Professional Documents
Culture Documents
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© 2001 South-Western College Publishing Company
Chapter 1
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© 2001 South-Western College Publishing Company
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
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Overview of Financial Markets
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Overview of Financial Markets
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Overview of Financial Markets
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Overview of Financial Markets
■ Primary vs. Secondary Markets
✔Secondary Market
• Trading previously issued securities
• No new funds for issuer
• Provides liquidity for seller
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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
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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
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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
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Overview of Financial Markets
■ Organized vs. OTC Markets
✔OTC Market
• Wired network of dealers
• No central, physical location
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Securities Traded in Financial Markets
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■ Securities: Debt or Equity?
✔Debt Securities: Contractual obligations
(IOU) of Debtor (borrower) to Creditor (lender)
✔Equity Securities: Claim with ownership
rights and responsibilities
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Financial Market Efficiency
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Financial Market Regulation
■ Why Government Regulation?
✔To Promote Efficiency
• High level of competition
• Efficient payments mechanism
• Low cost risk management contracts
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Financial Market Regulation
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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
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Financial Market Globalization
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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
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Role of Financial Institutions in
Financial Markets
T Y P E S O F D E P O S I T O R Y F I N A N C I A L
C O M M E 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 N I O N S
$ $ $ T 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 s s e t s
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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
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Role of Financial Institutions in
Financial Markets
■ Types of Nondepository Financial Institutions
✔Finance Companies
✔Mutual Funds
✔Securities Companies
✔Insurance Companies
✔Pension Funds
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Role of Financial Institutions in
Financial Markets
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Comparison of Financial Institutions
■ Sources of funds
■ Uses of funds
■ Competition between financial institutions
■ Consolidation of financial institutions
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Global Expansion by Financial
Institutions
■ International expansion
■ International mergers
■ Impact of the single European currency
■ Emerging markets
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