Money and Banking: Lecture 5

Money and Banking: Lecture 5 provides students with content about: financial intermediaries; financial instruments; uses; characteristics; value; classes of financial instruments; financial and economic development;... Please refer to the lesson for details!

Money and

Banking

Lecture 5

Review of the Previous Lecture

• Money

• Financial Instruments

• Financial Markets

• Financial Institutions

• Central Banks

• Measuring Money

• Definitions

Topics under Discussion

• Uses

• Characteristics

• Value

• Examples

Financial Intermediaries

mainstay of the financial system centuries ago have since given way to the formal

financial instruments of the modern world

exists to facilitate the design, sale, and

exchange of a broad set of contracts with

a very specific set of characteristics

Financial Intermediaries

from this system in two ways:

• directly from lenders and

• indirectly from financial institutions called

financial intermediaries

Financial Intermediaries

Indirect Finance

• a financial institution (like a bank) borrows

from the lender and then provides funds to the borrower

• If someone borrows money to buy a car, the

car becomes his or her asset and the loan a liability

Financial Intermediaries

Direct Finance

• Borrowers sell securities directly to lenders in

the financial markets

• Governments and corporations finance their

activities this way

• The securities become assets to the lenders

who buy them and liabilities to the borrower who sells them

Financial and Economic Development

linked to economic growth

very low levels of financial development

Financial Instruments

legal obligation of one party to

transfer something of value –

usually money – to another party at some future date, under certain

conditions, such as stocks, loans,

Financial Instruments

• Written legal obligation means that it is

subject to government enforcement;

• the enforceability of the obligation is an

important feature of a financial instrument

company, or government

when some event occurs

Financial Instruments

number of possible contingencies under which one party is required to make a

payment to another

examples of financial instruments

Characteristics of Financial Instruments

• Standardized agreements are used in order to

overcome the potential costs of complexity

• Because of standardization, most of the financial

instruments that we encounter on a day-to-day

basis are very homogeneous

• summarize certain essential information about the

issuer

Classes of Financial Instruments

Primitive Securities)

• e.g Stocks and bonds

• value and payoffs are “derived from” the

behavior of the underlying instruments

• Futures and options

Value of Financial Instruments

• People will pay more for an instrument that

obligates the issuer to pay the holder a greater sum

• The bigger the size of the promised

payment, the more valuable the financial instrument

Value of Financial Instruments

made (risk).

• The more likely it is that the payment will be

made, the more valuable the financial instrument

payment will be made.

• Uses

• Characteristics

• Value

Upcoming Topics

• Examples

• Financial Institutions