Table of Contents

Chapter 1 - Functions and Roles of the Financial System in the Global Economy
Chapter 2 - Financial Assets, Money, Financial Transactions, and Financial Institutions
Chapter 3 - The Financial Information Marketplace
Chapter 4 - The Future of the Financial System and the Money and Capital Markets
Chapter 5 - The Determinants of Interest Rates: Competing Ideas
Chapter 6 - Measuring and Calculating Interest Rates and Financial Asset Prices
Chapter 7 - Inflation and Deflation, Yield Curves, and Duration: Impact on Interest Rates and Asset
Prices
Chapter 8 - The Risk Structure of Interest Rates: Defaults, Prepayments, Taxes, and Other Rate-
Determining factors
Chapter 9 - Interest-Rate Forecasting and Hedging: Swaps, Financial Futures, and Options
Chapter 10 - Introduction to the Money Market and the Roles Played by Governments and Security
Dealers
Chapter 11 - Commercial Banks, Major Corporations, and Federal Credit
Chapter 12 - Roles and Services of the Federal Reserve and Other Central Banks Around the World
Chapter 13 - The Tools and Goals of Central Bank Monetary Policy
Chapter 14 - The Commercial Banking Industry: Structure, Products, and Management
Chapter 15 - Nonbank Thrift Institutions: Savings and Loans, Savings
Chapter 16 - Mutual Funds, Insurance Companies, Investment Banks, and Security Dealers
Chapter 17 - Regulation of the Financial Institutions' Sector
Chapter 18 - Federal, State, and Local Governments Operating in the Financial Markets
Chapter 19 - Business Borrowing: Corporate Bonds, Asset-Backed Securities, Bank Loans, and Other
Forms of Business Debt
Chapter 20 - The Market for Corporate Stock
Chapter 21 - Consumer Lending and Borrowing
Chapter 22 - The Residential Mortgage Market
Chapter 23 - International Transactions and Currency Values
Chapter 24 - International Banking
Course: Monetary Policy & Central Banking
Schedule of Instructions

LEARNING MODE OF
MEETINGS TOPICS REMARKS
OBJECTIVES LEARNING
Chapter 1 - You will Reporting
Functions and understand the Power point
Roles of the functions presentation
Financial System performed and
in the Global the roles played
Economy by the system of
financial markets
and financial
institutions in the
global economy
and in our daily
lives.

You will
discover how
important the
money and
capital markets
and the whole
financial system
are to increasing
our standard of
living, generating
new jobs, and
building our
savings to meet
tomorrow's
financial needs.

Other Instructions;

1. Power point presentation rule 7 rows per slide.

Summary: Chapter 1 - Functions and Roles of the Financial System in the Global Economy

The opening chapter of Money and Capital Markets presents us with an introduction to the global
financial system in which the money and capital markets play central roles. It also highlights the
principal institutions that shape the character and functioning of the worlds financial marketplace.

The financial system produces and distributes financial services to the public. Among its most
important services is a supply of credit which allows businesses, households, and governments to
invest and acquire assets they need for daily economic activity. The financial system of money and
capital markets determines both the amount and cost of credit available. In turn, the supply and cost
of credit affect the health and growth of the global economy and our own economic welfare.

Credit and other financial services are offered for sale in the institution we call a market.
Markets allocate financial and physical resources that are scarce relative to demand.

Another key role played by markets operating within the financial system is to stimulate an
adequate volume of savings (i.e., funds left over after current consumption spending by households
and earnings retained by businesses) and to transform those savings into an adequate volume of
investment (i.e., the purchase of capital goods and the buildup of inventories of goods to sell). In
turn, investment generates new products and services and creates new jobs and new businesses,
resulting in faster economic growth and a higher standard of living. By determining interest rates
within the financial system, the money and capital markets bring the volume of savings generated by
the public into balance with the volume of investment in new plant and equipment and in
inventories of goods and resources available for sale.

One important way to view the financial system of money and capital markets is by
examining its seven key functions or roles in meeting the financial needs of individuals and
institutions, including generating and allocating savings, stimulating the accumulation of wealth,
providing liquidity for spending, providing a mechanism for making payments, supplying credit to aid
in the purchase of goods and services, providing risk protection services, and supplying a channel for
government policy in helping achieve the nations economic goals (including maximum employment,
low inflation, and sustainable economic growth).

