TABLE OF CONTENTSSr.No. Particulars Page # 1 Financial System: 2 Financial Markets: 3 Financial Institutions: 4 Financial Intermediaries: 5 The Stock Market: 6 Securities: 7 Types of Finance Companies: 8 Insurance Companies:Financial System:Some economic units generate more income than they spend and have funds leftover. These are called Surplus Economic Units. Other economies units generateless income than they spend and need to acquire additional funds in order tosustain their operations. These are called Deficit Economic Units. The purpose offinancial system is to bring the two groups, surplus economic units and deficiteconomic units, together for their mutual benefits.Financial Markets: • Physical Asset markets • Spot markets • Money markets • Mortgage markets • The primary market • The secondary market • Private markets • The money market • The capital market • Security exchangesFinancial Institutions:
• Commercial Banks • Savings & Loan Associations • Central Bank • Credit Unions • Insurance Companies • Mutual Funds • Pension FundsFinancial Intermediaries: • Investment Bankers • Brokers • DealersThe Stock Market: • Physical Location Stock Exchange • The Over-the-Counter Market • The NASDAQ stock marketSecurities: Securities in Money Market: • T-Bill • Negotiable Certificates of Deposits • Commercial Papers • Eurodollars • Banker’s Acceptance Securities in Capital markets: • Bonds • Treasury Notes • Municipal Bonds • Corporate BondsTypes of Finance Companies: • Consumer Finance Companies • Commercial Finance Companies • Sales Finance CompaniesInsurance Companies:
• Life Insurance Companies • Property and Casualty Insurance Companies • Pension Funds • AnnuitiesFinancial Markets:Financial Asset Markets:Financial asset markets, on the other hand deal with stocks, bonds, notes,mortgages and other financial instruments.Spot Markets:Spot markets and future markets the terms that refer to whether the assets arebeing bought or sold on the spot delivery or for delivery at some future date.Such as six months or a year in future.Money Markets:Are the markets for short term, highly liquid debt securities. The New York andLondon money markets have long been the world’s largest markets.Mortgage Markets:Deals with loan and residential, commercial and industrial real estate and onfarmland.The Primary Market:When a security is created and sold for the first time in the financial marketplace,the transaction takes place in the primary market. It is also known as Initial PublicOffering (IPO)The Secondary Market:Once a security has been issued, it may be traded from one investor to another.The Money Market:Short term securities are traded in money market. Network of dealers operate inthis market.The Capital Market:
Long term securities traded in the capital market.Security Exchanges:Security exchanges facilitate trading of stock or bond among investors.Financial Institutions:Commercial Banks:Commercial banks are financial institutions that exit primarily to lend money tobusiness. Banks also lend to individuals, government and other entities, but thebulk of their profit typically come from business loans. Commercial banks makemoney by charging a higher interest rate on the money they lend than the ratethey pay on money lent to them in the form of deposits. The difference betweenthe rate charged to borrowers and the rate paid to depositors is known as theinterest rate spread.Banking is different from many other types of business in that it must have acharter before it can open its doors. A bank charter is much more different toobtain Ethan a city license need to open another business. It is an authorizationfrom the government granting permission to operate.Commercial Bank Operations:Commercial banks operate with more government oversight than mostbusinesses but they are managed just like other companies.Value maximization of Stockholders. Commercial banks have stockholders,employees,mnagers,equipment, facilitiesand the primary financial goal of such banks is to maximize value for theirstockholders.Receiving and Lending of Funds:The banks do most of their business by receiving funds from depositors andlending the funds to those who need them.Issuance of Bonds:Commercial banks occasionally issue long term bonds to raise funds, borrowfrom the federal reserve, or borrow deposits kept by other financial institutions inthe federal reserve banks in what is known as the federal fund market.
Commercial Banks Reserves:Commercial banks are not allowed to lend all the funds they get from depositors.Central bank requires all commercial banks to keep a minimum amount ofreserves on hand.The required level of reserves a bank must hold is determined by applying acertain percentage to the average weekly deposits held by the bank. The exactpercentage of deposits a bank must hold in reserve, called the require reserveratio.Central Bank:THE STATE BANK OF PAKISTANPrimary FunctionsSole Authority to Issue Notes:One of the primary responsibilities of the State Bank is the regulation of currencyin accordance with the requirements of business and the general public. For thispurpose the Bank has been granted the sole right of issuing notes in the countryunder Section 24 of the State Bank of Pakistan Act, 1956. The overall affairs withrespect to the issuing of notes are conducted through two notionally separatedepartments of SBP.T-Bill AuctionsSBP 3-day repots rate influences the yield of T-bills sold through auctions the cutoff yield is determined by the Auction Committee, keeping in view monetarytargets, Current economic and financial conditions and expected marketresponse. The Six month T-bill is considered the most important benchmark bythe money market.Open Market OperationSBP is conducting regular Open Market Operations(OMOs) since January 1995.Regulation and Supervision of the Financial System:Another principal task of the Bank is to safeguard the soundness of the financialsystem. To perform this crucial role effectively and efficiently, State Bank ofPakistan has been given vast powers under the State Bank of Pakistan Act,1956,
Bankers Bank:The Bank also functions as the bankers’ bank. Banks are classified as scheduledand non-scheduled. The Bank maintains an updated list of all scheduled banks atits various offices. These banks are entitled to certain facilities from the StateBank and in return they have some obligations to it.Lender of the Last Resort:One of the important characteristics of a central bank is its being the lender of thelast resort. The State Bank provides loan and re-discount facilities to scheduledbanks in times of dire need when they find no other source of funds.Banker to Government:The State Bank conducts the banking business of Federal and ProvincialGovernment and some government agencies.2 Secondary Functions:2.1 Public Debt ManagementThe Bank is responsible for the management of government debt undersubsection13(e) of section 17, and section 21 of the SBP Act, 1956.Management of Foreign ExchangeBeing responsible for maintaining the external value of the currency, the StateBank of Pakistan assumed the charge of management and administration of theexchange system of the country in line with the Foreign Exchange RegulationAct,Reports on the State of the EconomyThe Bank submits its review of the economy to the Parliament through its annualand quarterly reports.Relationships with International Financial InstitutionsPakistan is the member of International Monetary Fund. The State Bank ofPakistan deals with the IMF on behalf of the Government of Pakistan3 Non-traditional Functions:Micro Finance:
