PowerPoint Slides for

Financial Markets and Institutions

5th Edition
By
Jeff Madura
Prepared by
Ann M. Hackert and Steve Byers
Idaho State University

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© 2001 South-Western College Publishing Company
 Chapter 1

Role of Financial Markets and

Institutions

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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

■ Financial Market: a market in which financial

assets (securities) such as stocks and bonds
can be purchased or sold
■ Provide for financial intermediation--financial
savings (Surplus Units) to investment (Deficit
Units)
■ Provide payments system
■ Provide means to manage risk

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 Overview of Financial Markets

■ Broad Classifications of Financial Markets

✔Money versus Capital Markets
✔Primary versus Secondary Markets
✔Organized versus Over-the-Counter Markets

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 Overview of Financial Markets

■ Primary vs. Secondary Markets

✔Primary Market
• New issue of securities
• Exchange of funds for financial claim
• Funds for borrower; an IOU(I owe you, 借据
) for lender

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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

■ Money market securities

■ Capital market securities
■ Derivative securities
✔Financial contracts whose value is derived
from the values of underlying assets

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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

■ Security prices reflect available information

■ New information is quickly included in security
prices
■ Investors balance liquidity, risk, and return
needs

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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

■ Why Government Regulation?

✔To Maintain Financial Market Stability
• Prevent market crashes
– Circuit breakers( 上限条款 )
– Federal Reserve discount window
• Prevent Inflation--Monetary policy
• Prevent Excessive Risk Taking by Financial Institutions

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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

■ Increased international funds flow

✔Increased disclosure of information
✔Reduced transaction costs
✔Reduced foreign regulation on capital flows
✔Increased privatization
Results: Increased financial integration--capital
flows to highest expected risk-adjusted return

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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

Depository Financial Institutions

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

■ Role of Nondepository Financial Institutions

✔Focused on capital market
✔Longer-term, higher risk intermediation
✔Less focus on liquidity
✔Less regulation

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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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