Chapter 2 an overview of the financial system
This presentation is the property of its rightful owner.
Sponsored Links
1 / 23

Chapter 2: An Overview of the Financial System PowerPoint PPT Presentation


  • 60 Views
  • Uploaded on
  • Presentation posted in: General

Chapter 2: An Overview of the Financial System. Classifying Financial Markets Financial Market Instruments Financial Intermediaries Regulation. I. Classification Debt vs. Equity Markets. debt security cash flows are fixed bonds, loans equity security cash flow variable, residual

Download Presentation

Chapter 2: An Overview of the Financial System

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Chapter 2 an overview of the financial system

Chapter 2: An Overview of the Financial System

  • Classifying Financial Markets

  • Financial Market Instruments

  • Financial Intermediaries

  • Regulation


I classification debt vs equity markets

I. ClassificationDebt vs. Equity Markets

  • debt security

    • cash flows are fixed

    • bonds, loans

  • equity security

    • cash flow variable, residual

    • common stock


Primary vs secondary markets

Primary vs. Secondary Markets

  • primary market

    • newly issued securities

      -- investment banking

  • secondary market

    • brokers match buyers and sellers

    • dealers act as buyers and sellers

      -- “market-makers”


Exchanges vs otc markets

Exchanges vs. OTC Markets

  • exchange

    • buying & selling of securities in physical location

    • NYSE

  • OTC (over-the-counter)

    • dealers in many locations buy & sell securities


Money vs capital markets

Money vs. Capital Markets

  • money market

    • short-term debt securities (up to 1 yr.)

    • highly liquid, low risk

  • capital market

    • longer-term debt

    • equity


Ii financial market instruments

II. Financial Market Instruments

a security or financial instrument

= claim on future income or assets of issuer

a security is an asset for the buyer,

but a liability for the issuer


Example

example

  • shares of stock in Time Warner, Inc.

    • shares of ownership in TW

    • a claim on the earnings/assets of TW

    • a liability for Time Warner

    • an asset for me


Chapter 2 an overview of the financial system

  • my mortgage

    • I am the issuer (liability)

    • the bank is the buyer/holder (asset)

    • the bank has a claim on my house


Iii financial intermediaries

III. Financial Intermediaries

Why have them?

  • Transactions costs

    • search costs to find borrower & lender

    • contract costs

    • economies of scale


Chapter 2 an overview of the financial system

  • Risk sharing

    • intermediaries are experts at bearing risk

    • asset transformation


Chapter 2 an overview of the financial system

  • Asymmetric Information

    • one party has more info than the other

    • creates problems BEFORE loan is made

    • creates problems AFTER loan is made

    • financial intermediaries minimize these problems


Adverse selection

adverse selection

  • BEFORE the loan

  • people with worst credit are more likely to seek a loan

    • lending not attractive

  • solution?

    • banks expert at assessing credit risks


Moral hazard

moral hazard

  • AFTER the loan

  • once money is lent, borrower may blow the money

  • solution

    • banks monitor borrowers and enforce lending contracts


Types of intermediaries

Types of intermediaries

Depository institutions

  • “banks”

  • accept deposits, make loans


Chapter 2 an overview of the financial system

  • Commercial banks

    • largest in total assets

  • Savings & Loans

    • originally restricting to savings deposits and mortgages

    • less restricted today

  • Credit Unions

    • consumer loans

    • nonprofit

    • organized around a group


Chapter 2 an overview of the financial system

Contractual savings institutions

  • acquire funds through payments in return for obligations

  • life insurance

  • property and casualty insurance

  • pension funds


Chapter 2 an overview of the financial system

Investment intermediaries

  • indirect investment

  • finance companies

    • issue commercial paper

    • consumer & commercial loans

  • mutual funds

    • sell shares to stock/bond portfolios

  • taken away bank business in past 30 years


Chapter 2 an overview of the financial system

  • money market mutual funds

    • money market portfolio

    • shares = $1, pay dividends

    • check writing privileges


Iv regulation

IV. Regulation

  • Reducing asymmetry of info

    • disclosure of financial information -- by companies selling securities

      -- by financial institutions

    • restrict insider trading


Chapter 2 an overview of the financial system

  • promoting stability

    • prevent financial panic

      -- markets cease to function

    • financial institutions

      -- restrict ownership

      -- restrict activities

      -- insurance on deposits


Chapter 2 an overview of the financial system

  • controlling the money supply

    • Federal Reserve System


  • Login