Adeyl Khan, Faculty, BBA, NSU Chapter 17. Adeyl Khan, Faculty, BBA, NSU The Financial System The...

Adeyl Khan, Faculty, BBA, NSU

The Financial SystemChapter 17


The Financial System

The financial system is the process by which money flows from savers to users.


Understanding the Financial SystemFinancial 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.


Types of Securities

Securities Financial instruments Obligations on the part of the issuer

Businesses and Governments Provide rate of return to purchasers

Money Market InstrumentsBondsStock


Money Market Instruments

Short-term Debt Securities Issued by governments, financial institutions and corporations

Investors are paid interest for the use of their funds.Generally low-riskU.S. Treasury bills, commercial paper, and bank certificates of deposit


Bonds

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.


Bond Ratings

Price is determined by risk and interest rate.Several firms rate bonds

Standard & Poor’s (S&P) Moody’s

Investment-gradeSpeculative/Junk


Stocks

Common stock – ownership claims in corporations. Vote on major company decisions Cash dividends Price appreciation

Preferred stock – stockholders with preference in the payment of dividends.


Convertible SecuritiesStockholder has the

right to exchange the bond or preferred stock for a fixed number of shares of common stock.


Financial Markets

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.


Understanding Stock Markets

Stock market (exchange) – market in which common stocks are traded, such as the New York Stock Exchange.


Stock Exchanges

The New York Stock Exchange – the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are listed on NYSE.

The Nasdaq Stock Market – the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq but many are smaller firms.

Other U.S. Stock Markets The American Stock Exchange/AMEX Regional Stock Exchanges Foreign Markets


ECNs and The Future of Stock Markets

ECNs – electronic communication networks The 4th Market Buyers and sellers meet in a virtual market and exchange with one another Take place on INET or Archipelago

INET and Archipelago have been purchased by Nasdaq and NYSE


Investor Participation in the Stock MarketsInvestors use brokerage firms, they:

Establish an account Enter orders Trade stock

The brokerage firm executes the trade on behalf of the investor, charging a fee for the order Market Order Limit Order


Financial Institutions

Commercial BanksSavings Banks and Credit UnionsNon-depository Institutions


Electronic Banking

An increasing amount of funds move through electronic funds transfer (EFTs).Millions of businesses and consumers now pay bills and receive payments electronically.Most employees directly deposit employee paychecks.Social security and other federal payments are made each year electronically.Automated Teller Machines (ATMs) continue to grow in popularity.More than 1/3 of American households use some online banking.


Federal Deposit Insurance

Enacted by the Banking Act of 1933Restore public confidence in the banking systemBefore deposit insurance, runs were common as people rushed to withdraw their money from the bankDeposit insurance shifts the risk of bank failures from individuals to the FDIC


Savings Banks and Credit Unions

Offer a variety of consumer services85% of their loans are real estate loansCredit unions are cooperative financial institutions that are owned by depositors/members.Credit unions are created to serve consumers.

Insured by National Credit Union Administration (NCUA) which functions the same as the FDIC


Non Depository Financial Institutions

Insurance CompaniesPension FundsFinance Companies


The Role of the Federal Reserve

Created In 1913Central bank of the United StatesRegulate commercial banksPerform banking-related activities for the U.S. Department of TreasuryProviding services for banksSetting monetary policy


Organization of the Federal Reserve

12 Federal reserve districts Own federal reserve bank

District banks are run by a nine-member board of directors.The board of governors is the governing body.Politically independentFederal Open Markets Committee (FOMC) sets most policies concerning monetary policy and interest rates.


Check Clearing and the Fed

Americans still write billions of paper checks.The process by which funds are transferred from the check writer to receiverThe multiple-step process is managed and cleared by the FED.The Check Clearing for the 21st Century Act is making this process more electronic.


Monetary Policy

Supply of money and creditMeasures of the money supply: M1 & M2The FED requires banks to maintain reserves.Set the discount rateOpen Market Operations


M1 & M2 Graphic


Regulation of the Financial System

Bank RegulationGovernment Regulation of the Financial MarketsIndustry Self-Regulation

Rules of conduct by professional organizations like National Association of Securities Dealers Market Surveillance


The Financial System:A Global PerspectiveThe financial system is more

connected.Financial institutions are

more global.Only 3 of the 30 largest

banks in the world are US institutions.

Most nations have a central bank.

Adeyl Khan, Faculty, BBA, NSU27


Learning Goals

Outline the structure and importance of the financial system.

List the various types of securities.

Define financial market, and distinguish between primary and secondary financial markets.

Describe the characteristics of the major stock exchanges.

Discuss the organization and functioning of financial institutions.

Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit.

Evaluate the major features of regulations and laws affecting the financial system.

Describe the global financial system.

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Adeyl Khan, Faculty, BBA, NSU Chapter 17. Adeyl Khan, Faculty, BBA, NSU The Financial System The...

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