File Name: foundation of financial markets and institutions .zip
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds , raw materials and precious metals , which are known in the financial markets as commodities. The term "market" is sometimes used for what are more strictly exchanges , organizations that facilitate the trade in financial securities, e.
View larger. Download instructor resources. Additional order info. K educators : This link is for individuals purchasing with credit cards or PayPal only. A core text for one semester courses in Financial Institutions and Markets.
Download Free PDF. Suborna Barua. Download PDF. A short summary of this paper. Introduction to the Financial SystemThis book is devoted to the study of the financial system-the collection of markets, institutions, laws, regulations, and techniques through which bonds, stocks, and other securities are traded, interest rates are determined, and financial services are produced and delivered around the world.
The financial system is one of the most important creations of modern society. Its primary task is to move scarce loanable funds from those who save to those who borrow to buy goods and services and to make investments in new equipment and facilities so that the global economy can grow and increase the standard of living enjoyed by its citizens.
Without the global financial system and the loanable funds it supplies, each of us would lead a much less enjoyable existence. The financial system determines both the cost and the quantity of funds available in the economy to pay for the thousands of goods and services we purchase daily.
Equally important, what happens in this system has a powerful impact upon the health of the global economy. When funds become more costly and less available, spending for goods and services falls. As a result, unemployment rises and the economy's growth slows as businesses cut back production and lay off workers. In contrast, when the cost of funds declines and loanable funds become more readily available, spending in the economy often increases, more jobs are created, and the economy's growth accelerates.
In truth, the global financial system is an integral part of the global economic system. We cannot understand one of these systems without understanding the other.
The Global Economy and the Financial System Flows within the Global Economic SystemTo better understand the role played by the financial system in our daily lives, we begin by examining its position within the global economy.
The basic function of the global economic system is to allocate scarce resourcesland, labor, management skill, and capital-to their most highly valued use, producing the goods and services needed by society. The high standard of living most of us enjoy today depends on the ability of the global economy to turn out each day an enormous volume of food, shelter, and other essentials of modern living.
This is an exceedingly complex task because scarce resources must be procured in just the right amounts to provide the raw materials of production and combined at just the right time with labor, management, and capital to generate the products and services demanded by consumers. In short, any economic system must combine inputs-land and other natural resources, labor and management skill, and capital equipment-to produce outputgoods and services.
The global economy generates a flow of production in return for a flow of payments. We can depict the flows of payments and production within the global economic system as a circular flow between producing units mainly businesses and governments and consuming units principally households. See Exhibit 1. In the modern economy, households provide labor, management skill, and natural resources to business firms and governments in return for income in the form of wages and other payments.
Most of the income received by households is spent to purchase goods and services from businesses and governments. The remainder of personal income-a little more than 3 percent-was set aside as savings. The result of this spending is a flow of funds back to producing units as income, which stimulates them to produce more financial systemIf you are interested in following the financial system on a daily basis, consider following such sites as money.
What is a market? It is an institution through which buyers and sellers meet to exchange goods, services, and productive resources. This exchange determines what goods and services will be produced and in what quantity. The marketplace is dynamic. It must respond continuously not only to changes in consumers' tastes, but also to the introduction of new goods and services, often associated with new technology. Today, cell phones and DVDs are part of our everyday lives, yet they barely existed a short 10 years ago.
How did the resources of the economy get redeployed to produce those new goods? This shift in production was accomplished in the marketplace through changes in the prices of goods and services being offered.
If the price of an item rises, for example, this stimulates business firms to produce and supply more of it to consumers. In the long run, new firms may enter the market to produce those goods and services experiencing increased demand and rising prices. A decline in price, on the other hand, usually leads to reduced production of a good or service, and in the long run some lessefficient suppliers may leave the marketplace.
Markets also distribute income. In a pure market system, the income of an individual or a business firm is determined solely by the contribution each makes to producing goods and services demanded by the marketplace.
Markets reward superior productivity and sensitivity to consumer demands with increased profits, higher wages, and other economic benefits. Of course, in all economies, government policies also affect the distribution of income and the allocation of other economic benefits.
Types of MarketsThere are essentially three types of markets at work within the global economic system: 1 factor markets, 2 product markets, and 3 factor markets, consuming units sell their labor and other resources to those producing units offering the highest prices.
The factor markets allocate factors of productionland, labor, managerial skills, and capital-and distribute income-wages, rental payments, and so on-to the owners of productive resources. Consuming units use most of their income from factor markets to purchase goods and services in product markets. Food, shelter, automobiles, theater tickets, and clothing are among the many goods and services sold in product markets. In addition, business firms save billions of dollars each year to build up their reserves for future contingencies and for long-term investment.
For example, in , U. It is here that the third kind of market, the financial market, performs a vital function within the global economic system. The financial markets channel savings to those individuals and institutions needing more funds for spending than are provided by their current incomes. The financial markets are the heart of the global financial system, attracting and allocating savings and setting interest rates and the prices of financial assets stocks, bonds, etc.
In the business sector, savings include current earnings retained inside business firms after payment of taxes, stockholder dividends, and other cash expenses. Government savings arise when there is a surplus of current revenues over current expenditures in a government's budget. Nature of Savings Nature of InvestmentMost of the funds set aside as savings flow through the global financial markets to support investment by business firms, governments, and households. Investment generally refers to the acquisition of capital goods, such as buildings and equipment, and the purchase of inventories of raw materials and goods to sell.
