banks

1. 3. Securities Firms:
• Some securities Firms use their information
resources to act as a broker, executing securities
transactions between two parties.The fee is
reflected in the diFerence between their bid and
ask quotes.
• Furthermore, securities firms oken act as dealers,
making a market in specific securities by adjusting
their inventory of securities.
.
4. Pension Funds:
• Many corporations and government agencies
offer pension plans to their employees in which
funds are periodically contributed by the
employees, their employees or both.

2. FINANCiAL MARKETS &
iNSTiTUTiONS

3. TYPES OF FINANCIAL MARKETS
Primary versus secondary markets
• New securities are issued in primary
markets,
• while existing securities are traded in
secondary markets.
—Facilitate the Trading of Existing Securities
—Provide Liquidity
—Continuous Information
—Makes it easy for firms to raise Funds

5. TRKURY BILLS
” ‘“ "”” "” CERTIFICATEOF
DEPOSITS
NEGOTIABLE CD'S
CONMGRCIAL PAPER
EURODOLLAR
DEPOSITS
BANKER'S
ACCEPTANCES
FED£kAL FUNDS
REPURCHASE
AGREEI M
ENTS
FEDERAL
GOVERNNENT
BANKS AND SAVING
INSTITUTIONS
BANKS AND SAVING
INSTITUTIONS
BANK HOLDING
CONPANIES.
FINANCING
CONPANIES
BANKS LOCATED
OUTSIDE US
BANKS
DEPOSITORY
INSTITUTIONS
FIRMS AND
FINANCIAL
INSTITUTIONS
HOUSEHOLDS, FIRN,
FINANCIAL
INSTITUTIONS
ONE YEAR OR LESS HIGH
HOUSEHOLDS
FIRI”IS
FIRNS
FIRI”IS AND
GO'YERNf4ENTS
FIRIdS
DEPOSITORY
INSTITUTIONS
FIRMS AND
FINANCIAL
INSTITUTIONS
7DAYS-5 Y
E
A
R
SOR
LONGER
NONEXISTENT
2 WGEKS- I YEAR NODERATE
DAY-270 DAYS LOVV
I DAY- I YEAR NON EXISTENT
30 DAYS- 270 DAYS HIGH
I D
A
Y—7 DAYS
I DAY- I5 DAYS
NON EXISTENT
NON EXISTENT

6. • Security:
A certificate that represents a claim on the
issuer.
• How do deficit units work:
They issue (sell) securities to surplus units IN
order to obtain funds

7. ""” 3. Credit Unions:
• Credit unions differ from commercial banks and savings
institutions in that:
• They are non-profit
• They restrict their business to the credit union
members, who share a common bond.

9. ” - • Financial institutions are required to
resolve the problems caused by market
imperfections
• They match up buyers and sellers of
securities, breakdown securities to the
desired size of an investor.

10. ’- - S. Insurance Companies:
• Insurance companies receive premiums in exchange for
insurance policies payable upon death, illness, or
accidents and use the funds to purchase a variety of
securities.

11. ” - • Depository institutions are the major
type of financial intermediary which
accept deposits from surplus units and
provide credit to deficit units

12. . I"ñoney versus Capital Markets
• Financial markets that facilitate the flow of
short-term funds (with maturities less
than one year) are I‹nown as money
markets,
• While those that facilitate the flow of
long-term funds are known as capital
markets.

13. • Participants of the market:
Households
Firms
c Government agencies
• The ones providing funds to financial
markets are called Surplus Units-
(households)
• Participants who use financial markets to
obtain funds are called Oe/icit Units

14. Organized versus Over•the-Counter
Markets
”
- -
• Some secondary stock market
transactions occur at an organized
exchange, which is a visible market place
lor secondary market transactions.
• Over the counter market is a
telecommunication network for market
transactions

15. CAPITAL MARKET SECURITIES
• Securities with a maturity of more than one
year.
' Bonds and mortgages: are long term debt obligations
issued by corporations and government.
Mortgages are debt obligations to finance real estate
Stocks represent partial ownership in the firms that
issue them, they have no maturity and serve as long-
term source of funds.

16. Securities traded
” • Money market securities:
Are debt securities that have a maturity of
one year or less.
Have a high degree of liquidity,
° Low expected return.

17. Role of FinancialMarl‹etsand
Institutions
.. • Even if markets are efficient, this does not imply that
individual or institutional investors should ignore the various
investment instruments available.
• Investors normally intend to balance the objective of high
return with their particular preference for low default risk
and adequate liquidity.
• As time passes, new information about economic conditions
and corporate performance becomes available.
• Announcements that do not contain any new valuable
information will not elicit a market response.

18. Depository institutions
,
- .. I . Commercial Banks:
• They serve surplus units by offering a wide variety of deposit
accounts, and they transfer deposited funds to deficit units by
providing direct loans or purchasing securities.
2. Saving Institutions:
• Like commercial Banks, savings and loan associations offer deposit
accounts to surplus units and then channel these deposits to deficit
units.
• S&L’s have concentrated on residential mortgage loans, while
commercial banks have concentrated on commercial loans.
• Saving Banks are similar to savings and loan associations, except
that they have more diversified uses of funds.

19. Exposure of Financial Institutions to Risk
- .. • Bonds and mortgages are subject to interest rate risk,
whereby prices of existing bonds or mortgages
decline in response to an increase in interest rates.
• Stocks are subject to market risk, whereby the stock
market experiences lower prices in response to
adverse economic conditions or pessimistic
expectations of investors.
• All types of securities dominated in foreign currencies
are subject to exchange rate risk, in which the
currencies dominating the securities depreciate
against the investor's home currency.

20. Functions of Depository
Financial Institutions
.
I . Finance Companies:
• Most finance companies obtain funds by issuing securities,
then lend the funds to individuals and small businesses.
2. h'futual Funds:
• Mutual Funds sell shares to surplus units and use the funds
received to purchase a portfolio of securities.
• By purchasing shares of mutual funds and money market
mutual funds, small savers are able to invest in a diversified
portfolio of securities with a relatively small amount of funds.

21. FINANCIAL MARKETS
• Is a market in which financial assets such
as stocks and bonds are traded.
• They facilitate the flow of funds, allowing
financing and investing.
• Financial markets transfer funds from
those who have excess funds to those
who need funds

22. Securities traded in Financial
Markets
” - • Equity securities represent ownership in
business.
• Debt securities represent IOU'S,
investors who purchase these securities
are creditors.
• While equity securities typically have no
maturity, debt securities have maturities
ranging from one day top twenty years or
longer.