ehet = J S Study em - 1 Orientation to Financial System ancial Market(s) and Institutions Course Title: (Major: Finance) cial System The financial system is the collection of markets, institutions, laws, regulations and techniques through which bonds, stocks, and other securities are traded, interest rates are determined and financial services are produced and delivered around the world. ‘Types of Markets in the Financial System ‘There are essentially three types of markets within the global economic system: © The factor markets allocate the factors of production to the owners of productive resources. @® Consuming units use most of their income from factor markets to purchase goods and services in product markets. ‘The financial markets channel savings to those individuals and institutions needing more funds for spending than are provided by their current incomes. Functions of Financial System > Savings function. The global system of financial markets and institutions provides a conduit for the public’s savings. Wealth function. The financial instruments sold in the money and capital markets provide an excellent way to store wealth. nancial markets provide liquidity for savers who hold financial instruments but > Liquidity function. are in need of money. Credit function. Global financial markets furnish credit to finance consumption and investment > spending. > Payments function, The global financial system provides a mechanism for making payments for goods and services. > Risk protection function. The financial markets around the world offer businesses, consumers, and governments protection against life, health, property, and income risks. > Policy function. The financial markets are a channel through which governments may attempt to stabilize the economy and avoid inflation.~ SGnG : ts and their Characteristics sora cain agains mene o wealth of sine Fim, household or uit of cia : A financial ase 2 Oy by a certfcale, receipt, computer record file or ather egal docume ig of money. mt Financial Asset government repr sind usually ereated by the Fendi i follows: Characteristics of Financial Assets are as re inaniaasets are chosen beeause Ney proms tre erst thei owners and Serve 38 se of value (purchasing Powe") ike physical goods, and their physical condition or form is usually not they do not depreciate | ae nr heir market value. relevant in determining t Their cos of transportation and storage is low, such that they have litle or no value as a commatiy + Financial asses ae fungible they can easily be changed in form and substituted for other asst, ‘Types of Financial Assets © Any financial asset that is generally accepted in payment forthe purchases of goods and services iss form of money. Examples include currency and checking accounts. © Equities represent ownership shares ina business firm and are claims against the firm's profits and proceeds from the sale of its assets. Common stock and preferred stock are equities, © Debt securities entitle their holders to a priority claim over the holders of equities to the assets and income of an economic unit. They are either negotiable or nonnegotiable. Examples include bonds, notes, accounts payable and savings deposits. © Derivatives have a market value that is tied to or influenced by the value or return on a financial asset. Examples include futures contracts, options and swaps. ‘The Evolution of Financial Transactions Financial systems change constantly in response to shifting demands from the public, the development of new technology, and changes in laws and regulations. Over time, the ways of carrying out financial transactions have evolved in complexity. In particular, the transfer of funds from savers to borrowers can t accomplished in at least three different ways, © Direct Finance ~ Dire . ince — Direct lending gives rise to direct claims against borrowers. (loans of OW of funds spending power for an agreed-Upon period of time) Borrower (OBus)> Primary Securities ovk{locks, bonds, notes, etc., fencing direct’claims against borrowers)ty © Semicdirect Fi Semi-direet Finance ~ Direct lending withthe aid of market maker claims against borrowers. aaa vatfewers) | Swsoss © Indirect Finance Primary Securties (geoct dn aasine slipate sGrrowers In the form of [oan Crentracts, stocks, ponds, netes, etc) Segury Bene, 5 who assist in the sale of direct Primary Secures BRR isims ‘spars Fiow of funds donne of spensing owe) ~ Financial intermediation of funds. secondary Secures cnciSS Seine againet wlimate indirect las ad by fipanciat oetcomeciaes in the form ot interme ehsurance Pores, rol epet cavings accounts, cic.) Financial (banks, savings Tasurance com ‘mutual funds, ultimate [| j borrowers ; (Bus) L Tintermediaries and Igon associations igs ties, creat unions, nats fi (SBUs) finance. pension funds) ‘companies, Flow of funds, (loans of spending power) ‘types of Financial Institutions Depository institutions de Investment institutions sell shat Disintes Disintermediation refers to th (savers) > Commercial banks, savings a1 > Insurance companies, pension funds > Investment companies, money mark mediation of Funds .e withdrawal of funds and the lending of those funds directly to the Primary Securities imate rive the bulk of their loanable fu nd loan associations, savings banks, eredit unions. Contractual institutions attract funds by offering legal cor res to the public and invest the from a e ulti: Flow of funds (loans of spending power) nds from deposit accounts sold to the public. tracts to protect the saver against risk. et funds, real estate investment trusts. financial intermediary by the ultimate lenders ate borrowers. Untimate, parowers Financial | Tengors (SS05} foaUs) t— Teanable fonds Financial Disintermediation proceeds in stocks, bonds and other assets:Explain the Sock ots Which impact on lsamuble funds Sonid theory, commonly ‘used to ests hot yele is determined by the fuckers gd for loan whle Answere? The loomable ex ploin jterest vate movements , SUAQ . Hho market jwterest thot condo! the svpply ° Sonds - ae The theory is espectally omens im gaa! jevel 0 a posticoler county . Land demon uselo| for explaining aa interest votes fov @ demands “for leonable- Dndic The, phrase : 7 ~ ioe widely used tin Loy joonsble Finds" ‘ borrowing cactivittes ot Lin oncta « demond gnorKet © yefey “to the households, business <> amd governments . ifsS| [subj Household Demand for loonable fonds - ‘ fore Re — Household commonly demand loanable- funds te . Smee. housing expenditores, : ar -1 hoosehold 2 aguid be surveyed ot any given point in me by Indicate. the quantity of loanabl fonds the would demand «t varios hnterest vate level there: would be on imverse- yelationship bekween the hrheest whe: and the. quncHty of: leanable fonds demanded . “This simpy mems that ony point in time, “households -axvld demand a greeter quontity “of Ieomable donds ot lower yokes of intevestly Relatimship between | Tterest rates and Housheld | pemond (Dr) fer Loonuble Finds | at ogiven peink intime. ve 3 ~ The i . 7 Gua of Leanable. Fond c Variws events am cause \rousehol d borrowing wile nees +o change ond there by shitt the damond gchedvle. Fer eample, T4 tox vates on ove ltoldibincametitore. expected to signiticently decrense. in the future, household 3 might believe. th future lean repayments and thus be. willing te [exci move funds. For Y interest ‘veke’y the qyortity ot demanded by household s would be of the tax low oyustmestt- at. they con exsily oftord | \oonable funds grater as ox vesulkUd Business Demand for loanable funds: eee el eee ee P Business demand for loanable “ford to invest in long—term(-fixed) and short kevm as @ gets.) The ~ quoartity ot fund demanded by besiness depends oy Lhe number ot business projects ~f be_ implemented, p Business evaluate a progect by comparing the present value of its’ aes to its intial javestment os Follows : 2 of _ pees NPV = INV. + 6&0 Kt Where 5 , NPV = trek present vole of project. tare = mibal investment CR. = flow in’ pertédiay. | Ke = vepived vein 8 velar Sip pace(seine) [pier ] PProjeets with a positive net present valve (NPV) ere. aecepted becayse. the present valve of their benefits outaeights: he costs . pThe required vetem “to implement @ qiven project tevest yake. ave lower becavee_ will be lower it the iw -Lo support the. project the cost of bovowing fonds will be lewer. gects will hove positive NPVs, Semsequently » move ‘Pr of Finomeln g need 0 greater amoont will demend © & quantity oa in-beves E vate are. lower, and business will “This. implies business ble fund when | Voom. pr ° —- a iid) Government demand for loanable. fund | endive eonnot iS planned exp > Whenever & government mia yevenves aovered by its tas be completely i4. deman Fvom “toes ond donds « > Municipal othe gourees, d loanable er yernment issue. municipal! (otete or local’) 7 funds, while” ‘federal qovernment bonds to obboin Isgue. evry gecor ity and and its agenses federal ogeey gecurities’. These seeort-bigs 4 debt. qovernmer represent othe federal qoverninent's expenditure and -tax policies aye qenerolly heought ty be. independent ot re vertes. Thus the federal government! s interes demand for funds Ao tkeest yectes | Is said te be Inkevest ~ inelastic oy msendtive[ subject: «| j= Date: { Tmpack of ineveased government Budget deficit on the Govenmal et Demand for Loanable Fonds . We Heves The federal qovemmentis | | i demand _for-loomable. fonds . schedule 10 L Pg Pye t's Dae in’ Exhibit X0Y graph. qnd new auantity of Loanable Funds, demmd schedele is Dyz. B The busmess demand fox leanable fonds schedule. eon ahidt in veaction -te ony events thet affect business borvowi ng preferences tf the economia condition: become. more. Sevovable the expected cash flows on yexious proposed projects will merease . B The increase in demond will vesult in an outward ehifl tn the demand curve Cho thevight) , Pro=]. Le OFreicfn Daael for_laarable fds: > A toveign courbry's demand for ws. funds fs influenced by the ditterential between its ae eerie ‘ Calong with other factors) other thing + quantity of US. funds oil and US. vetes being eqpal, & lorger be demanded by foreign qovemment s. and .corpova tts s if thei domestre interest! vetes ave high yelutive. “Eo US. yates. PTthevetore-for a given jekevest va set of foreign interest yates, the quantity oF US: Losmable_Fond.s demanded by foreign governments ¢ sreladted +o US. interest yates , £divms will be mversely Or 4 Limpact of neveased Retes, Foreign iprkevest we tes on the Foreign Demand tor US. Loon able Fin 45, | ah, DA Dis uenrtitys Lomable fwEs wid Aggregate Dern Fox loom. Rese: pthe aggreqrt demand tor loomable turds is the gum of the quurtitigs demonted by ot ony given twterest vets. the separate sectors Redeal Govt — Municipal &eut. — Feveign, Demond Demand Pemand pinhgld —Busess Demand ; Demand | | | 1, i I \ | \ | | Pn Do | oY | \ Din | ot » age 7 L 1 Aggrequte Demand ge | \ \ PA ae auantity of Loaruble funds ot these sectors ave likely be demand ofe-fnde .at lower seackes Interest ra-bes equal). the aggregquke demand for \v welated to interest rote PBecayse most 0. larger quality Cother things beg (ronable Lunde in inverse ak ony given “point in time . PteSubject — there are several didfevent interest vate s because igher votes thon others. forces that | In veality, som borrowers pay ah er the Socugton the vptevest vutes to change, will enter that | At this part, howev cause qenero| level of os interest vates ams ao supply More Savers loonable founds TW the muy Ke the Yewad Cinterest vote ) Is higher. Second, some potenti borrowers will decide not +o danand loan-able. fond s ot the higher arbeest wte . Sn this grep XY. aera j once the ‘interestrwte Rate | $ aiseto i, the quantity ale | loonabk- fonds demanded has Ae deavease & and the quentity ; of supplied has jnove sed to D, exet “chat storage vse ge a ie longer exist ¢- An equilibyium pesition ate unds . +e P Mahi cued mee,} { subject yrdvestioné = Desevibe “the economic for thot orffeot a ees “tha et | ivrberest votes . Answeves it is usell fo identity those who supply or funds, it is also necessary ty recognize | Lovees that cavse. & change. Although — loon able the underlying eeonomic in the supply of ov demand or loanable. funds . foctors influence. the demond for | finds und Lhevefore. interest P the following economic ond supply of loanable- sportes ... @ Impoct ot Economic. Gvouth on Tn kevest Rates, (ay Tongue at Intlotion on Tytevest Rates. ee tieSoe 7 [Date: 4 “ia i] schedule DAz in the exhibition cqveph xe) Gavses an in the equilibriom interes + Yote tt in ineveaSe pressure. on intest | Just ag eeonomic growth pot on i shutdown puts dounway d |tbviven interst yote. yates. an economic. © pressure on the eqyi ci) Impark a infliction on interest whe: Chonges in ang lotionoyy exp intelest vote! by ing the amount of spending b households oy business Decision to spend otfeet “ ants aut y or finds) and the moun ¢ me %! al horro wed (demand i. \ ‘ Ee Dn this queph OY, show ing the impook ‘ ot economic slaw doum + We ' a2 81 quantity ° Loanable tum PteTT [ subjects_ -- [oo Tova | oimpuct of budget defi x Tee fedeval government enacts Sisal policies. hat When the doles than’ “conPwevenue, the. yesult in) Mote expendi orlget deficit is mevease deficit would oflect interest ¥ the federal government suming wo other owmges | ™ the habits by cmsimers md Firms oee0rS- eid ithe ee Bre warty demanded Aur Wie I id. Consider how on imevease. Mm utes, ok ony prevailing interest the nt demand schedule. - Ahigher as Joon able funds sotes, causmg of oot Assuming “10 oft sctting mevease in t JL wise . Given O& certain amount ot interest yokes wi toongble funds supplied ty the mar Net (Aroogh swig), d tor, these funds tends he svpply schedule, _qovemmenct deman excessive. +o exowd cot” Ahe- sprivate-jtemers Cby Acie ond coy por ot! ons) for funds al i : Pte