Survey of Financial Markets _ Institutions by mudoc123


									Survey of Financial Markets &

  Department of Banking & Finance
        Semester II - 2003
About Me
   Professor Shane Khartabil
       Masters in Business Administration –
        Monash University – Australia
       Graduate Diploma Accounting &
        Economic Studies – Latrobe
        University – Australia
       Bachelor Business Administration –
        American University
       Economic & Financial Consultant –
        Australian Bureau of Statistics –
       Lecturer – Creative Teaching Institute
        – Australia
   Room 2 – 101 B , Consultation
    Times to be advised.
About You
   Tell me something about yourself
    (Name and Email) your strengths
    and your plans.

Name          Email       Other
Course Outline
   Textbook:
       Financial Markets And
        Institutions, Saunders-Cornett,
        2001, McGraw-Hill Companies.
   Evaluation:
     Attendance & Hand-ins (20%)
     Mid Term (20%)
     Mid Term II (20%)
     Final Exam (40%)

   Lecture Handouts:
       Emailed after each Lecture
1.    Overview of Financial Markets
2.    Determination of Interest Rates
3.    Interest Rates and Security Valuation
4.    The Federal Reserve System, Monetary Policy, and
      Interest Rates
6.    Securities Markets : Money & Bond Markets
7.    Securities Markets : Mortgage & Stock Markets
8.    Securities Markets : Foreign Exchange & Derivative
      Securities Markets
9.    Depository Institutions : Commercial Banks & Thrift
10.   Depository Institutions Financial Statement Analysis
      and Regulation
12.   Other Financial Institutions: Insurance Companies
13.   Other Financial Institutions: : Securities Firms,
      Investment Banks & Finance Companies
14.   Other Financial Institutions: Mutual Funds & Pension
15.   Types & Management of Risks Incurred by Financial
Financial Markets & Institutions
   Financial Markets allow for
    the exchange of financial
    assets such as stocks and
   Financial Institutions serve
    as financial intermediaries in
    financial markets by
    facilitating the flow of funds
    from individuals, corporations,
    or governments with excess
    funds to those with deficient
Overview of Financial Markets
   The main participants in financial market
    transactions are households, businesses
    (including financial institutions), &
    governments that purchase or sell financial
   Participants that provide funds are called
    surplus units; such as households and
    businesses, Foreign investors, and Federal
    Reserve System
   Participants that enter financial markets to
    obtain funds are called deficit units; such as
    the federal government (Treasury) who
    finances the budget deficit by issuing
    Treasury securities
   Many participants simultaneously act as
    surplus and deficit units. For example, a
    business may sell new stocks and use some of
    the proceeds to establish a checking account.
    Thus, funds are obtained from one type of
    financial market and used in another.
Primary vs Secondary Markets
   New securities are issued in
    primary markets.
   Existing securities are resold in
    secondary markets.
   The issuance of new corporate
    stock or new Treasury securities
    represents a primary market
   The sale of existing corporate
    stock or Treasury security
    holdings by any businesses or
    individuals represents a secondary
    market transaction.
Money Vs Capital Markets
   Financial markets that facilitate the flow
    of short-term funds are money markets.
   Financial Markets that facilitate the flow
    of long-term funds are capital markets.
   Securities with a maturity of one year or
    less are called money market securities
   Securities with a maturity of more than
    one year are called capital market
   Common stocks are classified as capital
    market securities, since they have no
    defined maturity.
   Money market securities have a higher
    degree of liquidity without a loss of value.
   Capital market securities are typically
    expected. to generate a higher annual
    return to investors.
Organized Vs Over-the-Counter Markets