The markets that serve the financial system may be classified in several different ways,
including money markets, supplying short-term loans (credit) of less than a year, and capital markets,
supplying long-term loans (credit) lasting longer than a year. There are also open markets where
anyone may participate as buyer or seller versus negotiated markets where only a few bidders seek
to acquire assets. There are primary versus secondary markets; in the former, new financial
instruments are traded in contrast to the latter where existing instruments are exchanged. Additional
types of financial markets that make up the global financial system include markets that deal in the
immediate purchase or sale of goods or services, called spot markets, and those that promise future
delivery, known as futures, forward, or option markets.

While many different segments make up the money and capital markets around the globe, all
these markets share the common purpose of supplying credit to answer global demands for
borrowed funds and all encourage saving to make investment (and, therefore, economic growth)
possible. Funds flow easily and, for the most part, smoothly from one segment of the marketplace to
another, spurred by such forces as arbitrage and speculation. For example, arbitrage causes credit,
savings, and investment to flow toward those market segments that offer the most favorable returns,
helping different markets to price resources more consistently and eliminate price disparities for the
same goods and services. Prices are also brought into balance from market to market by the force of
speculation, which seeks out underpriced and overpriced services and goods.

Finally, the money and capital markets have revealed themselves to be efficient institutions,
gathering and quickly using all relevant information to price credit and other financial services. Some
are nearly perfect markets where competition sets prices and allocates resources. However,
important imperfections do exist within the financial system where competition is sometimes
restricted and excess profits are sometimes earned by those who stifle competition or gain access to
inside information not freely available to all due to asymmetries within the marketplace.

Summary: Chapter 2 - Financial Assets, Money, Financial Transactions, and Financial Institutions

The global financial system of money and capital markets performs the important function of
channeling savings into investment. In that process a unique kind of asset in the economya
financial assetis created.
Financial assets represent claims against the income and assets of individuals and institutions
issuing those claims. There are three major categories of financial assetsmoney, debt, and equities.
A fourth instrument, derivatives, is closely related to financial assets, deriving its value from these
assets.
Money is among the most important of all financial assets in the economy because it serves
as a medium of exchange to facilitate purchases of goods and services, a standard for valuing all
items bought and sold, a store of value (purchasing power) for the future, and a reserve of liquidity
(immediate spending power). Despite all these advantages, money has a weakness susceptibility to
inflation (i.e., a rising price level), because its rate of return is normally so low. In contrast, the
financial assets represented by debt or equity securities, and often by derivatives as well, carry
greater average yields but, unlike money, may incur loss when converted into immediately spendable
funds.
The creation of financial assets occurs within the financial system through three different
channelsdirect, semidirect, or indirect finance. Direct finance involves the direct exchange of
financial assets for money in which borrowers (deficit-budget units, or DBUs) and lenders (surplus-
budget units or SBUs) meet directly with each other to conduct their business. Semidirect finance
involves the use of a broker or dealer to help bring borrower and lender together and reduce
information costs. Indirect finance refers to the creation of financial assets by financial
intermediaries who accept primary securities from ultimate borrowers (DBUs) as their principal
earning assets and issue secondary securities to ultimate savers (SBUs) to raise funds.
Financial intermediaries (such as banks, pension funds, and insurance companies) have
grown to dominate most financial systems today due to their greater expertise, efficiency, and
capability in diversifying away some of the risks involved in lending money.
One of the most serious management problems encountered by some financial
intermediaries is disintermediationthe loss of funds from an intermediary to direct or semidirect
finance. Much of the disintermediation experienced by modern intermediaries has occurred due to
financial innovation. Borrowers have found new ways to obtain the funds they need without going
through a financial intermediary.
Finally, financial systems around the world appear to fall into one of two broad categories
bank-dominated financial systems and security-dominated financial systems. In bank-dominated
systems the majority of financial assets arise from the banking system. When banks get into trouble
the financial system itself may experience difficulties with risk exposure and slower growth. In
security-dominated financial systems, by contrast, security brokers and dealers tend to be leaders in
the financial system and often provide the greatest volume of funds to those in need of new capital.
Security-dominated financial systems are heavily dependent upon direct and semidirect finance (i.e.,
the open market), while bank-dominated systems tend to rely upon financial intermediaries (indirect
finance) for the raising of funds.

Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace, 9/e
Peter Rose, Texas A&M University
Milton Marquis, Florida State University