Economics 370 Money and Banking - PowerPoint PPT Presentation

Loading...

PPT – Economics 370 Money and Banking PowerPoint presentation | free to view - id: 1f903-MzBhO



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Economics 370 Money and Banking

Description:

Where debt and equity securities are sold and traded ... Corporations must pay all their debt holders before they pay their equity holders ... – PowerPoint PPT presentation

Number of Views:53
Avg rating:3.0/5.0
Slides: 38
Provided by: RyanH5
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Economics 370 Money and Banking


1
Economics 370Money and Banking
  • Instructor
  • Ryan Herzog

2
Daily Overview
  • Articles/Paper
  • CNNMoney.com
  • Economist.com
  • Chapter 2 An Overview of the Financial System

3
Function of Financial Markets
  • Perform the essential function of channeling
    funds from economic players that have saved
    surplus funds to those that have a shortage of
    funds
  • Promotes economic efficiency by producing an
    efficient allocation of capital, which increases
    production
  • Directly improve the well-being of consumers by
    allowing them to time purchases better

4
Financial System
5
Direct Finance
  • Financial Markets
  • Borrowers borrow directly from lenders by issuing
    financial instruments
  • Claims on future income/assets
  • Assets for lender
  • Liability for the seller
  • Repayment promises
  • Allow individuals to come together and improve
    efficiency
  • Allow many individuals to make investments that
    otherwise are not available (education, housing,
    )

6
Structure of Financial Markets
  • Debt and Equity Markets
  • Primary and Secondary Markets
  • Where debt and equity securities are sold and
    traded
  • Investment Banks underwrite securities in primary
    markets
  • Brokers and dealers work in secondary markets
  • Exchanges and Over-the-Counter (OTC) Markets
  • Types of secondary markets
  • Money and Capital Markets
  • Money markets deal in short-term debt instruments
  • Capital markets deal in longer-term debt and
    equity instruments

7
Debt Markets
  • Entities use financial markets by issuing debt,
    usually through a bond or mortgage
  • Specify a fixed payment amount and the number of
    payments to the lender until maturity.
  • Maturity number of years until the instruments
    expiration date
  • Short-term less than one year
  • Long-term greater than ten years
  • Intermediate-term between one and ten years

8
Equity Markets
  • Equities
  • Claims to share in the net income and assets of a
    business
  • Make periodic payments to their holders
    (dividends)
  • Considered long-term because they do not have a
    maturity date

9
Debt vs. Equities
  • An equity holder is an residual claimant
  • Corporations must pay all their debt holders
    before they pay their equity holders
  • But equity holders benefit directly from an
    increase in the corporations profitability

10
Primary Markets
  • A financial market in which new issues of a
    security are sold to initial buyers from a
    corporation or government agency
  • Often times this takes place behind close doors
    usually assisted by an investment bank
  • The investment bank underwrites the securities,
    i.e. they guarantee a price for the corporations
    securities and then sells them to the public via
    the secondary markets

11
Secondary Markets
  • Common secondary equity markets are the NASDAQ
    and Dow Jones
  • Previously issued stocks are traded
  • Other examples of secondary markets are the bond,
    foreign exchange, futures, and options markets
  • Brokers are agents of investors who match buyers
    with sellers of securities
  • Dealers link buyers and sellers by buying and
    selling securities at a stated price

12
Secondary Market
  • When a transaction occurs
  • The buyer of the instruments pays money to the
    seller, but the initial issuer acquires no new
    funds
  • Make financial instruments more liquid
  • Determine the price of the instrument (via supply
    and demand)
  • As the price increases in the secondary market,
    the issuer will receive a higher price on new
    securities issued in the primary market

13
Secondary Markets
  • Secondary markets can be organized in two ways
  • Exchange market buyers and sellers meet in one
    central location to conduct trades
  • New York Stock Exchange, American Stock Exchange,
    Chicago Board of Trade
  • Over-the-counter market dealers at different
    locations have an inventory of securities
  • U.S. Government Bond Market, CDs, federal funds,
    bankers acceptances, and foreign exchange

14
Markets and Maturity
  • Money Market
  • A financial market in which short-term debt
    instruments are traded
  • More widely traded, more liquid
  • Used when entities have surplus funds for a short
    time
  • Capital Market
  • Is the market in which longer-term debt and
    equity instruments are traded
  • Financial institutions (insurance companies and
    pension funds)

15
Money Market Instruments
  • United States Treasury Bills
  • 1, 3, and 6 month maturities
  • Pay a set amount at maturity, no interest
    payment, but are sold at a discount (Saving Bond)
  • Negotiable Bank Certificates of Deposit
  • Debt instrument sold by banks to depositors
  • Commercial Paper
  • Short-term debt issued by large banks and
    well-known corporations

16
Money Market Instruments cont.
  • Bankers Acceptance
  • Is a bank draft, similar to a check, issued by a
    firm, payable at some future date, and guaranteed
    for a fee by the bank that stamps it accepted
  • Allows firms to purchase goods abroad, the funds
    are guaranteed even if the corporation goes
    bankrupt
  • Federal Funds
  • Typically overnight loans made by banks to other
    banks
  • Usually occurs when a bank falls below its
    required reserve amount

17
Money Market Instruments cont.
  • Repurchase Agreements (repos)
  • Short-term loans, less than two week maturity
  • A large firm may have excess funds it wants to
    lend for a week. The firm will buy treasury
    bills from the bank with an agreement that the
    bank will repurchase the t-bills in one weeks
    time.
  • The firm gets a small interest payment and the
    bank gets the use of the firms funds

