Overview of Financial Markets - Banking - Lecture Slides, Slides of Banking and Finance

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Topic 2

Overview of Financial Markets

Topic 2, page 1

ECO 350 • Money and Banking

Overview of Financial Markets

Topic 2, page 2

ECO 350 • Money and Banking

Main Function

A. Channel funds from lenders to borrowers

i. Lenders: surplus funds but no profitable/productive use of fundsii. Borrowers: profitable/productive investment opportunities but

short of funds

B.

Direct finance

: borrowers sell

securities

to lenders in financial

Topic 2, page 4

ECO 350 • Money and Banking

B.

Direct finance

:^

borrowers sell

securities

to lenders in financial

Main Function

A. Channel funds from lenders to borrowers

i. Lenders: surplus funds but no profitable/productive use of fundsii. Borrowers: profitable/productive investment opportunities but

short of funds

B.

Direct finance

: borrowers sell

securities

to lenders in financial

Topic 2, page 5

ECO 350 • Money and Banking

B.

Direct finance

: borrowers sell

securities

to lenders in financial

markets

• Security: claim on the borrower’s future income or assets

C. Indirect finance

: funds go through a

financial intermediary

Four Ways of Characterizing Financial Markets

A. Debt vs. Equity Markets

i. Debt

: a security with a specified payment schedule, such as a

bond or a mortgage• Fixed payments at regular intervals and a final payment•

Maturity

: the number of years (term) until its expiration date

• Short-term\intermediate-term\long-term

Topic 2, page 7

ECO 350 • Money and Banking

•^

Short

• term

\intermediate

• term

\long

• term

Four Ways of Characterizing Financial Markets

A. Debt vs. Equity Markets

i. Debt

: a security with a specified payment schedule, such as a

bond or a mortgage• Fixed payments at regular intervals and a final payment•

Maturity

: the number of years (term) until its expiration date

• Short-term\intermediate-term\long-term

Topic 2, page 8

ECO 350 • Money and Banking

•^

Short

• term

\intermediate

• term

\long

• term

ii. Equity

Four Ways of Characterizing Financial Markets (Continued)

B. Primary vs. Secondary Markets

i. Primary market:

new issues of a security are sold to initial

buyers• Investment banks underwrite securities.

Topic 2, page 10

Four Ways of Characterizing Financial Markets (Continued)

B. Primary vs. Secondary Markets

i. Primary market:

new issues of a security are sold to initial

buyers• Investment banks underwrite securities. ii. Secondary market:

resale of existing securities, such as NYSE,

American Stock Exchanges and NASDAQ

Topic 2, page 11

ECO 350 • Money and Banking

American Stock Exchanges and NASDAQ

Four Ways of Characterizing Financial Markets (Continued)

C. Exchanges vs. Over-the-counter Markets (ways the secondary

markets are organized)^ i. Exchange:

buyers and sellers (or their

brokers

) trade in a central

location.• NYSE and American Stock Exchanges• Chicago Board of Trade for Commodities (wheat, corn, silver,

Topic 2, page 13

ECO 350 • Money and Banking

•^

Chicago Board of Trade for Commodities (wheat, corn, silver, and other raw materials)

ii. Over-the-counter: dealers

Four Ways of Characterizing Financial Markets (Continued)

D. Money vs. Capital Markets

i. Money markets:

short-term debt instruments with maturity of

one year or less

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Financial Market Instruments

A. Money Market Instruments include:

• Treasury Bills• Negotiable Bank CDs• Commercial Paper• Federal Funds• Repurchase Agreements

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ECO 350 • Money and Banking

•^

Repurchase Agreements

Financial Market Instruments

A. Money Market Instruments include:

•^

Treasury Bills

» 1-, 3-, and 6-month maturities» Finance the federal government» Sell at a discount, no interest payments, pay a set

amount at maturity

Topic 2, page 17

ECO 350 • Money and Banking

amount at maturity

Financial Market Instruments

A. Money Market Instruments include:

•^

Treasury Bills

-^

Negotiable Bank CDs

-^

Commercial Paper

» A short-term debt instrument» Issued by large banks and well-known corporations

Topic 2, page 19

ECO 350 • Money and Banking

»^

Issued by large banks and well

• known corporations

Financial Market Instruments

A. Money Market Instruments include:

•^

Treasury Bills

-^

Negotiable Bank CDs

-^

Commercial Paper

-^

Federal Funds

»^

Overnight loans between banks of their deposits at the

Topic 2, page 20

ECO 350 • Money and Banking

»^

Overnight loans between banks of their deposits at the Federal Reserve » Not made by the federal government or by the Federal

Reserve » Federal funds rate