Banking
Upcoming SlideShare
Loading in...5
×

Like this? Share it with your network

Share
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
477
On Slideshare
477
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
15
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. Chapter 3: Financial Instruments, Markets and Institutions
    • Financial Instruments
    • Financial Markets
    • Financial Institutions
  • 2.
    • People who need funds
      • borrowers/issuer/seller
    • People who have funds to give
      • lenders/savers/buyers
  • 3. Indirect vs. Direct Finance
    • Indirect finance
      • Borrowers and lenders meet through a financial intermediary (e.g. bank)
      • Loan is a liability for borrower, and asset for a bank
  • 4.
    • Direct finance
      • Borrowers sell securities directly to lenders
      • e.g. corporate and Treasury bonds
  • 5.  
  • 6. I. Financial Instruments
    • aka. securities, financial assets
    • definition (p. 36 (1 st ) or 41 (2 nd ))
    • = written legal obligation of one party to transfer something of value, usually money, to another party at some future date, under certain conditions
    • a security is an asset for the buyer/lender,
    • but a liability for the issuer/borrower/seller
  • 7. example
    • shares of stock in Time Warner, Inc.
      • shares of ownership in TW
      • a claim on the earnings/assets of TW
      • a liability for Time Warner
      • an asset for me
  • 8.
    • my mortgage
      • I am the borrower (liability)
      • the bank is the buyer/holder (asset)
      • the bank has a claim on my house
  • 9. uses of financial instruments
    • means of payment
      • but much less liquid than money
    • store of value
      • better than money over time, but also greater risk
    • transfer of risk
      • buyer transfers risk to seller
      • e.g. insurance policies, futures contract
  • 10. Valuing financial instruments
    • sizing, timing & certainty of promised cash flows
    • Size: how much is promised?
      • the larger the cash flows, the greater the value
    • Timing: when is it promised?
      • the sooner the cash flows are received, the greater the value
  • 11.
    • Certainty: how likely its it that payments will be made?
      • the likelier the payments the greater the value
    • Under what conditions?
      • e.g. insurance, derivatives
      • payments when we need them the most are more valuable
  • 12. examples
    • bank loans
    • stocks
    • bonds
    • home mortgages
    • asset-backed securities
    • option and futures contracts
    • insurance policies
  • 13. II. Financial Markets
    • where financial instruments are bought and sold
    • these markets provide
      • liquidity for buying/selling
      • information through prices
      • risk-sharing among buyers/sellers
    • classified in various ways…
  • 14. Primary vs. Secondary Markets
    • primary market
      • newly issued securities
      • -- investment banking
    • secondary market
      • brokers match buyers and sellers
      • dealers act as buyers and sellers
      • -- “market-makers”
  • 15. Debt vs. Equity Markets
    • debt security
      • cash flows are fixed
      • bonds, loans
    • equity security
      • cash flow variable, residual
      • common stock
  • 16. Exchanges vs. OTC Markets
    • exchange
      • buying & selling of securities in physical location
      • NYSE
    • OTC (over-the-counter)
      • dealers in many locations buy & sell securities
  • 17. Money vs. Capital Markets
    • money market
      • short-term debt securities (up to 1 yr.)
      • highly liquid, low risk
    • capital market
      • longer-term debt
      • equity
  • 18.  
  • 19.  
  • 20. III. Financial Institutions
    • aka. financial intermediaries
    • Why have them?
    • Transactions costs
      • search costs to find borrower & lender
      • contract costs
      • economies of scale
  • 21.
    • Risk sharing
      • intermediaries are experts at bearing risk
    • Asset transformation
      • short-term to long-term
      • illiquid to liquid
  • 22. Types of intermediaries
    • Depository institutions
      • “banks”
      • accept deposits, make loans
  • 23.
    • Commercial banks
      • largest in total assets
      • least restricted
    • Savings & Loans
      • originally restricted to savings deposits and mortgages
      • less restricted today
    • Credit Unions
      • consumer loans
      • nonprofit, organized around a group
  • 24.
    • Nondepository institutions
      • insurance companies
      • pension funds
      • finance companies
        • Mortgage, auto, office equipment
      • Securities firms
      • gov’t-sponsored enterprises (GSEs)
  • 25. Subprime mortgage meltdown
    • Hit several types of financial institutions:
      • finance companies
        • Countrywide
      • securities firms
        • Citigroup, Merrill Lynch
      • GSEs
        • Fannie Mae, Freddie Mac