WHY STUDY
FINANCIAL
MARKETS AND INSTITUTIONS?
Chapter 1
FINANCIAL MARKETS
 Funds
are transferred from people with
excess funds to those with shortage
 Promotes
greater economic efficiency by
providing productive use for funds
FINANCIAL MARKETS
 Well-functioning
markets produce higher
economic growth
 Has
effects on personal wealth, behaviour
of businesses and consumers
 Cyclical
performance of the economy
SECURITY
 Also
called financial instrument
 Claim
on issuer’s future income or assets
(any financial claim or piece of property
that is subject to ownership)
DEBT MARKETS AND INTEREST RATES
 Bond
is a debt security that promises to
make payments periodically for a specified
period of time
 Also
known as bond market
DEBT MARKETS AND INTEREST RATES
 Enable
government and corporations to
borrow to finance their activities
 Where
interest rates are determined
 Interest
rate is the cost of borrowing or
price paid for rental funds
DEBT MARKETS AND INTEREST RATES
 There
are many different types of market
interest rates, including mortgage rates,
car loan rates, credit card rates, etc.
 Interest
levels
rates are important at different
DEBT MARKETS AND INTEREST RATES
 On
personal level, high interest rates
deter from spending but motivates
savings
 High
interest rates might postpone
businesses’ investment decisions
DEBT MARKETS AND INTEREST RATES
 Because
changes in interest rates have
important effects on individuals, financial
institutions, businesses and overall
economy it is important to explain
fluctuations in interest rates
THE STOCK MARKET
A
common stock represents a share of
ownership in a corporation
 Has
claim on the earnings and assets of
the corporation
 In
stock market, shares of stock are
traded
THE STOCK MARKET
 Fluctuations
in stock prices affect the size
of people’s wealth and affect their
willingness to spend
 Impact
 Price
business investment decisions
of shares affects the amount of funds
that can be raised by selling newly issued
stock to finance investment spending
THE FOREIGN EXCHANGE MARKET
 Conversion
of one currency into another
for moving funds between countries takes
place
 Change
in exchange rate affects the cost
of imports and revenue from exports
WHY STUDY FINANCIAL MARKETS?
 Financial
markets, such as bond and stock
markets, are crucial in our economy.
 These
markets channel funds from savers
to investors, thereby promoting economic
efficiency.
 Market
activity affects personal wealth,
the behavior of business firms, and
economy as a whole
WHY STUDY FINANCIAL MARKETS?
 Well
functioning financial markets, such
as the bond market, stock market, and
foreign exchange market, are key factors
in producing high economic growth.
WHY STUDY FINANCIAL INSTITUTIONS?
 Financial
Institutions are the institutions
that make financial markets work
 “Financial
Institutions
are
the
intermediaries, that take funds from the
people who save and lend it to people who
have
productive
investment
opportunities”.