworthiness ✔Diversify loans among numerous borrowers

22

Role of Financial Institutions in Financial Markets ■ Types of Nondepository Financial Institutions ✔Finance Companies ✔Mutual Funds ✔Securities Companies ✔Insurance Companies ✔Pension Funds

23

Role of Financial Institutions in Financial Markets ■ Role of Nondepository Financial Institutions ✔Focused on capital market ✔Longer-term, higher risk intermediation ✔Less focus on liquidity ✔Less regulation

24

Comparison of Financial Institutions ■ Sources of funds ■ Uses of funds ■ Competition between financial institutions ■ Consolidation of financial institutions

25

Global Expansion by Financial Institutions ■ International expansion ■ International mergers ■ Impact of the single European currency ■ Emerging markets

26