What are financial markets Benefits of financial markets How financial markets stimulate savings and borrowings Classification of financial markets

2. The financial sector is
composed of two important
segments:
Financial markets and
institutions.

3. Financial markets are individuals
and firms with SURPLUS FUNDS.
• Surplus – excess or an amount
such as money that is more
than the amount needed.

4. • Expenditures – an amount of
money that is spent on
something; expenses.

5. Individuals and firms who want
to borrow money are brought
together with those who want
lend in the financial markets.

6. SSUs – Surplus Spending Units
DSUs – Deficit Spending Units

7. Direct Financing
- Private placements
- Brokers
- Dealers
- Investment bankers
Deficit Spending
Units
- Households
- Business Firms
- Government
Indirect by Financial
Intermediaries
- Commercial Bank
- Savings and Loans
- Finance Companies,
etc.
Surplus Spending
Units
- Households
- Business Firms
- Government
Intermediation Market

8. Security – is fungible, negotiable
financial instrument that holds
some type of monetary value. An
instrument of investment in the
form of a documents (as a stock
certificate or bond) providing
evidence of its ownership.

9. 2 types of security
• Equity security, such as
partnership. Ex. Stock certificate
• Debt security, such as money
borrowed must be repaid w/ terms
that stipulates the size of the loan,
interest rate and maturity date.

10. Financial markets, just like any
market, operate in the demand
and supply funds. DSUs that can
use borrowed funds in the most
productive manner can afford to
pay higher interest rates.

11. Liquidity – the capability of
covering current liabilities
quickly.
This arrangement forces lender to
WAIT for MATURITY date of the loan
before he gets his money back.

12. Ways to stimulate savings
1. Denomination (size) intermediation
- secondary securities can be made
available in a wide range of
denominations, from a few hundred
pesos to many millions of pesos.

13. Ways to stimulate savings
2. Maturity intermediation – savers are
concerned about the length of the time of
their savings will be invested. It is also an
investment term that describes a bank’s
long-term lending of funds borrowed for a
short-term investment.

14. Ways to stimulate savings
3. Credit-risk intermediation – when
primary securities are offered for a sale,
individual SSUs may not be too eager to buy
because of their limited access to credit
information.

15. Ways to stimulate savings
4. Interest rate sensitivity – some types of
primary securities are subject to changes in
market interest rates. Many SSUs are
averse/opposed to such interest rate risk.
The SSUs are given a choice of secondary
security with a wide range of interest
sensitives.

16. Ways to stimulate savings
5. Foreign currency intermediation – when
SSUs buy primary securities stated in foreign
currencies, they assure the risk that the value
of the foreign currencies may change through
time.

17. Ways to stimulate savings
6. Higher net interest rates – when SSUs
undertake actual search for DSUs issuing primary
securities, they do so with higher search and
transaction costs. This is so because of the
difficulties involved in identifying DSUs,
determining the credit quality of securities offered
and locating the offices where the DSUs are
located.

18. Ways to stimulate borrowings
1. Denomination (size) intermediation – in
selling securities, financial intermediaries are able
to acquire a pool of funds which enable them to
buy primary securities in a wide range of
denominations.
This arrangement relieves the DSUs in the
searching for SSUs which are willing to lend the
exact amount they need.

19. Ways to stimulate borrowings
2. Maturity intermediation – In the absence of
financial intermediary, borrowers will have a hard
time looking for direct lenders who will match the
maturity period they require.
This problem is eliminated under the financial
intermediation arrangement because the
intermediary can create secondary securities in any
maturity.

20. Ways to stimulate borrowings
3. Interest rate sensitivity intermediation –
many borrowers are averse to the risk of
interest rate increases.
a) Intermediaries can sell secondary
securities to a variety of lenders w/
different preferences for interest change
periods.

21. Ways to stimulate borrowings
b) Intermediaries are better able to assume
and manage interest rate risk, so they just
perform the service.