FM 2015 Week 2 - Chapter 2

8/17/2019 FM 2015 Week 2 - Chapter 2

1/42

Chapter 2

Firms and

the FinancialMarket

8/17/2019 FM 2015 Week 2 - Chapter 2

2/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-2

Slide Contents

1.he !asic "tructure o# the $.". %inancial

&ar'ets

2.he %inancial &ar'etplace( %inancialInstitutions

).he %inancial &ar'etplace( "ecurities &ar'ets4.*ui+

8/17/2019 FM 2015 Week 2 - Chapter 2

3/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-)

2.1 THE BASIC STRUCTURE

F THE U.S. FI!A!CIA"MAR#ETS

8/17/2019 FM 2015 Week 2 - Chapter 2

4/42


Three $la%ers in the FinancialMarkets

ithin the #inancial ar'ets, there are threeprincipal sets o# players that interact(

!orro/ers individuals and usinesses "avers ostly individuals

%inancial Institutions Interediaries e3.Coercial an's

8/17/2019 FM 2015 Week 2 - Chapter 2

5/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-

Fi&'re 2(1 Financial Markets)Instit'tions) and the Circle o*

Mone%

8/17/2019 FM 2015 Week 2 - Chapter 2

6/42


2.2 THE FI!A!CIA"

MAR#ET$"ACE+FI!A!CIA" I!STITUTI!Sa. Coercial !an's

. 6on-!an' %inancial Interediaries(

1. %inancial "ervices Corporation2. Insurance Copanies

). Investent !an's4. Investent Copanies

8/17/2019 FM 2015 Week 2 - Chapter 2

7/42Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-7

Financial Intermediaries

%inancial institutions li'e coercial an's,#inance copanies, insurance copanies,investent an's, and investent copaniesare called *inancial intermediaries as theyhelp ring together those /ho have oneysavers and those /ho need oneyorro/ers.

8/17/2019 FM 2015 Week 2 - Chapter 2

8/42Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-8

Mone% ,ers's Capital Market

9 Mone% market - ar'ets #or short-terdet instruents such as reasury-ills,Coercial paper.

9 Capital market - ar'ets #or long-ter

det and e:uity instruents such asCoon stoc', Pre#erred stoc', Corporate

ond, $.". reasury ond.

8/17/2019 FM 2015 Week 2 - Chapter 2

9/42Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-;

Commercial Banks - E,er%onesFinancial Marketplace

Commercial /anks collect the savings o#individuals as /ell as usinesses and then

lend those pooled savings to otherindividuals and usinesses. hey earnoney y charging a rate o# interest toorro/ers that e3ceeds the rate they pay to

savers.

8/17/2019 FM 2015 Week 2 - Chapter 2

10/42


!on(Bank FinancialIntermediaries

9 hese include( %inancial services corporations, such as

Insurance copanies, such as Prudential>

Investent an's, such as

8/17/2019 FM 2015 Week 2 - Chapter 2

11/42


Financial Ser,icesCorporations

9 Financial ser,ices corporation are in thelending or #inancing usiness, ut they arenot coercial an's.

%or e3aple(

8/17/2019 FM 2015 Week 2 - Chapter 2

12/42


Ins'rance Companies

9 Ins'rance companies sell insurance toindividuals and usinesses to protect theirinvestents.

9 hey collect preiu and hold the preiuin reserves until there is an insured loss andthen pay out clais to the holders o# the

insurance contracts. hese reserves aredeployed in various types o# investentsincluding loans to individuals and usinesses.

8/17/2019 FM 2015 Week 2 - Chapter 2

13/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-1)

In,estment Banks

In,estment /anks are speciali+ed #inancialinterediaries that help copanies andgovernents raise oney and provideadvisory services to client #irs /hen theyenter into a?or transactions such as ergers

8/17/2019 FM 2015 Week 2 - Chapter 2

14/42


M't'al F'nds and E0chan&eTraded F'nds ETFs

M't'al *'nds are pro#essionally anagedaccording to a stated investent o?ective.Individuals can invest in utual #unds yuying shares in the utual #und at the netasset ,al'e 6A@. &utual #unds can eithere load or no(load *'nds. oad re#ers tosales coission.

