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Chapter16.pptxThe Financial System http://www.wileybusinessupdates.com
Chapter
16
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Understand the financial system.
List the various types of securities.
Discuss financial markets.
Understand the stock markets.
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Learning Objectives
Evaluate financial institutions.
Explain the role of the Federal Reserve System.
Describe the regulation of the financial system.
Describe the global perspective of the financial system.
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The financial system is the process by which money flows from savers to users.
The Financial System
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Financial System
Savers
Users
Financial Institutions
Financial Markets
Savings is a function of many variables.
Funds can be transferred between users and savers directly or indirectly.
Understanding the Financial System
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Securities
Financial instruments
Bonds, Stocks, Money Market Instruments
Obligations on the part of the issuer
Businesses and governments
Provide rate of return to purchasers
Types of Securities
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Short-term debt securities
Issued by governments, financial institutions, and corporations
Investors are paid interest for the use of their funds
Generally low-risk
U.S. Treasury bills, commercial paper, and bank certificates of deposit
Money Market Instruments
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Government Bonds
Bonds sold by the U.S. Department of the Treasury
Municipal Bonds
Bonds issued by state or local governments
Revenue bonds are used toward a project that will produce revenue, general obligation bonds are not
Corporate Bonds
A diverse group and often vary based on the collateral
Bonds
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Types of Bonds
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Price is determined by risk and interest rate.
Several firms rate bonds
Standard & Poor’s (S&P)
Moody’s
Fitch
Investment-grade
Speculative/Junk
Bond Ratings
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Standard and Poor’s Bond Ratings
Common stock– basic form of corporate ownership
Vote on major company decisions
Cash dividends
Price appreciation
Preferred stock– stockholders who receive preference in the payment of dividends
Stocks
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Primary market– firms and governments issue securities and sell them initially to the public
When a firm offers a stock for sale to the general public for the first time
Secondary market– collection of financial markets in which previously issued securities are traded among investors
Financial Markets
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Stock market (exchange)– market in which shares are bought and sold by investors, such as the New York Stock Exchange.
Understanding Stock Markets
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The New York Stock Exchange– the Big Board is the most famous and one of the oldest stock markets in the world. More than 2,300 companies’ stocks are listed on the NYSE.
The NASDAQ Stock Market– the second largest stock market. Over 3,6000 companies have their stocks listed on Nasdaq, but many are smaller firms.
Foreign markets
Stock Exchanges
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Investors use brokerage firms to trade and sell stock.
The brokerage firm executes the trade on behalf of the investor, charging a fee for the order.
Market order
Limit order
Investor Participation in the Stock Market
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Commercial Banks
Savings Banks and Credit Unions
Non-depository Institutions
Financial Institutions
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Financial Institutions
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An increasing amount of funds move through electronic funds transfers (EFTs).
Millions of businesses and consumers now pay bills and receive payments electronically.
Most employers directly deposit employee paychecks.
Social Security and other federal payments are made each year electronically.
Many consumers do some or all of their banking online
Electronic Banking
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Enacted by the Banking Act of 1933
Restored public confidence in the banking system
Before deposit insurance, runs were common as people rushed to withdraw their money from the bank
Deposit insurance shifts the risk of bank failures from individuals to the FDIC
Federal Deposit Insurance Corporation
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Offer a variety of consumer services
Not a major lender to small businesses
Credit unions are cooperative financial institutions owned by depositors/members
By law, credit union members must share similar occupations, employers, or memberships in certain organization, effectively capping the size.
Savings Banks and Credit Unions
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Insurance Companies
Pension Funds
Finance Companies
Mutual Funds
Nondepository Financial Institutions
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The Federal Reserve
Created In 1913
Central bank of the United States
Regulates commercial banks
Performs banking-related activities for the U.S. Department of Treasury
Provides services for banks
Sets monetary policy
The Role of the Federal Reserve
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Controlling supply of money and credit
Measures of the money supply: M1 & M2
The Fed requires banks to maintain reserves
Set the discount rate
Open market operations
Monetary Policy
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Commercial Bank Loans
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Tools Used by the Federal Reserve to Regulate the Growth in the Money Supply
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Bank regulation
Government regulation of the financial markets (SEC)
Regulation of the Financial System
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The financial system is more connected.
Financial institutions are more global.
Only 3 of the 20 largest banks in the world are U.S. institutions.
Most nations have a central bank.
The Financial System: A Global Perspective
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