The document defines finance and financial systems. It discusses the functions of money, different measures of money supply, and the roles of money lending, capital formation, and investment in the financial system. It also describes the evolution of financial systems from more rudimentary to indirect systems, the key components and markets within financial systems, and the functions of financial intermediaries, markets, and instruments.

1.  Finance as a function is
 1:"To provide or raise the funds or capital
 2: "the branch of economics that studies the
management of money and other assets"
3: "the management of money and credit and
banking and investments"

2.  System: Set of complex and closely connected
or interlinked institutions, agents, practices,
markets, transactions, claims, and liabilities in
the economy
 Financial System: Money, Credit, Finance
 A financial system functions as an intermediary
and facilitates the flow of funds from the areas of
surplus to the areas of the deficit.

3. Generally accepted as payment for goods
and services and repayment of debts
Functions of money:
Medium of Exchange
Unit of Account
Store of value

4. M1:Currency (coins and bills) and
checking account deposits
M2: Currency, checking account deposits
and savings account deposits
M3: M2 plus time deposits
M0: Currency plus deposits of banks and
other institutions at the central bank

5. Money Loaned
A method of paying for goods or services
at a later time, usually paying interest as
well as the original money

6. Activity by which claims to resources are
either assembled from those released by
domestic savings, obtained from abroad,
or specifically created usually as bank
deposits or notes and then placed in the
hands of investors.

7. Activity by which resources are actually
committed to production
Volume of capital formation: Intensity of
savings, finance and investment.
Conversion of savings to investment:
Transfer Process

8. Genesis of Financial System: Divorce
between savings and investment
Relationship between savings and
investment vary considerably among
economic units
Goldsmith’ designated categories of
economic units: Savings-surplus units
(Savings in excess of investments),
Economic Units (Investments exceed their
savings) and Neutral units (Savings equal

10. Financial innovation
Growth of technology
Rudimentary Finance
Direct Finance
Indirect Finance

11. Financial System of underdeveloped or
traditional economy
Per capita output low and declining
Absence of an array of financial assets/
instruments that would stimulate savings
Absence of an array of financial markets
that would allocate savings competitively
to investment

12. Improvement over rudimentary finance by
removing the obstacles to efficient capital
formation
Improved capital formation under direct
finance through: Financial assets/
instruments, Brokers/ Investment Bankers,
Secondary Markets/ Stock Exchanges

13. Financial instrument/ asset is a claim
against another economic unit and is held
as a store of value and for the return that is
expected.
Examples: Shares, Debentures, etc.
Financial assets stimulate capital formation
and speedy economic development

14. Find savers and bring them with economic
units needing funds
Brokerage function, Underwriting function

15. Provide savers with ability/ facility to
dispose of their investment portfolio and
realise cash to finance their current
consumption
Provide liquidity and marketability

16.  Flow of savings from savers to entrepreneurs
through intermediary financial institutions like
mutual funds, insurance companies, etc.
 Services offered by financial intermediaries:
 Convenience (Divisibility, Flexibility, Maturity)
 Lower risk
 Expert Management
 Economies of Scale
 Channelisation of savings (Encouraging,
Sponsoring, Discriminating between various
industries)

17. Functions
Saving Function
Liquidity Function
Payment Function
Risk Function
Policy Function

18. Public saving find their way into the hands
of those in production through the financial
system. Financial claims are issued in the
money and capital markets which promise
future income flows. The funds with the
producers result in production of goods
and services thereby increasing society
living standards.


19. The financial markets provide the investor
with the opportunity to liquidate
investments like stocks, bonds,
debentures, etc. whenever they need the
fund.

20. The financial system offers a very
convenient mode for payment of goods
and services. Cheque system, credit card
system etc are the easiest methods of
payments. The cost and time of
transactions are drastically reduced.

21. The financial markets provide protection
against life, health and income risks.
These are accomplished through the sale
of life and health insurance and property
insurance policies. The financial markets
provide immense opportunities for the
investor to hedge himself against or
reduce the possible risks involved in
various investments

22. The government intervenes in the financial
system to influence macroeconomic
variables like interest rates or inflation so if
country needs more money government
would cut rate of interest through various
financial instruments and if inflation is high
and too much money is there in the system
then government would increase rate of
interest.

24. Intermediary Market Role
Stock Exchange Capital Market
Secondary Market to
securities
Investment Bankers
Capital Market,
Credit Market
Corporate advisory
services, Issue of
securities
Underwriters
Capital Market,
Money Market
Subscribe to
unsubscribed
portion of securities
Registrars, Depositories,
Custodians Capital Market
Issue securities to the
investors on behalf
of the company and
handle share
transfer activity
Primary Dealers Satellite
Dealers Money Market
Market making in
government
securities

25. Upto 1951
!951 to the mid-eighties
After early nineties

26. Defined as the market in which financial assets
are created or transferred.
These assets represent a claim to the payment of a
sum of money sometime in the future and/or
periodic payment in the form of interest or
dividend.

27. Classification
Money market
(Short term instrument)
Capital markets
(Long term instrument)
The most important distinction between the
two:
The difference in the period of maturity.