8/17/2019 FM 2015 Week 2 - Chapter 2

15/42


M't'al F'nds and E0chan&eTraded F'nds ETFs cont.

An e0chan&e(traded *'nd E% is siilar toa utual #und e3cept that the o/nershipshares in the E% can e ought and sold onthe stoc' e3change. &ost E%s trac' an inde3,such as the the "BP 00.

8/17/2019 FM 2015 Week 2 - Chapter 2

16/42


M't'al F'nds and E0chan&eTraded F'nds ETFs cont.

&utual #unds and E%s provide a cost-e##ective/ay to diversi#y and reduce ris'. %or e3aple,y uying a utual #und or E% that invests in"BP 00,you can indirectly purchase aport#olio that trac's 00 stoc's /ith ?ust onetransaction.

8/17/2019 FM 2015 Week 2 - Chapter 2

17/42


Hed&e F'nds

Hed&e *'nds are siilar to utual #unds utare less regulated, ta'e ore ris', and aregenerally open only to high net /orthinvestors typically 1 illion and aove. Inaddition to anageent #ee aout 2D,ost #unds include an incentive #ee typically20D o# pro#its ased on the #unds overall

per#orance.

8/17/2019 FM 2015 Week 2 - Chapter 2

18/42


$ri,ate E3'it% Firms

$ri,ate e3'it% *irms is a #inancialinterediary that invests in e:uities that arenot traded on the pulic capital ar'ets. /otypes o# private e:uity #irs doinate thisgroup( @enture capital @C #irs andeveraged uyout !F #irs.

8/17/2019 FM 2015 Week 2 - Chapter 2

19/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-1;

$ri,ate E3'it% Firms cont.

4ent're capital *irms provide #inancing #orprivate start-up copanies /hen they are #irst#ounded. %or e3aple, initial #inancing o#

8/17/2019 FM 2015 Week 2 - Chapter 2

20/42


$ri,ate E3'it% Firms cont.

"e,era&ed /'%o't "B *irms ac:uireestalished #irs that typically have not eenper#oring /ell /ith the o?ective o# a'ingthe pro#itale again and then selling the.An !F typically uses det to #und thepurchase o# a #ir.

8/17/2019 FM 2015 Week 2 - Chapter 2

21/42


2.5 THE FI!A!CIA"MAR#ET$"ACE+ SECURITIES

MAR#ETS

8/17/2019 FM 2015 Week 2 - Chapter 2

22/42


Sec'rit%

9 A sec'rit% is a negotiale instruent thatrepresents a #inancial clai. It can ta'e the#or o# o/nership stoc's or a detagreeent.

9 he securities ar'et allo/ usinesses andindividual investors to trade the securities

issued y pulic corporations.

8/17/2019 FM 2015 Week 2 - Chapter 2

23/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-2)

$rimar% ,ers's Secondar%Market

9 $rimar% market a ar'et in /hichsecurities are ought and sold #or the firsttime. he #ir selling securities receives theoney raised.

9 Secondar% market a ar'et #orsubsequent trading o# previously issued

securities. he issuing #ir does not receiveany ne/ oney.

8/17/2019 FM 2015 Week 2 - Chapter 2

24/42


Fi&'re 2.2 Sec'rit% Markets $ro,idea "ink /et6een the Corporation andIn,estors

8/17/2019 FM 2015 Week 2 - Chapter 2

25/42


T%pes o* Sec'rities

7e/t Sec'rities( %irs orro/ oney yselling det securities in the det ar'et.=et is classi#ied ased on aturity period(ess than one year issued in oney ar'et,

one to ten years called !ote, issued incapital ar'et, ore than 10 years called/ond, issued in capital ar'et

8/17/2019 FM 2015 Week 2 - Chapter 2

26/42


T%pes o* Sec'rities cont.

E3'it% sec'rities represent o/nership o# thecorporation. here are t/o a?or types o#e:uity securities( common stock andpre*erred stock.

8/17/2019 FM 2015 Week 2 - Chapter 2

27/42


T%pes o* Sec'rities cont.

9 Common stock represents e:uityo/nership in a corporation, provides votingrights, and entitles the holder to pro#its inthe #or o# dividends.

