Money and Banking: Lecture 6

Money and Banking: Lecture 6 provides students with content about: financial instruments; financial markets; roles; structure; financial institutions; primarily stores of value; primarily to transfer risk; over-the-counter markets;... Please refer to the lesson for details!

Money and

Banking

Lecture 6

Review of the Previous Lecture

• Financial Intermediaries

• Financial Instruments

• Uses

Topics under Discussion

• Financial Instruments

• Financial Markets

• Financial Institutions

Examples of Financial Instruments

Primarily Stores of Value

• Bank Loans

immediately in exchange for a promised set of payments in the future

obtaining funds today a government or corporation promises to make payments in the future

Examples of Financial Instruments

Primarily Stores of Value

• A loan that is used to purchase real estate

• The real estate is collateral for the loan,

• it is a specific asset pledged by the borrower in order to

protect the interests of the lender in the event of nonpayment

• If payment is not made the lender can foreclose on the

property

• an owner of a share owns a piece of the firm and is

entitled to part of its profits

Examples of Financial Instruments

Primarily to transfer risk

• the primary purpose is to assure that payments will be made

under particular (and often rare) circumstances

• an agreement to exchange a fixed quantity of a commodity,

such as wheat or corn, or an asset, such as a bond, at a

fixed price on a set future date

• It is a derivative instrument since its value is based on the

price of some other asset

• It is used to transfer the risk of price fluctuations from one

party to another

Examples of Financial Instruments

Primarily to transfer risk

• Options

based on the value of some underlying asset;

obligation) to purchase a fixed quantity of the underlying asset at a predetermined price at any time during a specified period

Financial Markets

• Financial Markets are the places where

financial instruments are bought and sold.

financing for their activities

resources are placed at the disposal of those who can put them to best use

are no longer channeled to their best possible use and the society suffers at large

Structure of Financial Markets

• Primary vs Secondary Markets

from a lender by selling newly issued

securities

which will determine a price and then

purchase the company’s securities in

preparation for resale to clients; this is called

underwriting

sell existing securities

Structure of Financial Markets

• Centralized Exchanges vs Over-the-

counter Markets.

trading is done “on the floor”

electronic networks of dealers who trade with one another from wherever they are located

Structure of Financial Markets

• Debt and Equity vs Derivative Markets

are usually traded in the countries where the

companies are based

or

Financial Markets

Characteristics of a well-run financial market

and widely available

• If not, the prices will not be correct

• prices are the link between the financial markets

and the real economy

• A lack of proper safeguards dampens people’s

willingness to invest

Market Size and Investor Protection

• Financial Instruments

• Financial Markets

Upcoming Topics

• Financial Institutions

• Time Value of Money

• Present Value

• Interest Rates