Professional Documents
Culture Documents
16
The Financial System
Learning Objectives
1
Outline the structure and importance of the financial system. List the various types of securities. Define financial market, and distinguish between primary and secondary financial markets.
Discuss the organization and functioning of financial institutions. Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit. Evaluate the major features of regulations and laws affecting the financial system. Describe the global financial system.
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The financial system is the process by which money flows from savers to users.
Financial System
Savings is a function of many variables. Funds can be transferred between users and savers directly or indirectly.
Types of Securities
Securities
Financial instruments
Obligations on the part of the issuer
Investors are paid interest for the use of their funds Generally low-risk U.S. Treasury bills, commercial paper, and bank certificates of deposit
Bonds
Government Bonds
Bonds sold by the U.S. Department of the Treasury Bonds issued by state or local governments
Municipal Bonds
Revenue bonds are used toward a project that will produce revenue, general obligation bonds are not
Corporate Bonds
Types of Bonds
Bond Ratings
Price is determined by risk and interest rate. Several firms rate bonds
Investment-grade Speculative/Junk
Bond Ratings
Stocks
Convertible Securities
Stockholder has the right to exchange the bond or preferred stock for a fixed number of shares of common stock.
Financial Markets
Primary market firms and governments issue securities and sell them initially to the public
When a firm offers a stock for sale to the general public for the first time
Secondary market collection of financial markets in which previously issued securities are traded among investors
Stock market (exchange) market in which shares are bought and sold by investors, such as the New York Stock Exchange.
Stock Exchanges
The New York Stock Exchange the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are listed on the NYSE. The Nasdaq Stock Market the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq, but many are smaller firms. Other U.S. Stock Markets:
The 4th market Buyers and sellers meet in a virtual market and exchange with one another Take place on INET or Archipelago
INET and Archipelago have been purchased by Nasdaq and the NYSE
Investors use brokerage firms to: 1. Establish an account 2. Enter orders 3. Trade stock The brokerage firm executes the trade on behalf of the investor, charging a fee for the order.
Market order Limit order
Financial Institutions
Commercial Banks
Savings Banks and Credit Unions Non-depository Institutions
Financial Institutions
Electronic Banking
An increasing amount of funds move through electronic funds transfers (EFTs). Millions of businesses and consumers now pay bills and receive payments electronically. Most employers directly deposit employee paychecks. Social Security and other federal payments are made each year electronically. Most banks now offer customers debit cards More than 1/3 of American households use some online banking.
Enacted by the Banking Act of 1933 Restored public confidence in the banking system Before deposit insurance, runs were common as people rushed to withdraw their money from the bank Deposit insurance shifts the risk of bank failures from individuals to the FDIC
Offer a variety of consumer services 80+% of their loans are real estate loans Credit unions are cooperative financial institutions owned by depositors/members Credit unions are created to serve consumers
Insured by National Credit Union Administration (NCUA), which functions the same as the FDIC
Finance Companies
Mutual Funds
The Federal Reserve Created In 1913 Central bank of the United States Regulates commercial banks Performs banking-related activities for the U.S. Department of Treasury Provides services for banks Sets monetary policy
District banks are run by a nine-member board of directors The board of governors is the governing body Politically independent Federal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates
Americans still write billions of paper checks. The process by which funds are transferred from the check writer to receiver is a multiple-step process managed and cleared by the Fed. The Check Clearing for the 21st Century Act is making this process more electronic.
Monetary Policy
Controlling supply of money and credit Measures of the money supply: M1 & M2 The Fed requires banks to maintain reserves Set the discount rate Open market operations
M1 & M2
Bank regulation Government regulation of the financial markets (SEC) Industry self-regulation
Rules of conduct by professional organizations like National Association of Securities Dealers Market surveillance
The financial system is more connected. Financial institutions are more global. Only 3 of the 30 largest banks in the world are U.S. institutions. Most nations have a central bank.