   Some secondary stock market
    transactions occur at an
    organized exchange, which is
    a visible marketplace for
    secondary market
    transactions such as Bahrain
    Stock Exchange.
   financial market transactions
    occur in the over-the-counter
    (OTC) market, which is a
    telecommunications network.
Equity Vs Debt Securities
   Equity securities (common stock
    and preferred stock) represent
    ownership in a business.
   Debt securities represent IOUs (I-
    Owe-You); investors who
    purchase these securities are
   Equity securities typically have no
   Debt securities have maturities
    ranging from one day to twenty
    years or longer.
Role of Financial Institutions
   Markets are imperfect, securities buyers and
    sellers do not have full access to information
    and cannot always break down securities to
    the precise size they desire.
   Financial intermediaries are needed to resolve
    the problems caused by market
   They receive requests from surplus and deficit
    units on what securities are to be purchased
    or sold, and they use this information to
    match up buyers and sellers of securities.
   Because the amount of a specific security to
    be sold will not always equal the amount
    desired by investors, financial intermediaries
    sometimes unbundle the securities by
    spreading them across several investors until
    the entire amount is sold.
   Without financial intermediaries, the
    information and transaction costs of financial
    market transactions would be excessive.
Flow of Funds Exhibit 1.1

   Surplus units are shown at left side , while three types of
    deficit units are shown at the right side. Some flows of funds
    shown in the exhibit are directly from the surplus units to
    deficit units.
   Securities firms act as Financial intermediaries that serve as
    brokers by executing the purchases of corporate or
    government securities desired by surplus units.
   The remaining flows of funds involve a financial
    intermediary, which obtains funds from surplus units and
    provides funds to deficit units. In such situations, the flow of
    funds from surplus units to deficit units is indirect
Types of Financial Intermediaries

   Depository Institutions
       Accepts deposits from surplus
        units and provides credit to
        deficit units through loans and
        purchases of securities
   Non-Depository Institutions
       Generate funds from sources
        other than deposits
Functions of Depository Institutions
   They offer deposit accounts that can
    accommodate the amount and liquidity
    characteristics desired by most surplus
   They repackage funds received from
    deposits to provide loans of the size and
    maturity desired by deficit units.
   They accept the risk on loans provided.
   They have more expertise than
    individual surplus units to evaluate the
    credit- worthiness of deficit units.
   They diversify their loans among
    numerous deficit units and can absorb
    defaulted loans better than individual
    surplus units could.
Exposure to Risk
   Bonds and mortgages are subject to
    interest rate risk, whereby prices of
    existing bonds or mortgages decline in
    response to an increase in interest
   Stocks are subject to market risk,
    whereby the stock market experiences
    lower prices in response to adverse
    economic conditions or pessimistic
    expectations of investors.
   All types of securities denominated in
    foreign currencies are subject to ex-
    change rate risk, in which the currencies
    denominating the securities depreciate
    against the investor's home currency.
Reducing the Risk
   A derivative instrument is created (or
    derived) from a previously existing
    security. Markets have been established
    for these instruments to hedge/reduce
   For example, financial futures contracts,
    derived from securities such as Treasury
    bonds and Treasury bills, are used by
    investors holding bonds or mortgages to
    reduce interest rate risk.
   Interest rate swaps are also used to
    reduce their interest rate risk.
   Stock options, derived from stocks,
    enable investors who invest in stocks to
    reduce their exposure to market risk.
   Foreign exchange instruments, such as
    currency futures, currency options, and
    currency swaps, enable investors who
    invest in foreign securities to reduce their
    exposure to exchange rate risk.
Types of Depository Institutions
   Commercial Banks
   Savings Institutions
   Credit Unions

   Hand-in 1.1 : Research these
    types of Depository
    institutions and explain their
    role in financial markets in
    one page presentation.
Types of Non-Depository Institutions
   Finance Companies
   Mutual Funds
   Securities Firms
   Pension Funds
   Insurance Companies

   Hand-in 1.2 : Research these
    types of Non-Depository
    institutions and explain their
    role in financial markets in
    one page presentation.
   Financial institutions allow funds
    to flow efficiently between surplus
    and deficit units. Depository
    institutions are especially valuable
    for this service.
   The flow of funds from surplus
    units to deficit units commonly
    involves the purchase of
   The investment in securities by
    financial institutions and other
    investors can cause exposure to
    various types of risk.
   Derivative instruments have been
    created to reduce the risk.

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