Chapter 1 Introduction To Financial Markets And Financial

Chapter 1 Introduction To Financial Markets And Financial Institutions Chapter Objectives The specific objectives of this chapter are to: ■ describe the types of financial markets that facilitate the flow of funds, ■ describe the types of securities traded within financial markets, ■ describe the role of financial institutions within financial markets, and ■ identify the types of financial institutions that facilitate transactions in financial markets. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1

Definition of Financial Markets are markets in which financial products are traded. TIp. Sarhir. BaØvtßúmane. Kaled. ABIr. Tak; Tin. Kña ³ - - CYys. Mr. Yldl; hir. BaØb, TanpÞal; tamry³ecjp. Saym. Ulb½RtfµI - - erobc. Mkar. CYjd. Urn. Uvm. Ulb½Rt. Edl)anecjp. Say. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

Role of Financial Markets Surplus units: participants who receive more money than they spend such as investors. 2. Deficit units: participants who spend more money than they receive, such as borrowers. 3 - Securities: Financing or investment instruments (some negotiable , others not ) bought and sold in financial market. 1. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3

Role of Financial Markets 1. Types of Financial Markets Money versus capital markets b. Primary versus secondary markets Money Market : Debt securities with maturity of less than one year. Capital Market : Debt securities with maturity of longer than one year. Primary Market : a. kardak; lk; m. Ulb½Rt. Cael. Ikd. Mb. Ugeday. Rkumh ‘une)a. Hp. Saye. TA © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4

e. Gayvinieya. KKin Rt. Uv)ane. Keh. Afa. Cakarlk; Eckcay. Cael. Ikd. Mb. Ug. TIp. Sard. Mb. Ug KWCa. TIk. Enøg. Edl m. Ulb½Rt. Uv)anlk; Cael. Ik. TIm. Yy e. TA[sa. Far. NCn eh. Iy. Gñk. Tij)an. Tijm. Ulb½RtedaypÞal; BIRkumh‘une)a. H p. Say. Edl. Gac. Ca. Rkumh‘unsa. CIvkmµ (Corporation) b¤GgÁPa. Brdæa. Pi)al (Government Entity) m. Yy. Edl)ane)a. Hp. Saylk; m. Ulb½Rt. sac; R)ak; s. Mrab; TUTat; m. Ulb½Rt. Uvbg; e. TA[Rkumh‘une)a. Hp. Say 5 © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Pa. Kh‘unikd. Mb. Uge. KGackan; kab; Pa. Kh‘un. Ta. Mgen. H b¤k_lk; Pa. Kh‘un. Ta. Mg. Gs; e. TA[Gñkep. Sge. Tot. d. Me. NIkar lk; Pa. Kh‘une. TA[sa. Far. N³Cn Cael. Ikd. Mb. Ug Rt. Uve. KsÁal; fa. Ca : karna. MRkumh‘une. TAkan; sa. Far. N³ (Talking the company Public). en. Hmann½yfa Rkumh‘un Elgkan; kab; edayvinieya. Kind. Mb. Ug b¤sßabnik (Founder) e. Toteh. Iy. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6

Rkumh‘un. Edllk; Pa. Kh‘unrbs; xøÜne. TAkan; sa. Far. N³Cn Rt. Uv)ane. K snµt; fa : s. Me. NIlk; m. Ulb. Rt. Casa. Far. N³ (going public) ek. Itmane. LIg. en. Akñúg. Rbe. Tsm. Yyc. Mn. Yn Edl. Ca. Rbe. Tskumµúyn. Isþ e. Ke. Rb. IBakü Taking the company private CMn. Ys. Bakü (Talking the company Public). c. Me. Ba. Hd. Me. NIkarlk; Pa. Kh‘un. Cael. Ikd. Mb. Ugen. Akm<ú Ca Rt. Uv)ane. Keh. Afa : s. Me. NIe)a. Hp. Saylk; m. Ulb. Rt. Casa. Far. N³el. Ikd. Mb. Ug ( © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7

Secondary Market : TIp. SarbnÞab; KWCa. TIk. Enøg. Edlkar. CYjd. Urm. Ulb½Rt. Uv)anek. Ite. LI g. Ca. Rbca. M rvag. Gñklk; nig. Gñk. Tijm. Ulb½Rt. Twk. R)ak; Edlek. Itecj. BIskmµPa. B CYjd. Uren. H Rt. Uvbg; e. TA[Pa. Kh‘unik. Edllk; min. Emn[e. TARkuh‘une)a. Hp. Say d. Mb. Ugena. He. T. m. Ulb½Rt. Ta. Mg. Gs; Edl. CYjd. Uren. ATIp. SarbnÞab; Gac. Rt Uv)ane. K CYjd. Uren. Akñúg. TIp. Sarm. Ulb½Rt (Securities © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8

