Financial System

Financial System

1. FUNCTION

   • 4
     • CHANNEL FUNDS FROM SURPLUS TO SHORTAGES
     • ADJUST COMPOSITION OF WEALTH
     • MONETORY FUNCTION
     • RISK TRANSER

2. 3 MAIN ENTITIES

   • FINANCIAL INTERMEDIARIES
     • 3
       • DEPOSITORY INSTITUTES
         • 3
           • COMMERCIAL BANKS
             • RETAIL BANKING
               • ACCEPT DEPOSITS
                 • CHECKABLE DEPOSITS
                 • SAVING DEPOSITS
                 • TIME DEPOSITS
               • MAKE LOANS
                 • CREDIT CARDS
                 • RESIDENTIAL MORTGAGES
                 • SME LOANS
           • SAVING & LOANS INSTITUTION
             • SAVINGS FROM PUBLIC
             • HISTORICALLY RESIDENTIAL MORTGAGES
             • CHECKING DEPOSITS, CONSUMER & COMMERCIAL LOANS
           • CREDIT UNIONS
             • NON PROFIT ORGANISED MENBERS CLUB
             • SATISFY LENDING AND DEPOSIT REQUIREMENT OF MEMBERS
             • PAY HIGHER RATES OF INTEREST TO MEMBERS
             • MEMBERS BELONG TO PARTICULAR PROFESSION OR GEOGRAPHIC REGION
       • CONTRACTUAL SAVING INSTITUTES
         • 2
           • INSURANCE COMPANIES
             • PROTECTION FROM ADVERSE EVENTS
             • TWO MAIN SEGMENTS
               • LIFE
               • PROPERTY & CASUALTY
           • PENSION COMPANIES
             • PROVIDE INCOME IN FORM OF ANNUITIES
             • TAKE DEPOSITS FROM EMPLOYEE OR EMPLOYER
               • INVEST IN CORPORATE BONDS & STOCKS
             • 2 TYPES
               • PUBLIC
               • PRIVATE
       • INVESTMENT INTERMEDIARIES
         • 5
           • MUTUAL FUNDS
             • POOL RESOURCES FROM MANY INDIVIDUALS & COMPANIES
               • INVEST IN DIVERSIFIED PORTFOLIO OF BONDS, STOCKS & MONEY MARKET INSTRUMENTS
             • 2 ADVANTAGES
               • OPPRTUNITY FOR SMALLER INVESTORS & DIVERSIFY RISK
               • ADVANTAGE OF LOWER TRANSACTION COST BY BUYING LARGER BLOCKS OF FINANCIAL SECURITIES
             • 2 SEGMENTS
               • LONG TERM FUNDS
                 • BOND FUNDS
                 • EQUITY FUNDS
                 • HYBRID FUNDS
               • SHORT TERM FUNDS
                 • VARIOUS TYPE OF MONEY MARKET INSTRUMENTS
                   • ALLOW SHAREHOLDERS TO WRITE CHEQUES AGAINST VALUE OF HOLDING
           • FINANCE COMPANIES
             • CONSUMER LENDING, BUSINESS LENDING, MORTGAGES
             • SOME PRODUCTS SIMILAR TO COMMERCIAL BANKS
             • DO NOT TAKE DEPOSITS, RAISE MONEY BY SELLING COMMERCIAL PAPER & ISSUING STOCKS & BONDS
             • HIGHER RISK CUSTOMER BASE
             • 3 MAJOR TYPES
               • SALES FINANCE INSTITUTE
                 • LOANS TO CUSTOMERS OF PARTICULAR MANUFACTURER
               • PERSONAL CREDIT INST
                 • CREDIT TO HIGH RISK INDIVIDUALS
               • BUSINESS CREDIT INSTITUTE
                 • CREDIT TO BUSINESSES THROUGH EQUIPMENT LEASING AND FACTORING
           • INVESTMENT BANKS
             • ASSIST GOV & CORPS IN ISSUE OF NEW DEBT
             • ORIGINATION, UNDERWRITING & PLACEMENT OF SECURITIES IN PRIMARY MARKET
               • UNDERWRITING
                 • PURCHASE ENTIRE ISSUE AT PREDETERMINED PRICE
                   • RESELL IN THE MARKET
                 • BEARS THE RISK OF NON SALE OF ISSUE AND HOLD ON BALANCE SHEET
                 • CHARGES AN UNDERWRITING FEE FROM CORP
             • CORPORATE FINANCIAL ADVISORY SUCH AS MERGER & ACQUISITIONS
           • SECURITY COMPANIES
             • ASSIST IN TRADING OF EXISTING SECURITIES IN THE SECONDARY MARKET
             • 2 TYPES
               • DEALER
                 • LINK BUYERS AND SELLERS. HOLD INVENTORIES
                 • EARN BID ASK SPREAD
               • BROKERS
                 • AGENTS OF INVESTORS MATCHING BUYERS WITH SELLERS
                 • MAIN SERVICE IS SECURITIES ORDERS GIVEN BY TRADERS WHEN THEY CANT NEGOTIATE TRADE THEMSELVES
                   • 2 TYPE OF ORDERS
                     • MARKET ORDERS
