The document outlines the types of assets, distinguishing between tangible and intangible assets, and details various financial instruments including loans and bonds. It explains the role and classification of financial markets, the importance of regulating these markets, and the motivations for integrating and utilizing international markets. Additionally, it addresses the risks associated with financial assets and the functions of derivative instruments in managing those risks.

1. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall1
Introduction
Chapter 1

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Types of Assets
Tangible Assets
Value is based on physical properties
Examples include buildings, land, machinery
Intangible Assets
Claim to future income
Examples include various types of financial assets

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Types of Financial Assets
Bank loans
Government bonds
Corporate bonds
Municipal bonds
Foreign bond
Common stock
Preferred stock
Foreign stock

4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H4
Debt vs. Equity
Debt Instruments
Fixed dollar payments
Examples include loans, bonds
Equity Claims
Dollar payment is based on earnings
Residual claims
Examples include common stock, partnership share

5. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H5
Price of Financial Asset and Risk
The price or value of a financial asset is equal to the present
value of all expected future cash flows.
Expected rate of return
Risk of expected cash flow

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Types of Investment Risks
Purchasing power risk or inflation risk
Default or credit risk
Exchange rate or currency risk

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Role of Financial Assets
Transfer funds from surplus units to deficit units.
Transfer funds so as to redistribute unavoidable risk
associated with cash flows generated from both tangible and
intangible assets.

8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H8
Key Points You Should
Understand
Difference between tangible and financial assets
Difference between debt and equity
Cash flow of a financial asset
Three types of risks associated with financial asset
Two principal economic functions of financial assets

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Role of Financial Markets
Determine price or required rate of return of asset.
Provide liquidity.
Reduce transactions costs, which consists of search costs and
information costs.

10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H10
Classification of Financial Markets
Debt vs. equity markets
Money market vs. capital market
Primary vs. secondary market
Cash or spot vs. derivatives market
Auction vs. over-the-counter vs. intermediated market

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Financial Market Participants
Households
Business units
Federal, state, and local governments
Government agencies
Supranationals
Regulators

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Key Points You Should
Understand
Three economic functions of financial markets
Ways that financial markets can be classified
Market participants

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Globalization of Financial Markets
Deregulation or liberalization of financial markets
Technological advances
Increased institutionalization

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Classification of Global Financial
Markets
Internal Market
(also called national
market)
External Market
(also called international
market, offshore market,
and Euromarket)
Domestic Market Foreign Market

15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H15
Motivation for Using Foreign Markets and
Euromarkets
Limited fund availability in internal market
Reduced cost of funds
Diversifying funding sources

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Derivatives Market
Futures/forward contracts are obligations that must be
fulfilled at maturity.
Options contracts are rights, not obligations, to either buy
(call) or sell (put the underlying financial instrument.

17. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H17
Role of Derivative Instruments
Protect against different types of investment risks, such as
purchasing power risk, interest rate risk, exchange rate risk.
Advantages:
Lower transactions costs
Faster to carry out transaction
Greater liquidity

18. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H18
Key Points You Should
Understand
Three major factors that have integrated financial markets
Institutionalization of financial markets
Internal and external markets
Motive to raise money outside of domestic market
Two basic types of derivatives
Principal economic role of derivatives
Potential uses of derivatives

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Types of Regulation
Disclosure regulation
Financial activity regulation
Regulation of financial institution
Regulation of foreign participation

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Regulation in the United States
Reasons for regulation
Stock market crash of 1929
Great Depression of 1930s
Regulation primarily by SEC, CFTC, Treasury, and Federal
Reserve
“Blueprint for Regulatory Reform”
Split regulation by functions
Market stability regulator
Prudential regulator
Business conduct regulator

21. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H21
Key Points You Should
Understand
Explanation for the existence of regulation
Goals sought in regulation
Major forms of regulation
“Blueprint for Regulatory Reform”

22. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice H22
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