• Pa. Bxus. Kñarvag Securities Exchanges nig Over-The. Counter KWRtg; fa Securities Exchanges man. TIk. Enøg. Cak; lak; s. Mrab; [Ba. Ni. C¢kr Securities Dealer b¤QµÜje. CIgsarm. Ulb½Rt Securities Brokers CYb. Tl; Kñakñúgkar. CYjd. Urm. Ulb½Rt. -c. MENkÉ Over-The-Counter vij Ba. Ni. C¢krm. Ulb½Rt b¤QµÜje. CIgsarm. Ul - © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9

kt; s. MKal; ³ edaysarbec©kvi. Tüar. Ikc. Mer. In Pa. Bxus. Kñarvsg. TIp. Sar. Ta. Mg. BIr manlkçN³minc, as; las; en. Ae. Bl. Edl. TIp. Sarm. Ulb. Rtnae. Blbc©úb, nñ Bwg. Ep¥kkan; Ete. Rc. Inel. Ib. Nþajk. MBüúT½r Ca. Cagkare. Rb. IR)as; TIk. Enøgen. Ael. I TIp. Sarm. Ulb. Rts. Mrab; kar. CYjd. Ur. Pa. Kh‘un. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10

- en. Akñúg. TIp. Sarr. Mlgb. Ba¢r Over-The-Counter Market ³ Ca. Fmµta Gñk. CYjd. Urm. Ulb½Rt ed. Irt. Yna. TICa. Ba. Ni. C¢krm. Ulb½Rt ¬ Securities Dealer ¦ RBm. Ta. MgbegáIt. TIp. Sarm. Yy ( Make a market) edayxøÜnÉg kñúgkar. CYjd. Ur Rbe. PTm. Ulb. Rt. Cae. Rc. In. e. KCa. GñkbegáIt. TIp. Sar ( Market maker). © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11

e. FVI[man. TIp. Sar. Edl. Eckecj. Ca. BIr. Epñk KW ³ Epñk. Tij nig. Epñklk; tamry³kardak; témø (Quoting a price) m. Yy Edl. Gñk begáIt. TIp. Sar. Gac. TUTat; [Gñklk; (Bidding Price) b¤kñúgtémøm. Yy. Edl BYke. KGaclk; [Gñk. Tij (Asking Price). Pa. Bxus. Kñarvag témølk; nigtémøTij (Bid and Ask) Rt. Uv)ane. Keh. Afa Kmøat (Spread). - Market maker © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12

Securities Traded in Financial Markets 1. Money Market Securities: -T-Bill -Certificate of deposit (CD) -Commercial paper (CP) -Banker’s Acceptance (BA) -Fed Funds -Repurchase agreements (REPO) © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13

Securities Traded in Financial Markets 2 -Capital Market Securities a. b. c. Bonds : Long term debt obligations issues by firms or government Mortgages : Long term debt obligations created to finance the purchase of real estate. Stocks © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14

Sources and Uses of funds of Financial Institutions - Depository Financial Institutions Generate funds from deposit - Non depository Financial Institutions Generate funds from sources others than deposits © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15

- Depository Financial Institutions Source of funds Commercial Banks : various deposits Uses of funds Commercial Loan Securities Purchase Saving Institutions : Deposit Residential Mortgage Loan Securities Purchase Credit Union Deposit Various Loan : Non-profit Serve credit union members Small size © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16

- Non depository Financial Institutions Source of funds Uses of funds Financial companies : Securities Services Loans Investment Mutual Funds : Share Bonds Stocks Securities Firms : Services Securities Brokers Underwriter Dealer © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17

- Non depository Financial Institutions (Cont) Source of funds Uses of funds Insurance Companies : Insurance policies Long-Term bonds Stocks Pension Funds : Pensions Contribution Long-Term bonds Stocks © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18

Exhibit 1. 3 Comparison of Roles Among Financial Institutions © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19

Exhibit 1. 4 Asset Sizes of Financial Institutions (in Billions of Dollars) © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20

Exhibit 1. 5 Summary of Institutional Sources and Uses of Funds © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22