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An Introduction To Financial Markets and Institutions

The document provides an overview of key components of a financial system including financial markets, institutions, and how funds flow between participants. It describes the structure of a financial system including banking systems, money markets, bond markets, and other financial intermediaries. Major topics covered include the primary and secondary markets, types of securities traded, how financial institutions raise and invest funds, and the roles and benefits provided to users of the financial system.

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Windyee Tan
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246 views18 pages

An Introduction To Financial Markets and Institutions

The document provides an overview of key components of a financial system including financial markets, institutions, and how funds flow between participants. It describes the structure of a financial system including banking systems, money markets, bond markets, and other financial intermediaries. Major topics covered include the primary and secondary markets, types of securities traded, how financial institutions raise and invest funds, and the roles and benefits provided to users of the financial system.

Uploaded by

Windyee Tan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INTRODUCTION:

THE FINANCIAL SYSTEM


GD20503
Financial Markets and Institutions
Semester 1 2019/2020

1
LEARNING OBJECTIVES
¢  What are the components in a financial system
¢  The key features of financial markets and
institutions
¢  Who the users of the system are, and the benefits
they receive.

2
FINANCIAL SYSTEM STRUCTURE

Financial
System

Financial Financial
Institutions Markets

Non-Bank Money, Foreign


Banking
Financial Exchange, Bond, Equity
system 3
Intermediaries and Derivatives Markets
FUND FLOWS CHANNELS

4
BORROWER DEALS DIRECTLY WITH LENDER
¢ Risky
¢ Costly
¢ Inefficiently

5
THE KEY FEATURES OF FINANCIAL MARKETS

¢ A market in which


financial assets (securities)
can be purchased or sold

6
THE KEY FEATURES OF FINANCIAL MARKETS

Surplus units: Deficit units:


Participants who Participants who
receive more money spend more
than they spend money than they
Flow of Flow of
such as investors. receive, such as
Funds Funds
borrowers.

¢  Financialmarkets facilitate the flow of funds and


thereby allow financing and investing by households,
firms and government agencies.

7
OPERATION OF FINANCIAL MARKET
¢  Primary market
- Facilitate the issuance of new financial securities like
bonds and stocks. Also known as IPO.

¢  Secondary market
- where the existing securities are traded.

¢  The primary and secondary markets are inter-


related and inter dependant

8
SECURITIES TRADED IN FINANCIAL
MARKETS
1.  Money Market Securities - debt securities that
have a maturity of one year or less (e.g. Treasury bills
and commercial papers)
2.  Capital Market Securities – securities with a
maturity of more than one year:
a.  Bonds
b.  Mortgages
c.  Stocks
3.  Derivative Securities – financial contracts whose
values are derived from the values of underlying
assets:
a. Speculation using an underlying asset
b. Risk management and hedging 9
VALUATION OF SECURITIES IN FINANCIAL
MARKETS
1.  Impact of information on valuations (see Exhibit
1.2)
a.  Information on economic conditions
b.  Information on industry conditions
c.  Information on firm-specific conditions
2.  Impact of internet on the valuation process
a.  More timely pricing
b.  More accurate pricing
c.  More informative pricing

10
EXHIBIT 1.2 USE OF INFORMATION TO
MAKE INVESTMENT DECISIONS

Information on
Economic Conditions

Decide
Assessment Valuation of
Information on Whether to
of Firm’s Security
Industry Conditions Take a
Expected Related to
Position in
Cash Flows Firm
Security

Firm-Specific
Information

11
FUND FLOWS CHANNELS

12
EXAMPLE: SOURCES OF RAISING FUNDS IN
FINANCIAL INSTITUTIONS
Balance Sheets

Lender Institutions Borrower


Liability Asset Liability Asset Liability Asset
50,000 150,000 150,000 150,000
50,000
50,000

13
FINANCIAL INSTITUTIONS
1.  Depository institutions
a.  Commercial banks
b.  Savings institutions
2.  Non-depository institutions
a.  Finance companies
b.  Mutual funds
c.  Securities firms
d.  Insurance companies
e.  Pension funds

14
EXHIBIT 1.4 SUMMARY OF INSTITUTIONAL
SOURCES AND USES OF FUNDS
Financial Main Sources of Main Uses of
Institutions Funds Funds
Commercial Banks Deposits from Purchases of
households, government and
businesses and corporates securities;
government agencies loans to businesses
and households
Financial Companies Securities sold to Loans to households
households and and businesses
businesses
Mutual Funds Shares sold to Purchases of long-
households, term government
businesses and and corporate
government agencies securities
15
EXHIBIT 1.4 CONTINUED..
Financial Main Sources of Main Uses of
Institutions Funds Funds
Insurance Insurance Purchases of long-
Companies premiums and term government
earnings from and corporate
investments securities
Pension Funds Employer/employee Purchases of long-
contributions term government
and corporate
securities

16
ATTENDANCE

17
NEXT LECTURE

INTEREST RATE
DETERMINATION

18

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