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Share Market

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  • 1. © 2008 Pearson Education Canada 2. Chapter 2 An Overview of the Financial System
  • 2. An Overview of the Financial System
    • Primary Function of the Financial System is Financial Intermediation
    • The channeling of funds from households, firms and governments who have surplus funds (savers) to those who have a shortage of funds (borrowers).
    © 2008 Pearson Education Canada 2.
  • 3. An Overview of the Financial System © 2008 Pearson Education Canada 2.
  • 4. Classifications of Financial Markets
    • Debt Markets
    • Short-term (maturity < 1 year) – the Money Market
    • Long-term (maturity > 10 year) – the Capital Market
    • Medium-term (maturity >1 and < 10 years)
    © 2008 Pearson Education Canada 2.
  • 5. Classifications of Financial Markets
    • Equity Markets - Common stocks
    • Primary Market - New security issues sold to initial buyers
    • Secondary Market - Securities previously issued are bought and sold
    © 2008 Pearson Education Canada 2.
  • 6. Classifications of Financial Markets (Cont’d)
    • Secondary Markets
    • Exchanges
    • Trades conducted in central locations (e.g., Toronto Stock Exchange and New York Stock Exchange)
    • Over-the-Counter Markets
    • Dealers at different locations buy and sell
    © 2008 Pearson Education Canada 2.
  • 7. Financial Market Instruments © 2008 Pearson Education Canada 2.
  • 8. Financial Market Instruments (Cont’d)
    • Other Money Market Instruments
    • Certificates of deposit
    • Repurchase agreements
    • Overnight funds
    © 2008 Pearson Education Canada 2.
  • 9. Financial Market Instruments (Cont’d) © 2008 Pearson Education Canada 2.
  • 10. Financial Market Instruments (Cont’d)
    • Other Capital Market Instruments
    • Canada savings bonds
    • Provincial and municipal bonds
    • Government agencies securities
    © 2008 Pearson Education Canada 2.
  • 11. Internationalization of Financial Markets
    • International Bond Market
    • Foreign bonds - sold in a foreign country and denominated in that country
    • Eurobonds – denominated in a currency other than the country in which it is sold
    • Eurocurrencies – foreign currencies deposited in banks outside the home country
    © 2008 Pearson Education Canada 2.
  • 12. World Stock Markets © 2008 Pearson Education Canada 2.
  • 13. Function of Financial Intermediaries
    • Financial Intermediaries
    • Engage in process of indirect finance
    • Are needed because of transactions costs and
    • asymmetric information
    © 2008 Pearson Education Canada 2.
  • 14. Function of Financial Intermediaries (Cont’d)
    • Transactions Costs
    • 1. Financial intermediaries make profits by
    • reducing transactions costs.
    • 2. They reduce transactions costs by developing
    • expertise and taking advantage of
    • economies of scale.
    © 2008 Pearson Education Canada 2.
  • 15. Function of Financial Intermediaries (Cont’d)
    • Risk Sharing
    • Create and sell assets with low risk characteristics and then use the funds to buy assets with more risk (also called asset transformation)
    • Lower risk by helping people to diversify portfolios
    © 2008 Pearson Education Canada 2.
  • 16. Asymmetric Information
    • Adverse Selection
    • Before transaction occurs
    • Potential borrowers most likely to produce adverse outcomes are ones most likely to seek loans and be selected
    © 2008 Pearson Education Canada 2.
  • 17. Asymmetric Information (Cont’d)
    • Moral Hazard
    • After transaction occurs
    • Hazard that borrower has incentives to engage in undesirable activities making it more likely that loan won’t be paid back
    © 2008 Pearson Education Canada 2.
  • 18. Financial Intermediaries © 2008 Pearson Education Canada 2.
  • 19. Size of Financial Intermediaries © 2008 Pearson Education Canada 2.
  • 20. Regulation of Financial Markets © 2008 Pearson Education Canada 2.
  • 21. Regulation of Financial Markets
    • Primary Reasons for Regulation
    • Increase information to investors
      • - Decreases adverse selection and moral hazard problems
      • - Securities commissions force corporations to disclose information
    © 2008 Pearson Education Canada 2.
  • 22. Regulation of Financial Markets (Cont’d)
    • Primary Reasons for Regulation (continued)
    • 2. Ensuring the soundness of intermediaries
      • Prevents financial panics
      • Restrictions on entry/assets/activities, disclosure, deposit insurance, limits on competition
    © 2008 Pearson Education Canada 2.

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