In order to expand the banking services at grass root level and to enable thefinancial sector to play its role in poverty alleviation, the State Bank of Pakistan isalso promoting micro banking in the country.Training Facilities to Bankers:Keeping in view an acute shortage of trained bankers at the time of theindependence, the State Bank introduced "Bank Officers Training Scheme"withinone month of its establishment. On July 2 1948, the Central Board of Directors ofthe Bank approved a comprehensive scheme for university graduates especiallywith mathematics, economics and commerce backgrounds.Savings and Loan Associations:Like commercial banks, savings and loan associations are in business to take indeposits and lend money, primarily in the form of mortgage loans. Mortgageloans are loans that are secured by real property such as real estate. If borrowerdefaults on a mortgage loan, the lender can take legal possession on theproperty. The property can then be sold and the lender keeps the proceeds fromthe sale up to the amount owed.S&Ls make a profit by charging a higher interest rate on the money they lendthan the rate paid on deposits they take in.Credit Unions:Credit unions are cooperative associations whose members are supposed tohave a common bond, such as being employees of the same firm. Member’ssavings are loans and home mortgage, credit unions are often the cheapestsource of funds available to the individual borrowers.Mutual Funds:Are corporations that accept money from savers and then use these stocks,bonds, long term bonds, or short term debt instruments issued by businesses orgovernment units. These organizations pool funds and thus reduce risk bydiversification. They also achieve economy of scale in analyzing securities,managing portfolios, and buying and selling securities.Pension Funds:Pension funds are retirement plans funded by corporations or governmentagencies for their workers and administered generally by the trust departments of
commercial banks or by life insurance companies. Pension funds invest primarilyin bonds, stocks, mortgages and real estate.Financial Intermediaries:Investment BankersInstitutions called investment banking firms exist to help business and state andlocal governments sell their securities to the public.Underwriting:Investment bankers arrange securities sale on either an underwriting basis orbest effort basis. The term under wring refers to the process by which aninvestment banker purchase all the new securities from the issuing company andthen resell them to the public.Investment bankers who underwrite securities face some risk becauseoccasionally an issue is overpriced and can’t be sold to the public for the priceanticipated by the investment banker.Brokers:Brokers often account representative for an investment banking firm, handleorders to buy or sell securities. Brokers are agents who work on behalf of aninvestor. When investor call with an order. Brokers work on their behalf to findsomeone to take the other side of the proposed trade. If investor want to buy,brokers find sellers. If investors want to sell, broker find buyers.Dealers:Dealers make their living buying securities and reselling them to others. Dealersmake money by buying securities for one price, called bid price and selling themfor a higher price, called the ask (offer) price. The difference or spread betweenthe bid price and the ask price represents the dealer’s fee.The Stock Market:Physical Location Stock Exchange: Exist physically such as Karachi Stock Exchange. Trade of securities between buyer and seller.The Over-the-Counter Market:
No fix location. Network of dealers around the world who maintain inventories of securities for sale.The NASDAQ stock market: Computerized exchange of securities all over the world.Securities:Document that represent the right to receive funds in the future.Securities in Money Market: • T-Bill: Treasury bills are considered the benchmark of safety because the have essentially no risk • Negotiable Certificates of Deposits: They are simply pieces of paper that certify that you have deposited a certain amount of money in the bank, to be paid back on a certain amount of money in the bank. • Commercial Papers: A type of short term promissory note issued by large corporations with strong credit rating. • Eurodollars: Euro dollar are deposited and borrowed by large institutions with good credit rating. • Banker’s Acceptance: A banker’s acceptance is a short term debt instrument that is guaranteed for payment by a commercial bank.Securities in Capital markets: • Bonds:
Bond is the promise to pay their owner a certain amount of money on some specified date in the future. • Treasury Notes: When the federal government wants to borrow the money for period of more than one year, it issues treasury notes. • Municipal Bonds: The bonds issued by state and local governments are known as municipal bonds. • Corporate Bonds: Corporate bonds are similar as treasury notes but issued by the corporations.Types of Finance Companies: Consumer Finance Companies These are some times known a small loan companies, make small loans to consumers for car purchases, medical expenses, vacations, and the like.interst rate charged on these types of loans a little bit higher. Commercial Finance Companies These firms concentrate on providing credit to other business firms. Sales Finance Companies These companies help to sale of some corporation.Insurance Companies: Life Insurance Companies: Life insurance companies sell policies that pay the beneficiary of the insured hen the insured person dies. Property and Casualty Insurance Companies:
Property and casualty insurance companies insure against a wide rangehazards associated person and property. These include theft, weatherdamage for hurricanes and earthquake.Pension Funds:Pension funds are set up by companies, government and unions to payretirement benefit to their employees. Employees generally contribute moneyto the funds now in order to draw it later, on retirement.Annuities:Sometime the sponsor of pension funds will use the funds accumulatedduring the retire person’s working year to purchase an annuity from aninsurance company.insurane companies also sell annuities to investors.