18
(No Transcript)
19
Capital Market Instruments
  • Stocks
  • Equity claims on the net income and assets of a
    corporation
  • Mortgages
  • Loans to households or firms to purchase housing,
    land, or other real estate structures
  • The structural/land serves as collateral
  • Corporate Bonds
  • Long-term bonds issued by corporations with
    strong credit ratings
  • Sends an interest payments twice a year and pays
    off the face value of the bond at maturity

20
Capital Market Instruments
  • U.S. Government Securities
  • Long-term debt instruments issued by the U.S.
    Treasury to finance the government deficit
  • U.S. Government Agency Securities
  • Long-term bonds used to finance capital
  • State and Local Government Bonds
  • Municipal bonds, long-term debt issued by state
    and local governments. Interest payments are tax
    free.
  • Consumer and Bank Commercial Loans

21
(No Transcript)
22
Internationalization of Financial Markets
  • Foreign Bondssold in a foreign country and
    denominated in that countrys currency
  • U.S. bonds sold in Europe and denominated in
    Euros
  • Eurobondbond denominated in a currency other
    than that of the country in which it is sold
  • U.S. bonds sold in Europe and denominated in
    Dollars
  • Eurocurrenciesforeign currencies deposited in
    banks outside the home country
  • EurodollarsU.S. dollars deposited in foreign
    banks outside the U.S. or in foreign branches of
    U.S. banks
  • World Stock Markets

23
Function of Financial Intermediaries Indirect
Finance
  • Lower transaction costs
  • Reduce Risk
  • Asymmetric Information

24
Indirect Finance
  • Financial Intermediation
  • Primary route for moving funds from lenders to
    borrowers
  • Firms rely on financial intermediaries much more
    so than the securities markets
  • True for the U.S. and most other developed
    countries

25
Financial Intermediaries
  • Have lower transaction costs
  • Allows small lenders and borrowers to enter the
    market
  • Very costly to write a loan contract
  • Economies of scales
  • Financial intermediaries write many loans, the
    average cost of doing so is much small than one
    individual writing one loan
  • Liquidity Services
  • Banks offer checking and savings accounts which
    all customers to earn interest on their savings,
    but also have access to their money to purchase
    goods and services

26
Financial Intermediaries cont.
  • Risk Sharing
  • Financial Intermediaries create and sell assets
    with less risk that customers are more
    comfortable with
  • Banks offer less risky assets (CDs, Money Market
    Accounts) and use these funds to purchase riskier
    securities
  • Allow investors to diversify their portfolio and
    lower risk

27
Financial Intermediaries cont.
  • Asymmetric Information
  • One party does not know everything about the
    other party
  • Adverse Selection
  • Occurs before the transaction takes place
  • Borrowers who are the most likely to produce an
    undesirable outcome are the ones most actively
    seeking the loan
  • Borrowers with a lot to gain and a little to lose
    are most likely to take out loans at a high
    interest rate

28
Financial Intermediaries cont.
  • Moral Hazard
  • Occurs after the transaction takes place
  • The risk that the borrower might engage in
    activities that are undesirable from the lenders
    point of view, i.e. it will be less likely the
    loan is paid back
  • The borrower uses the money for purposes other
    than agreed upon

29
Financial Intermediaries
  • Allows small savers the ability to provide funds
    to the financial markets
  • Financial intermediaries are more successful than
    individuals on earning returns because they can
    screen out bad credit risks from good ones
  • They are able to reduce the risks incurred from
    moral hazard

30
Types of Intermediaries
  • Depository institutions (banks)
  • Contractual savings institutions
  • Investment intermediaries

31
Depository Institutions
  • Commercial Banks
  • Raise funds via checking and saving deposits
  • Make commercial, consumer, and mortgage loans and
    buy U.S. securities
  • Savings and Loan Associations and Mutual Savings
    Banks
  • Raise funds via checking, time, and saving
    deposit.
  • Initially, constrained to just mortgage loans,
    but now very similar to banks
  • Credit Unions
  • Smaller than banks and organized around a
    particular group

32
Contractual Savings Institutions
  • Life Insurance Companies
  • Acquire funds through premiums by selling
    annuities once the individual is retired
  • Buy corporate bonds, mortgages, and some
    restricted stocks
  • Fire and Casualty Insurance Companies
  • Similar to life insurance companies, but
    experience a greater probability of losses
  • Pension Funds and Government Retirement Funds
  • Acquire funds through employee and employer
    contributions
  • Purchase corporate bonds and stocks

33
Investment Intermediaries
  • Finance Companies
  • Sell commercial paper and issue stocks and bonds
  • Make loans to consumers
  • Mutual Funds
  • Sell shares to individuals and use the funds to
    purchase diversified portfolios of stocks and
    bonds
  • Money Market Mutual Funds
  • Sell shares to purchase money market instruments,
    interest is paid to shareholders, and
    shareholders can write checks against their
    holdings
  • Investment Banks
  • Advises corporations on the type of securities to
    issue and purchases them at a predetermined price
  • Also participate in mergers and acquisitions

34
(No Transcript)
35
Regulation of the Financial System
  • To increase the information available to
    investors
  • Reduce adverse selection and moral hazard
    problems
  • Reduce insider trading
  • To ensure the soundness of financial
    intermediaries
  • Restrictions on entry
  • Disclosure
  • Restrictions on Assets and Activities
  • Deposit Insurance
  • Limits on Competition
  • Restrictions on Interest Rates

36
(No Transcript)
37
(No Transcript)
About PowerShow.com