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

11. Riyadh Pizza Company
Saudi Style Supreme

12. Riyadh Pizza Company
Borrow
or
Sell ownership shares

13. 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

14. Bond
Term - Length of time
!
Credit Risk - chance of default
!
Tax - How is the interest or
profit taxed

15. Stock
Ownership Share
Company sells once
Then resold to other buyers
Limited Liability
No promises of profit
Equity position

16. 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

17. Stock Certificate
Riyadh Pizza Company
One
Share
Dr. Gale
CEO
Current Share Owner: Prince Alwaleed

19. Stock Markets
“Circulation”
160 Companies
www.tadawul.com
http://en.wikipedia.org/wiki/Tadawul

20. Stock Valuation
Share Price
Dividend
Price-Earnings Ratio

21. Share Price
Every time a share sells
it sets the current price
!
Share prices go up and
down

22. Dividend
Company Earnings or
Profits
!
Declare dividend
Keep - Retained Earnings

23. Dividend
Earnings: 500
Dividend: 300
Retained Earnings: ?

24. Price - Earnings Ratio
P/E Ratio
!
Current Share Price
divided by
Earnings last year

25. P/E Ratio
Current Share Price: 75
!
Earnings last year: 5
!
P/E Ratio: ?

26. 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

27. Financial Intermediaries
Banks
!
Mutual Funds

29. Banks
Borrowe
rs
Savers
Bank Pays
5%
Make money
on spread
7% - 5% = 2%
Bank Charges
7%

30. We are rich today
because
people yesterday
were willing to save
and not consume

31. Mutual Funds
Allows small investors
to pool and diversify
their savings

32. 460
Total:1292
792
40
Mutual Fund
small
savers
small
savers
small
savers
small
savers
323
323
323
323

33. Index Fund
Buy one share of all the
companies in the
market
!
Tadawul All Share Index
(TASI)

34. 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)

35. 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

37. 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