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Lecture-1-Financial-Markets

The document provides an overview of the financial system, which includes financial markets, institutions, and regulatory bodies that facilitate the exchange of funds. It discusses the functions and structures of financial markets, including direct and indirect finance, classifications by financial instruments, maturity, and security issues. Key concepts such as debt and equity instruments, money and capital markets, and primary and secondary markets are also outlined.

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Alyssa Mae Matienzo
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Download as PDF, TXT or read online on Scribd
9 views

Lecture-1-Financial-Markets

The document provides an overview of the financial system, which includes financial markets, institutions, and regulatory bodies that facilitate the exchange of funds. It discusses the functions and structures of financial markets, including direct and indirect finance, classifications by financial instruments, maturity, and security issues. Key concepts such as debt and equity instruments, money and capital markets, and primary and secondary markets are also outlined.

Uploaded by

Alyssa Mae Matienzo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 1

An Overview
of the Financial System
Chapter Preview
Topics include:
1. Meaning of Financial System.
2. Function of financial Markets.
3. Structure of Financial Markets
Why Study Financial Markets?
 Financial System: is a set of Financial Markets, Financial
institutions, and Regulatory and supervisory bodies. A 'Financial
system' is a system that allows the exchange of funds between
financial market participants such as lenders, investors, and
borrowers. Financial systems operate at national and global
levels.

 Financial markets: are markets in which funds are transferred


from people and Firms who have an excess of available funds to
people and Firms who have a need of funds. A financial market
is a market in which people trade financial securities and
derivatives at low transaction costs. Some of the securities
include stocks and bonds, raw materials and precious metals,
which are known in the financial markets as commodities.
2. Function of Financial Markets
 Perform the essential function of channeling funds
from economic players that have saved surplus funds
to those that have a shortage of funds.
 Promotes economic efficiency by producing an
efficient allocation of capital, which increases
production.
 Directly improve the well-being of consumers by
allowing them to time purchases better.
Figure 1 Flows of Funds Through
the Financial System
Segments of Financial Markets
Direct Finance
• Borrowers borrow directly from lenders in financial
markets by selling financial instruments which are claims
on the borrower’s future income or assets.

Indirect Finance
• Borrowers borrow indirectly from lenders via financial
intermediaries (established to source both loanable funds
and loan opportunities) by issuing financial instruments
which are claims on the borrower’s future income or
assets.
3. Structure of Financial Markets
There are several basis for classification of Financial Markets:

3.1 Financial •Debt instrument.


instrument •Equity instrument.

3.2 Maturity •Capital Market.


Date •Money Market.

3.3 Security •Primary Market.


Issue •Secondary Market.
3. Structure of Financial Markets (cont’d)
3.1 Financial instruments consisted of:
❑Debt Instruments:
is a contractual agreement by the borrow to pay the holder of
instrument fixed amount (interest *principal payment) at regular
interval until a specific date, then final payment is made.
Types of Debt instruments:
─ Short-Term (maturity < 1 year)
─ Long-Term (maturity > 10 year)
─ Intermediate term (1-10).
3. Structure of Financial Markets
(cont’d)
3.1 Financial instruments consisted of:
❑Equity Instruments:
Example: common stock.
Definition: are claims to share in the net income
(income after expenses and taxes) and the assets of a
business.
Periodic payments: (dividends).
No maturity date.
Adv.: Owning stock means that you own a portion of
the firm and thus have the right to vote on issues
important to the firm and to elect its directors.
3. Structure of Financial
Markets (cont’d)
3.2 Classifying Markets by Maturity of the Securities:
❑ Money Market: Short-Term (<= 1 year)
Is financial market in which short –term debt instrument are
traded.

❑ Capital Market: Long-Term (> 1 year).


Is financial market in which long–term equity and debt
instrument are traded.
Such as stock and long-terms bonds are held by financial
intermediaries such insurance and pension funds.
3. Structure of Financial Markets
(cont’d)
3.3 Classifying Markets by Security Issue.
❑ Primary Markets: (New securities).
 is a financial market in which new issues of a security are
sold to initial buyers by the corporation or government
agency borrowing the funds.
 Investment Banks: underwrite securities in primary markets,
advising company about market timing, administrative
functions as in help with all legal paper and registration
statements with stock market.
3. Structure of Financial Markets
(cont’d)
3.3 Classifying Markets by Security Issue.
❑ Secondary Market: (Previously issued).
 is a financial market in which securities that have been
previously issued can be resold.
 Brokers and dealers work in secondary markets.
Brokers: are agents of investors who make trade on
behave of others. Dealers: are person who trade
business on their own.

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