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CH 1

Financial markets allow funds to flow from those with excess funds to those who need funds. Key financial markets include bond, stock, and foreign exchange markets. Financial instruments like bonds, stocks, and securities represent claims on assets or future income. Interest rates influence business investment and personal savings. Financial institutions like banks facilitate the flow of funds and manage risks. Changes in money supply and interest rates impact price levels, economic growth, and financial markets.

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53 views

CH 1

Financial markets allow funds to flow from those with excess funds to those who need funds. Key financial markets include bond, stock, and foreign exchange markets. Financial instruments like bonds, stocks, and securities represent claims on assets or future income. Interest rates influence business investment and personal savings. Financial institutions like banks facilitate the flow of funds and manage risks. Changes in money supply and interest rates impact price levels, economic growth, and financial markets.

Uploaded by

kiran shahzadi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER NO.

1
 Financial Markets
Financial markets are markets in
which funds are transferred
from people who have an
excess of available funds to
people who have a shortage.

Financial markets such as bond


and stock markets are
important in channeling funds
from individuals and firms that
do not have a productive use
for them to those that do.
 Financial
Instrument
A security (also called a
financial instrument) is a
claim on the issuer’s
future income or assets
(any financial claim or
piece of property that is
subject to ownership).
 Bond
A bond is a debt security that promises to make payments
periodically for a specified period of time.
 Interest Rates
High interest rates:
1. Discourage businesses from making investments.
2. Encourage to save by putting some of the savings aside.
 Stock
A stock is a security that is a claim on
the earnings and assets of a
corporation.
 The Stock Market
The stock market is a market in which
shares of stock are traded.
It is the most widely followed
financial market in America.
 The Foreign
Exchange Market
The foreign exchange
market is a place where
the conversion of
currency between
countries takes place.
So it is instrumental in
moving funds between
countries.
 Financial Institutions
Financial institutions are those that help financial markets to move
funds from people who save to people who have productive
investment opportunities.
 Financial System
The financial system is complex, comprising many different
types of financial institutions, including banks, insurance
companies, mutual funds, finance companies, and investment
banks, all of whom are heavily regulated by the government.
 Financial Intermediaries
Financial intermediaries include institutions such as commercial
banks, savings and loan associations, mutual savings banks,
credit unions, insurance companies, mutual funds, pension
funds and finance companies that borrow funds from people
who have saved and in turn make loans to others.
.
 Financial Innovation
The financial system nowadays
has been diversified which
means that businesses have
expanded opportunities for
acquiring funds.

Rapid changes in the regulatory


environment have
accompanied rapid financial
innovation.
 BANKS
Banks are financial institutions that
accept deposits and make loans.

These financial institutions, which


include commercial banks,
savings and loan associations,
mutual savings banks, and credit
unions are financial
intermediaries that the average
person or business interacts
with.
 In recent years, the economic
environment has become an
increasingly risky place.
 Risks such as fluctuations in
Interest rates, stock market
crashes, crises in financial
exchange markets and failures of
financial institutions etc need to
be managed.
 Financial institutions use many
techniques to manage risk.
Non-Bank Financial Institutions
 Banks are not the only important financial institutions.

 Other financial institutions such as insurance companies,


finance companies, pension funds, mutual funds, and
investment banks have been growing at the expense of banks.
 Interest Rates
Changes in the money supply play
an important role in interest rate
fluctuations.
 decline in money growth ‗

decline in interest rates


 decline in interest rates ‗ profits

recovery
To understand financial markets
and institutions, it is needed to
study how the money supply is
determined
 Aggregate Price Level
Changes in the money supply are also a major factor in what
happens to the average prices of goods and services in an
economy, called the aggregate price level or, more simply,
the price level.
 Inflation
Inflation, a continual increase in the price level, affects
individuals, businesses, the government, and especially
financial institutions, which hold financial assets whose values
are very sensitive to the rate of inflation.
 Business Cycles
Changes in the money supply
also play an important role
in generating business
cycles, upward and
downward movement of
aggregate output in the
economy (the total
production of goods and
services).
Applied Managerial
Perspective
Another reason for studying
financial institutions is that
they are among the largest
employers in the country and
frequently pay very high
salaries.

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