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Eco 202 ch 26 the financial system
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Eco 202 ch 26 the financial system

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Transcript

  • 1. Chapter 26 ! Saving, Investment, and the Financial System
  • 2. I. O. U I Owe You Promises Name Amount Date Signature
  • 3. Promissory Note I.O. U. 10 SAR Dr. Gale Trading paper for paper
  • 4. Financial System Institutions that match people who save money with people who need money
  • 5. Financial Instruments I.O.Us Simple to Complex Relationship Contract
  • 6. Financial System Two categories ! Financial Markets ! Financial Intermediaries
  • 7. Financial Markets Bond Market ! Stock Market
  • 8. Financial Markets Bonds - Borrow - Debt ! Stocks - Sell Ownerships Equity
  • 9. Bond Markets What is a Bond? ! Certificate of Indebtedness
  • 10. Riyadh Pizza Company Saudi Style Supreme
  • 11. Riyadh Pizza Company Borrow or Sell ownership shares
  • 12. Bond 2023 100 Riyals Dr. Gale CEO 10% Riyadh Pizza Company 2014 Coupon 2015 Coupon 2016 Coupon 2017 Coupon 2018 Coupon 2019 Coupon 2020 Coupon 2021 Coupon 2022 Coupon Pays 10 Riyals each year Pays 100 riyals at maturity 2023 Coupon
  • 13. Bond Term - Length of time ! Credit Risk - chance of default ! Tax - How is the interest or profit taxed
  • 14. Stock Ownership Share Company sells once Then resold to other buyers Limited Liability No promises of profit Equity position
  • 15. Riyadh Pizza Company Need to raise 1,000 SAR Create 1,000 shares and sell for 1 SAR each Each share is worth 1/1,000 of the company
  • 16. Stock Certificate Riyadh Pizza Company One Share Dr. Gale CEO Current Share Owner: Prince Alwaleed
  • 17. Stock Markets “Circulation” 160 Companies www.tadawul.com http://en.wikipedia.org/wiki/Tadawul
  • 18. Stock Valuation Share Price Dividend Price-Earnings Ratio
  • 19. Share Price Every time a share sells it sets the current price ! Share prices go up and down
  • 20. Dividend Company Earnings or Profits ! Declare dividend Keep - Retained Earnings
  • 21. Dividend Earnings: 500 Dividend: 300 Retained Earnings: ?
  • 22. Price - Earnings Ratio P/E Ratio ! Current Share Price divided by Earnings last year
  • 23. P/E Ratio Current Share Price: 75 ! Earnings last year: 5 ! P/E Ratio: ?
  • 24. P/E Ratio Price Last Sale Earnings Last 12 months P/E Ratio Equation Earnings x P/E Ratio Price ÷ P/E Ratio Price ÷ Earnings Apple 460 44 10.45 Google 792 31.93 24.8 STC 40 4 10
  • 25. Financial Intermediaries Banks ! Mutual Funds
  • 26. Banks Borrowe rs Savers Bank Pays 5% Make money on spread 7% - 5% = 2% Bank Charges 7%
  • 27. We are rich today because people yesterday were willing to save and not consume
  • 28. Mutual Funds Allows small investors to pool and diversify their savings
  • 29. 460 Total:1292 792 40 Mutual Fund small savers small savers small savers small savers 323 323 323 323
  • 30. Index Fund Buy one share of all the companies in the market ! Tadawul All Share Index (TASI)
  • 31. Exchange Indexes Dow Jones Industrial Average (DJIA) 30 biggest U.S. Companies ! S&P 500 500 biggest U.S. companies ! ! Tadawul All Share Index (TASI)
  • 32. Market for Loanable Funds 10% 9% Interest Profit Rate % Supply 8% 7% 6% 5% 4% Demand 3% 2% 1% 0% 0 100 200 300 400 500 600 Loanable Funds 700 800 900 1000
  • 33. ideas technology methods Intellectual Human trust knowledge skills personality health relationships Entrepreneur money and risk savers and borrowers time is money Culture Financial (1+r)n insurance   limited liability corporations Physical natural resources time buildings equipment things than make things