FINANCIAL

MARKETS AND
INSTITUTIONS
INTRODUCTION
 FINANCIAL TERMS
• FINANCE – term describing the study and system of money, investments and
other financial instruments. (Management, Allocation and Distribution)
• FINANCIAL SECURITIES – include equity securities issued by companies in
the form of shares (ownership) and debt securities (indebtedness).
• MONEY – a generally accepted medium of exchange, legal tender for
repayment of debt, standard of value, unit of accounting measures and
means to save or store purchasing power.
• CREDIT OR LOAN – a sum of money that is borrowed and eventually to be
retuned, normally with an interest.
FINANCIAL MARKETS
 FINANCIAL MARKETS
• Are structures through which funds flow.
• Place where people and organizations wanting to borrow
money are brought together to those who have surplus
funds.
• Includes all markets where transactions relating to the
trading of financial securities and extending credits take
place
TYPES OF FINANCIAL MARKETS
• Primary Markets – markets in which corporations raise funds
through new issues securities.
– IPO (Initial Public Offering) – first public issue of a financial
instrument by a firm.
• Secondary Markets – markets that trade financial instruments
once they are issued. Securities and other financial assets are
traded among investor after they have been issued.
TYPES OF FINANCIAL MARKETS
Primary Markets
USERS OF FUNDS UNDERWRITING WITH UNDERWRITING WITH
(CORPORATIONS) INVESTMENTS BANK INVESTMENTS BANK

Secondary Markets
AGENTS WANTING TO AGENTS WANTING TO
FINANCIAL MARKETS
SELL SECURITIES BUY SECURITIES
TYPES OF FINANCIAL MARKETS
• Money Markets – markets in which funds are borrowed or
loaned for short periods (less than one year).
• Capital Markets – markets for stocks and for intermediate-
or long-term debt (one year or longer).
MONEY MARKET INSTRUMENTS
• Treasury Bills – short term obligations issued by the government.
• Federal Funds – short-term funds transferred between financial
institutions usually for no more than 1 day.
• Repurchase Agreements – sale of securities by one party to
another with a promise buy the seller to repurchase the same
securities from the buyer at a specified date and price.
MONEY MARKET INSTRUMENTS
• Commercial Paper – short-term unsecured promissory notes
issued by a company to raise short-term cash.
• Negotiable certificates of deposit – bank-issued time deposit
that specify an interest rate and maturity date and are
negotiable.
• Banker’s acceptances – time drafts payable to a seller of
goods, with payment guaranteed by a bank.
CAPITAL MARKET INSTRUMENTS
• Corporate Stock – a fundamental ownership claim in a public
corporation.
• Mortgages – loans to individuals or businesses to purchase a
land, property or other real property.
• Corporate Bonds – long-term bonds issued by corporations.
• Treasury Bonds – long-term bonds issued by the government.
 CAPITAL MARKET INSTRUMENTS
• State and local government bonds – long-term bonds issued by
state and local governments.
• U.S. government agency bonds – long-term bonds collateralized
by a pool of assets and issued by agencies of the U.S.
government.
• Bank and consumer loans – loans to commercial bonds and
individuals.
TYPES OF FINANCIAL MARKETS
• Derivative Markets – markets in which derivative securities are
traded.
 Derivative Security – a financial security whose payoffs are linked to
other previously issued securities.
 Its value is derived from the value of other underlying asset. Example:
A contract to buy Japanese yen 6 months from now.
(The value depends on the current exchange rate of yen to peso)
TYPES OF FINANCIAL MARKETS
• Foreign Exchange Markets – markets in which cash flows from the sale
of products or assets denominated in a foreign currency are transacted.
• SPOT MARKETS – markets in which assets are brought and sold on the
spot.
• FUTURES MARKETS – participants agree today to buy and sell an asset
at some future date.
• PRIVATE MARKETS – transactions are worked out directly between
two parties.
• PUBLIC MARKETS – transactions are worked out publicly.
FINANCIAL INSTITUTIONS
 FINANCIAL INSTITUTIONS
• Performs the essential function of channeling funds from
those with surplus funds.
• A company engaged in the business dealing with
financial and monetary transactions, such as deposits,
loans, investment and currency exchange.
• Are the intermediaries or middleman that helps in
facilitating the needs of those users of funds and returns
of those suppliers of funds.
 DIRECT TRANSFERS
• A corporation sells its stock or debt directly to investors
without going through a financial institution.

SECURITIES ( STOCKS OR BONDS)

USERS OF FUNDS SUPPLIERS OF FUNDS

CASH
 INDIRECT TRANSFERS
• A transfer of funds between suppliers and users of funds
through a financial intermediary.
BUSINESS’ INTERMEDIARY’S
SECURITIES SECURITIES
FINANCIAL
BUSINESS SAVERS
INTERMEDIARY CASH
CASH
TYPES OF FINANCIAL INSTITUTIONS
• Commercial Banks – accepts deposits (liabilities) from customers
and in turn makes loans (assets).
• Thrifts – depository institutions in the form of savings
associations, savings banks and credit unions.
• Insurance Companies – financial institutions that protect
individuals and corporations from adverse events.
• Securities firms and investment banks – financial institutions
that help firms issue securities and engage in related activities
such as securities brokerage and securities trading.
TYPES OF FINANCIAL INSTITUTIONS
• Finance Companies – financial intermediaries that make loans
to both individuals and businesses.
• Investment Funds – financial institutions that pool financial
resources of individuals and companies and invest those
resources in diversified portfolios of assets.
• Pension Funds – offer savings plans through which funds
participants accumulate savings during their working years
before withdrawing them during their retirement years.
 OTHER KEY TERMS
• Liquidity – the ability of an asset to be converted quickly in cash at its fair
market value.
• Over-the-counter markets – do not operate in specific fixed location – rather
transactions occurs via telephones, wires transfers, and computer trading.
• Price risk – risk that an asset’s sale price will be lower than its purchase price.
• Delegated Monitor – responsible in collecting information and/or investing
funds on the behalf of smaller investors.
• Diversify – ability of an economic agent to reduce risk by holding a number of
different securities in a portfolio.