Institutions
2
Why Study Financial Markets?
3
Why Study Financial Markets?
Debt Markets & Interest Rates
4
Why Study Financial Markets?
The Stock Market
5
Why Study Financial Markets?
The Foreign Exchange Market
6
Why Study Financial Institutions?
7
Why Study Financial Institutions?
3. Financial Innovation
– Focusing on the improvements in technology and its
impact on how financial products are delivered.
8
Function of Financial Markets
9
How is Funds Transferred
between Savers and Borrowers?
• Direct transfers
• Investment
banks
• Financial
intermediaries
10
Three Ways to Transfer Financial
Capital in the Economy
11
1- Direct Transfer
12
Direct Finance: Financial Markets
13
2- Indirect Finance: Using Investment
Banks
15
3- Indirect Finance: Financial
Intermediaries
– Borrowers borrow indirectly from lenders via
financial intermediaries (e.g. commercial banks).
16
Transfer of Funds on
Financial Market
17
The Relationship between the
Corporation and the Financial Markets
18
The Corporation and the Financial
Markets (Direct)
Firm
Firm issues securities (A) Financial
markets
Invests
in assets
(B)
Retained
cash flows (F)
Short-term debt
Long-term debt
Current assets
Fixed assets Equity shares
Cash flow Dividends and
from firm’s assests (C) debt payments (E)
Taxes (D)
Government
and other
stakeholders
19
Types of Financial Markets
20
Types of Financial Markets
21
Primary versus Secondary Markets
Secondary Market:
• Provides the means for the transfer of
ownership of securities.
• Provide liquidity, making it easy to buy and sell
the securities of the companies
• Establish a price for the securities
22
Types of Financial Markets (cont’d)
Secondary Markets:
23
Benefits of Organized Stock
Exchange
• Providing continuous market: continuous
prices and execution of orders.
24
Over the Counter (OTC)
• The price the dealer is willing to pay is a bid
price.
26
Securities Traded in Financial
Markets (cont’d)
27
Securities Traded in Financial
Markets (cont’d)
28
Securities Traded in Financial
Markets (cont’d)
• Stocks:
– Stocks (equity) are certificates representing partial
ownership in corporations.
– Investors may earn a return by receiving dividends
and capital gains.
– Stocks have a higher expected return and higher
risk than long-term debt securities.
29
Valuation of Securities in
Financial Markets
• The valuation of a security is measured as the
present value of its expected cash flows,
discounted at a rate that reflects the uncertainty
of the cash flows (Risk).
30
Market Efficiency
31
Market Efficiency
32
Financial Market Regulations
33
Comparison of Roles among
Financial Institutions
Deposits
Depository
Institutions
Purchase
Individual Finance
Surplus Units Securities Companies
Purchase Shares
Mutual Funds Deficit Units
Premiums Insurance
Policyholders
Companies
Employee
Employers Contributions
Pension Funds
Employees
34
The End
35
Homework
36