fin markets intro

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Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved

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Topics Covered

The Flow of Savings to Corporations

Functions of Financial Markets

Functions of Financial Intermediaries




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The Flow of Savings to Corporations

The ultimate source of financing is

individual¶s savings

Two forms of financing: internal and external

Internal-retained cash and selling new shares

External-loans and bonds

Savings flow through financial markets (stock

exchanges) and financial intermediaries(mutual funds, pension funds, insurance

companies)






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Financial Markets

Financial market-a market where securities are issued

and traded

Securities ± a traded financial assets (shares; bonds)

Shares-a proportion of ownership claim on the firm, with no

maturity

Bonds-debt securities issued by a company representing a

obligation to investors to make regular interest payments and

principal on a specified date in the future

Stock market (stock exchange) is the most importantfinancial market

Stock market or equity market ± trading own common

equity (ordinary shares) of the firm




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Financial Markets

Primary market- market for sale of new issue of

securities (shares, bonds); its organized in banks,

brokerage co. (outside the exchange)

Secondary market - market in which previously

issued securities are traded among investors

Secondary market: Stock exchange and OTC

Stock exchange-organized market for trading securities

OTC-over the counter market




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Financial Markets

Primary

Markets

Secondary

Markets

OTC

Markets

Money




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Other Financial Markets

Fixed income market-market for debt securities(bonds)

Capital market- market for long-term financing

Money market- market for short-term financing(less than 1 year)

Foreign-exchange market- inter bank market for trading foreign currencies

Commodities market- organized market for trading

commodities (corn, wheat, cotton, oil) Derivatives market- organized market for trading

derivatives (options, futures, warrants, forwards,swaps)




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Financial Markets

Company

Issue Debt

CashInvestors




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Financial Intermediaries

Financial intermediaries- an organization

that rises money from investors and

provide financing for individuals,

companies e t.c.

mutual funds,

pension funds, insurance co.,

banks




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Mutual Funds

Mutual funds- pools the savings of manyinvestors and invests in a portfolio of securities;

mutual funds offer investors low-costdiversification and professional management;

Two types: Open-end funds and Close-end funds

funds pursue a wide variety of investment

strategies (only stocks, only bonds, onlydot.com.co¶s,high-tech growth stocks, mixture of stock and bonds ³balanced´ funds, funds of funds)




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Mutual Funds

Bank of AmericaBank of America

Windsor Fund

Windsor Fund

InvestorsInvestors

$ $

Sells

shares

Issues

shares




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Pension Funds

Pension funds- investment plan set up byemployer (companies) for providingemployees retirement

Defined contribution pension plan (a % of monthly pay is contributed to a pension fund- partly by employer, partly by employee)

Defined benefit pension plan (the employer

invest to the pension fund) Tax advantages

Macedonian experience




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Other financial institutions

Insurance companies- sells insurance

policies and with cash finance companies

Banks- collect deposits and lend money toindividuals and companies (short term and

long term loans)




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Functions of Financial Markets

Financial markets and intermediaries

channel savings to real investment

Financial markets and intermediaries provide financing for business

Other functions

Transporting cash across time

Provide liquidity

Reduce and reallocate risk




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Financial Markets

Funds

Funds

Banks

Insurance Cos.

Brokerage Firms

Obligations

Depositors

Policyholders

Investors

Obligations

Company

Intermediary

Investor




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Financial Markets

Banks

Depositors

$2.5 mil

Cash

Loan

Deposits

Company

Intermediary

Investor




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Financial Markets

InsuranceCompany

Policyholders

$250 mil

Cash

Loan

Sell policies

Issue Stock

Company

Intermediary

Investor




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Information Provided by Financial

Markets

Securities and commodity prices

Interest rates

Company values




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Opportunity Cost of Capital

Cost of capital- minimum acceptable rate of return of invested capital;

The cost of capital for corporate investment is

set by the rates of return on investmentopportunities in financial market; it¶s anopportunity cost-the safest form of investment(yield on treasury bills)

Investment projects offering higher return thatthe cost of capital are acceptable




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Key Words

Securities-hartii od vrednost

Shares(Stocks)-akcii

Bonds-obvrznici

Derivatives-derivati na hartii odvrednost(opcii,fju~ersi)

Stock market (stock exchange)-berza

Mutual fund-investicionen fond

Opportunity cost of capital-oportunitetna stapka

na povrat na kapitalot




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Web Resources

www.nyse.com

www.nasdaq.com

www.federalreserve.gov/releases/h15/update

www.investorlinks.com

www.indexfunds.com

www.morningstar.com

Click to access web sitesClick to access web sites

Internet connection required Internet connection required

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