CHAPTER 1

Why Study
Financial Markets
and Institutions?

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All rights reserved.
 Chapter Preview

Do I care about interest rates?

What is “the interest rate?
Will this impact my firm’s ability to get a
bank loan?

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 Chapter Preview

This course will help you answer these

questions by addressing a variety of topics
ranging from the functioning of the bond
and sock markets to the behavior of the
interest and banks.

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 Why Study Financial Markets?

Financial markets, such as bond and stock

markets, are crucial in our economy.
1.These markets channel funds from savers to
investors, thereby promoting economic
efficiency.
2.Market activity affects personal wealth, the
behavior of business firms, and economy as a
whole

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 Why Study Financial Markets?

 Well functioning financial markets, such

as the bond market, stock market, and
foreign exchange market, are key factors
in producing high economic growth.

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 Why Study Financial Markets?
Debt Markets & Interest Rates

 Debt markets, or bond markets, allow

governments, corporations, and
individuals to borrow to finance activities.
 In this market, borrowers issue a
security, called a bond, that promises the
timely payment of interest and principal
over some specific time horizon.
 The interest rate is the cost of borrowing.

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 Why Study Financial Markets?
Debt Markets & Interest Rates

 There are many different types of market

interest rates, including mortgage rates,
car loan rates, credit card rates, etc.
.

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 Bond Market and Interest Rates

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 Why Study Financial Markets?
The Stock Market
 The stock market is the market where common
stock (or just stock), representing ownership in
a company, are traded.
 Companies initially sell stock (in the primary
market) to raise money. But after that, the
stock is traded among investors (secondary
market).
 Of all the active markets, the stock market
receives the most attention from the media.
Why?

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 Stock
Market

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 Why Study Financial Markets?
The Foreign Exchange Market

 The foreign exchange market is where

international currencies trade and
exchange rates are set.
 Although most people know little about
this market, it has a daily volume around

$1 trillion!

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 Foreign Exchange Market

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 Why Study Financial
Institutions?
The financial institutions—the corporations,
organizations, and networks that operate the so-called
“marketplaces.”
1. Structure of the Financial System
─ Helps get funds from savers to investors
2. Financial Crises
─ The financial crises of 2007–2009 was the worst
financial crisis since the Great Depression. Why
did it happen?

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 Why Study Financial
Institutions?

3. Banks and Other Financial Institutions

─ Includes the role of insurance companies, mutual
funds, pension funds, etc.
4. Financial Innovation
─ Focusing on the improvements in technology and
its impact on how financial products are delivered
5. Managing Risk in Financial Institutions
─ Focusing on risk management in the
financial institution.

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 Applied Managerial Perspective

 Financial institutions are among the

largest employers and often pay high
salaries.
 Knowing how financial institutions are
managed may help better deal
with them.

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 How We Study Financial
Markets and Institutions

Basic Analytic Framework

1.Simplified approach to demand for
assets.
2. Basic supply & demand approach to
understanding behavior in financial
markets.

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 How We Study Financial
Markets and Institutions

Basic Analytic Framework

3. Equilibrium forces & profit seeking
behavior
4.Transactions cost & asymmetric
information approach to financial structure

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 Learning Objectives
─ the basic theory of asset demand and
determination of asset prices,
─ the role of arbitrage and profit motive in
financial markets,
─ the role of information in financial markets,
─ and the causes and consequences of
financial crises.

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