FINANCIAL MARKETS &

INSTITUTIONS
MARIA JORGETH O. CARBON
COURSE DESCRIPTION

• This course focuses on the role of financial markets and financial institutions in facilitating the flow of
funds to finance investments by corporations and governments. This course systematically evaluates
each market and describes the participants and types of instruments offered. Examine the role of
financial institutions such as commercial banks and mutual funds.
• This course builds on the foundations provided by Finance but focuses on learning how the principles of
finance can be applied in a market setting. This course will also prepare students for other more
advanced finance courses.
LEARNING OBJECTIVES
• By the end of this course, students will be able to:
• Explain the role of each financial market and compare the differences
between each market
• Describe the linkages between each market
• Describe the instruments in each market and how they are valued and traded
• Describe derivative instrument profiles and their use in hedging risk
• Explain the role of banks and other financial institutions
• Apply the knowledge learnt to current happenings in financial markets
•
ASSESSMENT METHOD

• The used of FISMO

FACTS AND INFORMATION 15%
SKILLS 25%
MEANING 30%
OUTPUT 30%
NOTE: 70% OF FISMO WILL FORM PART OF YOUR GRADE
30% FROM MAJOR EXAMS
INSTRUCTIONAL METHODS AND
EXPECTATIONS

• Class Participation
• Group Project and Presentation
• Examinations
• Individual presentations
CLASSROOM POLICIES (RISE)

• RESPECT
• INFORM
• SHARE
• ENCOURAGE
IF A PERSON NEEDS MONEY, WHAT POSSIBLE
OPTIONS A PERSON WOULD TAKE?
FINANCIAL MARKETS

• any marketplace where the

trading of securities occurs,
including the stock market,
bond market, forex market,
and derivatives market, among
others. Financial markets are
vital to the smooth operation
of capitalist economies.
TAKE NOTE
• Financial markets refer broadly to any marketplace where the trading of
securities occurs.
• There are many kinds of financial markets, including (but not limited to) forex,
money, stock, and bond markets.
• These markets may include assets or securities that are either listed on
regulated exchanges or else trade over-the-counter (OTC).
• Financial markets trade in all types of securities and are critical to the smooth
operation of a capitalist society.
• When financial markets fail, economic disruption including recession and
unemployment can result.
UNDERSTANDING THE FINANCIAL MARKETS

• play a vital role in facilitating the smooth operation of capitalist economies by allocating resources and
creating liquidity for businesses and entrepreneurs
• The markets make it easy for buyers and sellers to trade their financial holdings.
• create securities products that provide a return for those who have excess funds (Investors/lenders) and
make these funds available to those who need additional money (borrowers)
KEY ROLES OF FINANCIAL MARKETS

• Accommodating Corporate Finance Needs

• Accommodating Investment Needs
STRUCTURE OF A FINANCIAL MARKET
PRIMARY VS. SECONDARY MARKETS
SECURITIES TRADED IN FINANCIAL
MARKETS
SECURITIES TRADED IN FINANCIAL
MARKETS
CAPITAL MARKET SECURITIES
CAPITAL MARKET SECURITIES
CAPITAL MARKET SECURITIES
STRUCTURE OF A FINANCIAL MARKET
DEBT VS EQUITIES
DEBT VS EQUITIES
PRIMARY VS SECONDARY MARKETS
MONEY MARKETS VS CAPITAL MARKETS
EXCHANGE VS OVER THE COUNTER
INSTRUMENTS TRADED IN FINANCIAL MARKETS
INSTRUMENTS TRADED IN FINANCIAL MARKETS
FUNCTIONS OF FINANCIAL MARKETS
FUNCTIONS OF FINANCIAL MARKETS
FUNCTIONS OF FINANCIAL MARKETS
FINANCIAL INSTITUTIONS

• they act as intermediaries between savers and borrowers and they

direct the flow of funds between them .
FINANCIAL INSTITUTIONS
FINANCIAL INSTITUTIONS
FINANCIAL INSTITUTIONS
FINANCIAL INSTITUTIONS
GENERAL CLASSIFICATION OF FINANCIAL
INSTITUTIONS

• Depository Institutions

• Contractual savings associations

• Non-depository Financial Institutions

ROLE OF DEPOSITORY INSTITUTIONS

• Offer deposit accounts that can accommodate the amount and liquidity characteristics desired by most
surplus units
• Repackage funds received from deposits to provide loans of the size and maturity desired by deficit
units
• Accept the risk on loans provided
• Have more expertise than individual surplus units in evaluating the creditworthiness of deficit units
• Diversify their loans among numerous deficit units and can absorb defaulted loans better than
individual surplus units could.
DEPOSITORY FINANCIAL INSTITUTIONS
DEPOSITORY FINANCIAL INSTITUTIONS