28. Main Function
To channelize savings into short term productive
investments like working capital .
Instruments in Money Market
Call money market
Treasury bills market
Markets for commercial paper
Certificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note

29. Part of the national money market
Day-to day surplus funds mainly of banks are traded
Short term in nature
Maturity of these loans vary from 1 to 15 days
Lent for 1 day: Call money
Lent for more than 1 day but less than 15 days: Notice
money
Convenient interest rate
Highly liquid loan repayable on demand

30. Unsecured Promissory note.
Issued by well known companies with strong and
high credit rating.
Sold directly by the issuers to investors or through
agents like merchant banks and security houses.
Flexible Maturity
Low interest rates with compared to banks.
Imparts a degree of financial stability to the system.

31. Referred as note payable in accounting
It is a contract detailing the terms of a promise
by one party (the maker) to pay a sum of money
to the other (the payee).
The obligation may arise from the repayment of
a loan or from another form of debt.
For example, in the sale of a business, the
purchase price might be a combination of an
immediate cash payment and one or more
promissory notes for the balance.

32. Defined as short term deposit by way of usance
promissory notes.
Greater flexibility to investors in the deployment of
surplus funds.
Permitted by the RBI to banks
Maturity of not less than 3 months and upto 1 year.
Transferable in nature
Free negotiability and limited flexibility

33. Invest primarily in money market instruments of
very high quality.
RBI and public financial institution can set it
either directly or through its existing subsidiaries.
MMMF
Open Ended
Close Ended

34. Provided resources needed by medium and
large scale industries.
Purpose for these resources
Expansion
Capacity Expansion
Investments
Mergers and Acquisitions
Deals in long term instruments and sources of
funds

35. Main Activity
Functioning as an institutional mechanism to
channelize funds from those who save to those
who needed for productive purpose.
Provides opportunities to various class of
individuals and entities.

36. Primary Markets Secondary Markets
When companies need financial resources
for its expansion, they borrow money from
investors through issue of securities.
The place where such securities are traded
by these investors is known as the secondary
market.
Securities issued
a) Preference Shares
b) Equity Shares
c) Debentures
Securities like Preference Shares and
Debentures cannot be traded in the
secondary market.
Equity shares is issued by the under writers
and merchant bankers on behalf of the
company.
Equity shares are tradable through a private
broker or a brokerage house.
People who apply for these securities are:
a) High networth individual
b) Retail investors
c) Employees
d) Financial Institutions
e) Mutual Fund Houses
f) Banks
Securities that are traded are traded by the
retail investors.
One time activity by the company. Helps in mobilising the funds for the
investors in the short run.

37. 1. Financial institutions
2. Financial Markets
3. Financial
Instruments/Assets/Securities
4. Financial Services.

39. Financial Markets
Foreign Exchange and
Eurocurrency market
Domestic and International Bond
Market
Domestic and International Stock
Markets
Derivatives Markets

40. Liquidity: The ease of capturing an asset’s
value
Reflects a market’s operational efficiency
Impacts a market’s informational and
allocational efficiency
 The inter bank foreign exchange market
for large transactions is the world’s most
liquid market

41. Maturity:
 Short-term: Money market
 Long-term: Capital market
Regulatory Jurisdiction:
 Single-country internal markets
 Multi-country external markets
Middlemen
 Intermediated through a commercial bank
 Non-intermediated or direct to the public, through
a broker or investor bank

42. Spot Market
Cash market with delivery in two
business days
Forward Market
Trade at a prearranged date and price

43. Money Markets Capital Markets
Internal
Markets
Short term accounts
with domestic clients
Long term accounts
with domestic clients
External
markets
Eurocurrency deposits
and loans
Long term accounts
with foreign clients

44. Money Markets Capital markets
Internal
Markets
Short term Commercial
Paper
Stocks and bonds issued in
the domestic market
External
markets Eurocommercial paper
Global equity, foreign bonds
and Euro bonds

45. Eurocurrencies: Bank deposits and loans
residing outside any single country
Floating rate pricing usually with maturities
less than five years
Few regulatory restrictions because they
are outside the jurisdiction of any single
government
Competitive pricing – outstanding in 2.5
trillion dollars

46. Typically there are
No reserve requirement
No interest rate regulations or caps
No with holding taxes
No deposit insurance requirements
No credit allocation regulations
Less stringent disclosure requirements

47. Low interest rate risk: Interest rates tied to
a variable rate base such as the LIBOR
Low default risk: Traded between large
commercial banks, investment banks and
multinational corporations
Relatively short maturities: Typically less
than five years

48. Cross listing of shares: Increase demand
and enhance share price, Improves image
of the firm, Gets more customer and
investor base
Cross listing benefits the firm in improving
transparency and disclosure, reduces
opportunity for hostile takeover.
Dominant: 56 per cent

49. Domestic Bonds
Foreign Bonds
Euro Bonds: Samurai, Bull
dog, Yankee
USA dominant: 31 per cent

50. Forwards
Swaps
Options
Futures