                       • INSTRUCTIONS TO TRADE AT BEST PRICE CURRENTLY AVAILABLE ON THE MARKET
                       • TRADERS PAY BID-ASK SPREAD
                     • LIMIT ORDERS
                       • INSTRUCTIONS TO TRADE AT THE BEST CURRENT MARKET PRICE ONLY IF NOT WORSE THAN THE LIMIT SPECIFIED
           • COMMERCIAL BANKS
             • WHOLESALE BANKING
               • SMALL NO OF LARGE TRANSACTIONS
   • SECURITIES
     • 2
       • DEBT INTRUMENTS
         • BONDS
           • ZERO COUPON BONDS
             • NO INTEREST PAYMENT ONLY ONE PAYMENT AT MATURITY, ISSUED AT DISCOUNT OF FACE VALUE
           • COUPON BONDS
             • REGULAR INTEREST PAYMENTS AND THEN PAY FACE VALUE ON MATURITY
               • PERPETUAL BONDS
                 • NO MATURITY DATE, MAKES PAYMENT FOREVER OR TILL SPECIFIED DATE
               • FLOATING RATE BONDS
                 • LINKLED TO BASE INTEREST RATE LIKE LIBOR OR US T BILL
               • INDEX LINKED BONDS
                 • COUPN PAYMENT AND PRINICPAL ADJUSTED WITH THE RATE OF INFLATION
           • FOREIGN BONDS
             • ISSUED BY FOREIGN FIRM IN DOMINATION OF HOST COUNTRY CURRENCY
               • RUSSIAN FIRM SELLING STERLING BONDS IN UK
                 • AKA BULLDOG BOND
           • EUROBONDS
             • BONDS ISSUED IN DOMINATION OF ONE CURRENCY SOLD IN ANOTHER COUNTRY
               • STERLING BOND BEING SOLD IN RUSSIA
                 • LONDON IS LARGEST EUROBOND MARKET
           • OPTIONS
             • CALLABLE BOND
               • CAN BE REPAID EARLY BY ISSUER
             • PUTTABLE BONDS
               • REDEMPTION IS UNDER CONTROL OF THE BOND HOLDER
             • CONVERTIBLE BONDS
               • BOND CAN BE CONVERTED INTO EQUITY
         • ISSUED BY CENTRAL GOV
           • NOTES
             • MATURITY 1 - 10 YEARS
           • BONDS
             • MATURITY 10 - 20 YEARS
             • GILTS IN UK
             • TRESSUARIES IN USA
             • BUNDS IN GERMANY
           • DEFAULT RISK FREE
           • LOW INTEREST RATES
           • T BILLS
             • MATURITY < 1YEAR
               • MONEY MARKET INSTRUMENT
         • MUNICIPAL BONDS
           • DEFAULT RISK PRESENT
           • INTEREST LOWER THEN T BONDS
             • TAX FREE PAYMENTS
       • EQUITY INSTRUMENTS
         • STOCK / SHARES
           • COMMON STOCKS
             • REPRESENT OWNER SHIP IN THE FIRM
               • RECIEVE DIVIDENDS
               • ENJOY CAPITAL GAIN OR LOSSWHEN STOCK PRICES INCRESWS
               • HAVE VOTING RIGHTS
           • PREFERRED STOCK
             • LIMITED OWNER SHIP
               • RECEIVE FIXED REGULAR DIVIDEND
               • PRICE ARE RELATIVELY STABLE DUE TO DIVIDEND
               • NO VOTING RIGHTS
               • SENIOR CLAIM ON ASSET OVER COMMON STOCKHOLDER BUT AFTER CREDITORS
   • FINANCIAL MARKETS
     • 2
       • PRIMARY MARKET
         • NEW ISSUES OF STOCKS & BONDS ARE SOLD TO INITIAL INVESTORS
       • SECONDARY MARKET
         • PREVIOUSLY ISSUED STOCKS AND BONDS ARE SOLD
         • IMPORTANCE
           • MAKE SECURITIES MORE LIQUID
           • PARTLY DETERMINE PRICE OF PRIMARY MARKET STOCKS OF SIMILAR NATURE
         • ORGANISED AS
           • EXCHANGES
             • NYSE
               • AMEX
               • LSE
           • OVER THE COUNTER (OTC)
             • NASDAQ
         • ON BASIS OF MATURITY OF SECURITY
           • MONEY MARKETS
             • SHORT TERM DEBT INSTRUMENTS
           • CAPITAL MARKETS
             • EQUITY INSTRUMENTS, LONG TERM DEBT
         • ON BASIS OF TRADE INTERMEDIATION
           • QUOTE DRIVEN DEALER MARKETS
             • DEALER, MARKET MAKER IS ON ONE SIDE OF EVERY DEAL
             • DEALERS ARE READY TO BUY AND SELL HENCE PROVIDE LIQUIDY
             • EARN FROM DID-ASK PRICE & SPECULATUION
           • ORDER DRIVEN MARKET
             • BUYERS SELLERS TRADE DIRECTLY
             • AUCTION MARKETS
           • BROKERED MARKETS
             • PERFORM ACTIVE SEARCH ROLE
             • DO NOT HOLD INVENTORY
             • DO NOT PROVIDE LIQUIDITY