• Asavings and loan

association — also called an S&L, a
thrift, or simply a savings and loan — is a
financial institution similar to a bank that
specializes in helping people get residential
mortgages. Savings and loan associations can be
owned either by their customers or by
shareholders, but they were primarily meant to
let the average person pool his money so that
members could purchase homes.
DEPOSITORY FINANCIAL INSTITUTIONS

credit union is a type of cooperative ‘run

by its members for the members.’ A credit union 
is a not-for-profit organization that people who
have something in common form. For example,
they may go to the same church, belong to the
same trade union, club, industry, or locality.
• To join a credit union, you must meet its
eligibility criteria. In other words, you need to
share the same common bond with the current
members.
DEPOSITORY FINANCIAL INSTITUTIONS

• mutual savings bank is a bank, a

type of thrift institution, chartered by a central or
regional government that does not have
shareholders, i.e. no capital stock. People who put
their money into it own the financial institution.
• Mutual savings banks were initially set up in the
United States, specifically the Northeast and Mid-
Atlantic regions of the country, to help low-income
workers build up savings – 
put side a proportion of their disposable income
 that they had not spent. They would invest in
long-term, fixed-rate assets such as mortgages.
DEPOSITORY INSTITUTIONS
CONTRACTUAL SAVINGS ASSOCIATIONS

• * have long –term liabilities and stable cash flows are therefore ideal providers for term finance to both
government and industry
• Play a much bigger role in the financial systems of developed countries such as Switzerland, the
Netherlands, and the United Kingdom, the resources mobilized by life insurance companies and pension
funds correspond to well over 100 percent of annual GDP.
CONTRACTUAL SAVINGS INSTITUTIONS

• Insurance Companies are institutions into selling

Insurance which is a contract, represented by a
policy, in which an individual or entity receives
financial protection or reimbursement against
losses from an insurance company. The
company pools clients' risks to make payments
more affordable for the insured.
CONTRACTUAL SAVINGS INSTITUTIONS

• Pension funds are pooled monetary

contributions from pension plans set up by
employers, unions, or other organizations to
provide for their employees' or members'
retirement benefits. Pension funds are the
largest investment blocks in most countries and
dominate the stock markets where they invest.
When managed by professional fund managers,
they constitute the institutional investor sector
along with insurance companies and investment
trusts.
FINANCIAL MARKETS FAQS

What Are the Different Types of Financial Markets?

Some examples of financial markets and their roles include the stock market,
the bond market, forex, commodities, and the real estate market, among several
others. Financial markets can also be broken down into capital markets, money
markets, primary vs. secondary markets, and listed vs. OTC markets.
FINANCIAL MARKETS FAQS

How Do Financial Markets Work?

Despite covering many different asset classes and having various structures and
regulations, all financial markets work essentially by bringing together buyers
and sellers in some asset or contract and allowing them to trade with one
another. This is often done through an auction or price-discovery mechanism.
FINANCIAL MARKETS FAQS

• What Are the Main Functions of Financial Markets?

Financial markets exist for several reasons, but the most fundamental function is
to allow for the efficient allocation of capital and assets in a financial economy.
By allowing a free market for the flow of capital, financial obligations, and
money the financial markets make the global economy run more smoothly while
also allowing investors to participate in capital gains over time.
FINANCIAL MARKETS FAQS

Why Are Financial Markets Important?

Without financial markets, capital could not be allocated efficiently, and economic
activity such as commerce & trade, investment, and growth opportunities would be
greatly diminished.
FINANCIAL MARKETS FAQS

Who Are the Main Participants in Financial Markets?

Firms use stock and bond markets to raise capital from investors; speculators look to
various asset classes to make directional bets on future prices; hedgers use derivatives
markets to mitigate various risks, and arbitrageurs seek to take advantage of mispricings
or anomalies observed across various markets. Brokers often act as mediators that
bring buyers and sellers together, earning a commission or fee for their services.
FINANCIAL INSTITUTIONS

• a company engaged in the business of dealing with financial and monetary

transactions such as deposits, loans, investments, and currency exchange.
Financial institutions encompass a broad range of business operations within
the financial services sector including banks, trust companies, insurance
companies, brokerage firms, and investment dealers. Virtually everyone living
in a developed economy has an ongoing or at least periodic need for the
services of financial institutions.
TAKE NOTE

• A financial institution (FI) is a company engaged in the business of dealing with

financial and monetary transactions such as deposits, loans, investments, and
currency exchange.
• Financial institutions encompass a broad range of business operations within the
financial services sector including banks, trust companies, insurance companies,
brokerage firms, and investment dealers.
• Financial institutions can vary by size, scope, and geography.
FREQUENTLY ASKED QUESTIONS

• Why Are Financial Institutions (FI) Important?

• Financial institutions serve most people in some way, as financial operations are a
critical part of any economy, with individuals and companies relying on financial
institutions for transactions and investing. Governments consider it imperative to
oversee and regulate banks and financial institutions because they do play such an
integral part of the economy. Historically, bankruptcies of financial institutions can
create panic.