9 $re*erred stock is an e:uity security. Itgives pre#erence, relative to coon

stoc'holders, /ith regard to dividends andclai on assets.

8/17/2019 FM 2015 Week 2 - Chapter 2

28/42


Stock Markets

A stoc' ar'et is a pulic ar'et in /hich thestoc' o# copanies is traded. "toc' ar'etsare classi#ied as either organi+ed securitye3changes or the over-the-counter FC

ar'ets.

8/17/2019 FM 2015 Week 2 - Chapter 2

29/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-2;

Stock Markets cont.

9 r&ani8ed sec'rit% e0chan&es physicallyoccupy space and #inancial instruents aretraded on their preises. %or e3aple, the6e/ Gor' "toc' E3change 6G"E located in

6e/ Gor'.

9 oday, the 6G"E is a hybrid market, allo/ing

#or #ace-to-#ace trading on the #loor o# thestoc' e3change in addition to autoatedelectronic trading.

8/17/2019 FM 2015 Week 2 - Chapter 2

30/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-)0

Stock Markets cont.

6A"=A* 6ational Association o# "ecurities=ealers Autoated *uotations is an o,er(the(co'nter market and descries itsel# as a

Hscreen-ased, #loorless ar'et. In 201),

nearly ),200 copanies /ere listed on6A"=A*, including "taruc's,

8/17/2019 FM 2015 Week 2 - Chapter 2

31/42


8/17/2019 FM 2015 Week 2 - Chapter 2

32/42


ther Financial Instr'ments

ale 2.2 provides a list o# di##erent #inancialinstruents eginning /ith the shortest-aturity instruents $.". reasury ills thatare traded in the oney ar'et and oving

through to the longest-aturity instruentscoon stoc' that are traded in the capitalar'et.

/l 2 2 Ch i i *

8/17/2019 FM 2015 Week 2 - Chapter 2

34/42


8/17/2019 FM 2015 Week 2 - Chapter 2

36/42


8/17/2019 FM 2015 Week 2 - Chapter 2

37/42


Financial Markets and the

8/17/2019 FM 2015 Week 2 - Chapter 2

38/42


Financial Markets and theFinancial Crisis

9 Gear 2007 - %inancial crisis in the $nited"tates that lead to recession and spread/orld/ide.

9 &ain Causes Jeal estate de#aults and&!"s

9 E##ects - he governent ailed outinstitutions, uneployent s'yroc'eted, the

stoc' ar'et plueted, there /ere noa?or stand-alone investent an's le#t.


8/17/2019 FM 2015 Week 2 - Chapter 2

39/42

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-);

Financial Markets and theFinancial Crisis cont.

"ecuriti+ation Process1.Koeuyers orro/ oney y ta'ing out aortgage loan

2.ender sells the ortgage to another #iror #inancial institution.

).%inancial institution pools together aport#olio o# ortgages. he purchase o# that

port#olio is #inanced through sale o# &!"&ortgage-!ac'ed "ecurities.


8/17/2019 FM 2015 Week 2 - Chapter 2

40/42



4. &!"s are sold to investors /ho can holdthe as investents or resell the toothers.

"ince the original lender gets the oney ac':uic'ly and does not have to /orry aoutrepayent, it ay not ade:uately screen

the loan applicants. %inancial crisis egan/ith poor screening and spread /orld/idethrough sale o# &!"s.


8/17/2019 FM 2015 Week 2 - Chapter 2

41/42



In 2010 the =odd-%ran' all "treet Je#orand Consuer Protection Act /as passed,/hich su?ects an's and non-an' #inancialinstitutions to ore oversight and greater

transparency. Fne o# the rules, 94olker:r'le, prohiits an's #ro proprietar%tradin&.

8/17/2019 FM 2015 Week 2 - Chapter 2

42/42

Quiz Time …

Within 30 minutes, please explain as much aspossible about:1.Agency Theory2.Common Stoc3.!ro"ere# Stoc

This $ui% &ill be contribute# extra ' points tothe (inal )xamIt means:

*+ you are cheating or i+ you #i# not submit the

ans&er sheet on time, then your (inal )xam &illbe #e#ucte# ' points as &ell.

FM 2015 Week 2 - Chapter 2

Documents

Transcript of FM 2015 Week 2 - Chapter 2