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In general they provide both financial and non financial services like
appraisal, implementation, monitoring of projects and training
entrepreneurs and the like.
Financial institutions generally fall under financial
regulation from a government authority.
Types of Financial Institutions
Common types of financial institutions include
banks,
InsuranceCo,
Leasing Co,
Mutual Funds.
1.4. Financial Services and Instruments
Financial
Intermediaries
Financial
Markets
Lender –Savers: Borrower-
spenders:
1. Households
1. Business firms
2. Business firms
2. Government
3. Government
3. Households
4. Foreigners Direct Finance
4. Foreigners
Classifications of Financial Markets
1. Debt and Equity Markets
Any economic unit can obtain funds in a financial Market in
two ways.
a. Issuing Debt Securities/Instruments such as a Bond or a
Mortgage-a contractual agreement by the borrower to pay
the holder of the instrument a fixed dollar amounts at a
regular time intervals until a specified date (the maturity
date), when a final payment is made.
The classification of debt instruments based on maturity:
A. Short Term: with maturity period less than 1 year
B. Medium Term: debt instruments with maturity period between 1-10 years
C. Long Term: having maturity period of 10 years and above
Debt and Equity…
b. Issuing Equities such as common stock, which are
claims to share the net income (income after expenses
and taxes) and the assets of a business.
Equities usually entail periodic payments in the form
of dividends to their holders and are considered long-
term securities because they have no maturity date.
A place where debt funds can be obtained is called
Debt Market and a place where equity funds are
procured is called Equity Market.
In many countries the size of debt markets is larger
that that of equity markets.
2. Primary Vs Secondary Financial Markets
a. Primary Markets: deal with the new financial claims or new securities
and, therefore, they are also known as the new issue markets.
These markets mobilize savings and they supply fresh or additional
capital to business units.
b. Secondary Markets: deal with securities that are already issued or
outstanding.
Though they do not contribute directly to supply of additional capital,
they do so indirectly by rendering securities issued in the primary
markets liquid.
Stock markets have both primary and secondary market segments.
3. Money and Capital Markets
Another way of distinguishing between financial markets is
based on ‘maturity of securities traded in the market’.
a. The Money Market: only short-term debt securities are
traded.
These markets tend to be more liquid as they are traded
more widely.
Short-term debt securities have smaller fluctuations in
prices than long-term ones that conservative investors
prefer them for their safety.
As a result, many corporations and banks actively avail the
service of these market to earn profit on idle/surplus funds
by investing on short-term instruments temporarily.
Money and Capital…
e. Limits on competition
f. Restrictions on interest rates
3. Improving control of monetary policy
Government uses a regulatory tool of reserve