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02 AE13 Overview of The Financial System

The document provides an overview of the financial system including the function and structure of financial markets and their internationalization. It discusses how financial markets channel funds from savers to spenders, promoting economic efficiency. It describes the key components of financial markets including debt and equity markets, primary and secondary markets, money and capital markets, and exchanges and over-the-counter markets. It also explains how internationalization has increased with the rise of foreign bonds, Eurobonds, Eurocurrencies, and major world stock markets.

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36 views

02 AE13 Overview of The Financial System

The document provides an overview of the financial system including the function and structure of financial markets and their internationalization. It discusses how financial markets channel funds from savers to spenders, promoting economic efficiency. It describes the key components of financial markets including debt and equity markets, primary and secondary markets, money and capital markets, and exchanges and over-the-counter markets. It also explains how internationalization has increased with the rise of foreign bonds, Eurobonds, Eurocurrencies, and major world stock markets.

Uploaded by

LeojelaineIgcoy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Overview of the Financial

System
TOC

•Function of Financial Markets


•Structure of Financial Markets
•Internationalization of Financial Markets
Function of Financial Markets

•Channeling funds from households,


firms, and governments that have
saved surplus funds to those that
have a shortage of funds.
Why is this channeling of funds
from savers to spenders so
important to the economy?
Why is this channeling of funds from savers to
spenders so important to the economy?

•It promotes economic efficiency


which can result to an increase
in a country's national output.
What is economic efficiency?
Economic Efficiency

•Economic efficiency is when every


scarce resource in an economy is used
and distributed among producers and
consumers in a way that produces the
most economic output and benefit to
consumers.
Function of Financial Markets

•Financial markets are critical for


producing an efficient allocation of
capital, which contributes to higher
production and efficiency for the
overall economy.
Structure of Financial
Markets
Categorizations of Financial Markets
and the Essential Features of these Markets
Debt and Equity Markets

•A debt instrument is short-term if its


maturity is less than a year and long-
term if its maturity is 10 years or longer.
•Debt instruments with a maturity
between one and 10 years are said to be
intermediate-term.
Primary and Secondary Markets
• A primary market is a financial market in which new
issues of a security, such as a bond or a stock, are sold
to initial buyers by the corporation or government
agency borrowing the funds.
• A secondary market is a financial market in which
securities that have been previously issued can be
resold.
Primary Markets
• The primary markets for securities are not well known
to the public because the selling of securities to initial
buyers often takes place behind closed doors. An
important financial institution that assists in the initial
sale of securities in the primary market is the
investment bank. It does this by underwriting
securities: It guarantees a price for a corporation’s
securities and then sells them to the public.
Secondary Markets
• The Philippine Stock Exchange in which previously
issued stocks are traded is the best-known example of
a secondary market.
• Securities brokers and dealers are crucial to a well-
functioning secondary market.
• Brokers are agents of investors who match buyers
with sellers of securities; dealers link buyers and
sellers by buying and selling securities at stated prices.
Importance of Secondary Markets

•They make it easier and quicker to sell these


financial instruments to raise cash; that is,
they make the financial instruments more
liquid.
•They determine the price of the security
that the issuing firm sells in the primary
market.
Exchanges and Over-the-Counter Markets
• Secondary markets can be organized in two ways.
• One method is to organize exchanges, where buyers and
sellers of securities (or their agents or brokers) meet in one
central location to conduct trades.
• The other method of organizing a secondary market is to
have an over-the-counter (OTC) market, in which dealers at
different locations who have an inventory of securities stand
ready to buy and sell securities “over the counter” to anyone
who comes to them and is willing to accept their prices.
Money and Capital Markets
• The money market is a financial market in which only
short-term debt instruments (generally those with
original maturity of less than one year) are traded.
• The capital market is the market in which longer-term
debt (generally with original maturity of one year or
greater) and equity instruments are traded.
Internationalization of
Financial Markets
Internationalization of Financial Markets

•Before the 1980s, U.S. financial markets


were much larger than financial markets
outside the United States, but in recent
years the dominance of U.S. markets has
been disappearing.
Internationalization of Financial Markets

•American corporations and banks are


now more likely to tap international
capital markets to raise needed funds,
and American investors often seek
investment opportunities abroad.
International Bond Market,
Eurobonds, and
Eurocurrencies
Foreign Bonds

• The traditional instruments in the international


bond market are known as foreign bonds.
• Foreign bonds are sold in a foreign country and
are denominated in that country’s currency.
• For example, if the German automaker Porsche
sells a bond in the United States denominated in
U.S. dollars, it is classified as a foreign bond.
Eurobond

•A more recent innovation in the


international bond market is the Eurobond,
a bond denominated in a currency other
than that of the country in which it is sold—
for example, a bond denominated in U.S.
dollars sold in London.
Eurocurrencies

• A variant of the Eurobond is Eurocurrencies,


which are foreign currencies deposited in banks
outside the home country.
• The most important of the Eurocurrencies are
Eurodollars, which are U.S. dollars deposited in
foreign banks outside the United States or in
foreign branches of U.S. banks.
World Stock Markets
World Stock Markets

•U.S. Stock Market


•Tokyo Stock Exchange
•London Stock Exchange

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