WHY STUDY FINANCIAL

MARKETS AND INSTITUTIONS?

Chapter 1
FINANCIAL MARKETS
Funds are transferred from people with
excess funds to those with shortage

Promotes greater economic efficiency by

providing productive use for funds
FINANCIAL MARKETS
Well-functioning markets produce higher
economic growth

Has effects on personal wealth, behaviour

of businesses and consumers

Cyclical performance of the economy

SECURITY
Also called financial instrument

Claim on issuers future income or assets

(any financial claim or piece of property
that is subject to ownership)
DEBT MARKETS AND INTEREST RATES
Bond is a debt security that promises to
make payments periodically for a specified
period of time

Also known as bond market

DEBT MARKETS AND INTEREST RATES
Enablegovernment and corporations to
borrow to finance their activities

Where interest rates are determined

Interestrate is the cost of borrowing or

price paid for rental funds
DEBT MARKETS AND INTEREST RATES
There are many different types of market
interest rates, including mortgage rates,
car loan rates, credit card rates, etc.

Interest rates are important at different

levels
DEBT MARKETS AND INTEREST RATES
On personal level, high interest rates
deter from spending but motivates
savings

High interest rates might postpone

businesses investment decisions
DEBT MARKETS AND INTEREST RATES
Because changes in interest rates have
important effects on individuals, financial
institutions, businesses and overall
economy it is important to explain
fluctuations in interest rates
THE STOCK MARKET
A common stock represents a share of
ownership in a corporation

Has claim on the earnings and assets of

the corporation

In stock market, shares of stock are

traded
THE STOCK MARKET
Fluctuations in stock prices affect the size
of peoples wealth and affect their
willingness to spend

Impact business investment decisions

Priceof shares affects the amount of funds

that can be raised by selling newly issued
stock to finance investment spending
THE FOREIGN EXCHANGE MARKET
Conversion of one currency into another
for moving funds between countries takes
place

Change in exchange rate affects the cost

of imports and revenue from exports
WHY STUDY FINANCIAL MARKETS?
Financialmarkets, such as bond and stock
markets, are crucial in our economy.

These markets channel funds from savers

to investors, thereby promoting economic
efficiency.

Marketactivity affects personal wealth,

the behavior of business firms, and
economy as a whole
WHY STUDY FINANCIAL MARKETS?
Well functioning financial markets, such
as the bond market, stock market, and
foreign exchange market, are key factors
in producing high economic growth.
WHY STUDY FINANCIAL INSTITUTIONS?
Financial
Institutions are the institutions
that make financial markets work

Financial Institutions are the

intermediaries, that take funds from the
people who save and lend it to people who
have productive investment
opportunities.