The makeup of investment varies with the particular unit doing the investing. For a business firm, expenditures on capital goods fixed assets, such as buildings and equipment and inventories consisting of raw materials and goods offered for sale are investment expenditures.
In contrast to businesses, for households, current accounting procedures in the United States stipulate that only the purchase of a home may be counted as an investment. All other household expenditures on durable goods such as autos and furniture , as well as expenditures on nondurable goods for example, food and fuel and services such as having your hair styled are lumped together as consumption spending i. Government spending to build and maintain public facilities such as buildings, monuments, and highways is another form of investment.
Modern economies require enormous amounts of investment to produce the goods and services demanded by consumers. Investment increases the productivity of labor and leads to a higher standard of living. However, investment often requires huge amounts of funds, far beyond the resources available to a single individual or institution. By selling financial claims such as stocks and bonds in the financial markets, large amounts of funds can be raised quickly from the pool of savings accumulated by households, businesses, and governments.
The unit carrying out the investment then hopes to repay its loans from the financial marketplace by drawing on future income. Indeed, the money and capital markets make possible the exchange of current income for future income and the transformation of savings into investment so that production, employment, and income can grow, and living standards can improve.
Those who supply funds to the financial markets receive only promises in return for the loan of their money. These promises are packaged in the form of attractive financial claims and financial services, such as stocks, bonds, deposits, and insurance policies see Exhibit 1. Financial claims promise the supplier of funds a future flow of income in the form of dividends, interest, or other returns. But there is no guarantee that the expected income will ever materialize.
However, suppliers of funds to the financial system expect not only to recover their original funds but also to earn additional income as a reward for waiting and assuming risk. The role of the financial markets in channeling savings into investment is absolutely essential to the health of the economy. For example, if households set aside savings and those funds are not returned to the spending stream through investment by businesses and governments, the economy will begin to contract.
The amount of income paid out by business firms and governments will not be matched by funds paid back to Chapter 1 Functions and Roles of the Financial System in the Global Economy 7 those same sectors by households.
As a result, income payments will decline, leading, in turn, to reduced consumption spending. The public's standard of living will fall. Moreover, with less spending, the need for labor will be curtailed, resulting in fewer jobs and rising unemployment. The global financial system has seven basic economic functions that create a need for money and capital markets. Savings FunctionThe global system of financial markets and institutions provides a conduit for the public's savings.
Bonds, stocks, and other financial claims sold in the money and capital markets provide a profitable, relatively low-risk outlet for the public's savings, which flow through the financial markets into investment so that more goods and services can be produced i. When savings decline, investment and living standards begin to fall in those nations where savings are in short supply. Wealth FunctionWhile current savings represent a flow of funds, accumulated savings built up over time represent a stock of assets that we often refer to as wealth.
For those businesses and individuals choosing to save, the financial instruments sold in the money and capital markets provide an excellent way to store wealth i. Although we might choose to store our wealth in "things" e. However, bonds, stocks, and other financial instruments do not wear out over time and usually generate income; moreover, their risk of loss often is much less than for many other forms of stored wealth. Incidentally, what is wealth?
The portion of wealth held by society in the form of stocks, bonds, and other financial assets-that is, financial wealth-is created by the financial system and the money and capital markets within that system. The volume of financial wealth is huge and growing nearly every year.
If we subtract total debts owed by U. Wealth holdings represent stored purchasing power that will be used in future periods as income to finance purchases of goods and services and increase society's standard of living.
Therefore, income emerges from the wealth function of the global financial system. Income Y t is created by the rate of return r t that current wealth holdings W t generate for their owners. Liquidity FunctionFor wealth stored in financial instruments, the global financial marketplace provides a means of converting those instruments into cash with little risk of loss.
The world's financial markets provide liquidity immediately spendable cash for savers who hold financial instruments but are in need of money.
By Frank J. Fabozzi and Frank J. A thoroughly revised and updated edition of a textbook for graduate students in finance, with new coverage of global financial institutions. This thoroughly revised and updated edition of a widely used textbook for graduate students in finance now provides expanded coverage of global financial institutions, with detailed comparisons of U. A focus on the actual practices of financial institutions prepares students for real-world problems. After an introduction to financial markets and market participants, including asset management firms, credit rating agencies, and investment banking firms, the book covers risks and asset pricing, with a new overview of risk; the structure of interest rates and interest rate and credit risks; the fundamentals of primary and secondary markets; government debt markets, with new material on non-U.
A thoroughly revised and updated edition of a textbook for graduate students in finance, with new coverage of global financial institutions. This thoroughly revised and updated edition of a widely used textbook for graduate students in finance now provides expanded coverage of global financial institutions, with detailed comparisons of U. A focus on the actual practices of financial institutions prepares students for real-world problems. After an introduction to financial markets and market participants, including asset management firms, credit rating agencies, and investment banking firms, the book covers risks and asset pricing, with a new overview of risk; the structure of interest rates and interest rate and credit risks; the fundamentals of primary and secondary markets; government debt markets, with new material on non-U. Each chapter begins with learning objectives and ends with bullet point takeaways and questions. Toggle navigation.
The roles of managers, financial markets, and investors in channeling financial flows are discussed. Financial institutions channel the flow of funds between investors and firms. Individuals deposit funds at commercial banks, purchase shares of mutual funds, purchase insurance protection with insurance premiums, and contribute to pension plans. All of these financial institutions provide credit to firms by purchasing debt securities or providing loans or other credit products. In addition, all of these financial institutions except commercial banks purchase stocks issued by firms.
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