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Money & Banking. Introduction Chapters 1 & 2 Week 1. http://www0.gsb.columbia.edu/students/organizations/follies/. Why do we need a financial system?. Coordination problem facing savers and businesses requiring capital. Transactions costs. Function of Financial Markets.

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money banking

Money & Banking

Introduction

Chapters 1 & 2

Week 1

ECON305, Maclachlan, Fall 2006

why do we need a financial system
Why do we need a financial system?

Coordination problem facing savers and businesses requiring capital.

Transactions costs.

ECON305, Maclachlan, Fall 2006

function of financial markets
Function of Financial Markets

...

ECON305, Maclachlan, Fall 2006

financial intermediaries indirect finance
Financial Intermediaries(Indirect Finance)
  • Depository institutions
  • Contractual savings institutions (insurance companies, pension funds)
  • Investment intermediaries (finance companies, mutual funds)

ECON305, Maclachlan, Fall 2006

three major financial markets
Three Major Financial Markets
  • Bond market (debt, fixed income securities)
  • Stock market (equities)
  • Foreign exchange market

ECON305, Maclachlan, Fall 2006

bond market
Bond Market

ECON305, Maclachlan, Fall 2006

some distinctions
Some Distinctions
  • Primary vs. secondary markets.
  • Exchanges vs. over-the-counter markets.
  • Money vs. capital markets.
  • Brokers vs. dealers.
  • Eurocurrencies vs. Eurobonds.

ECON305, Maclachlan, Fall 2006

money market instruments
Money market instruments
  • Less than a year in maturity.
  • Low risk.
  • High denomination.

Examples: Treasury bills, commercial paper, bankers acceptances, repurchase agreements.

ECON305, Maclachlan, Fall 2006

slide10
Debt

Fixed cash flows (interest).

Principal to be repaid.

Default leads to bankruptcy.

Equity

Cash flows tied to profits (dividends).

No principal to be repaid.

Investors are residual claimants.

ECON305, Maclachlan, Fall 2006