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rendeer

Admin · Admin on Wed Oct 22, 2008 5:33 pm

Chapter Summary
(See related pages)

Chapter 1 summary

The opening chapter of Money and Capital Markets presents us with an introduction to the global financial system in which the money and capital markets play central roles. It also highlights the principal institutions that shape the character and functioning of the world's financial marketplace.
• The financial system produces and distributes financial services to the public. Among its most important services is a supply of credit that allows businesses, households, and governments to invest and acquire assets they need to carry on daily economic activity. The financial system of money and capital markets determines both the amount and cost of credit available. In turn, the supply and cost of credit affect the health and growth of the global economy and our own economic welfare.
• Credit and other financial services are offered for sale in the institution we call a market. Markets price and allocate financial and physical resources that are scarce relative to demand.
• Another key role played by markets operating within the financial system is to generate an adequate volume of savings (i.e., funds left over after current consumption spending by households and earnings retained by businesses) and to transform those savings into an adequate volume of investment (i.e., the purchase of capital goods and the buildup of inventories of goods to sell). In turn, investment generates new products and services and creates new jobs and new businesses, resulting in faster economic growth and a higher standard of living. By determining interest rates within the financial system, the money and capital markets bring the volume of savings generated by the public into balance with the volume of investment in new plant and equipment and in inventories of goods and resources available for sale.
• One important way to view the financial system is by examining its seven key functions or roles in meeting the financial-service needs of individuals and institutions, including generating and allocating savings, stimulating the accumulation of wealth, providing liquidity for spending, providing a mechanism for making payments, supplying credit to aid in the purchase of goods and services, providing risk protection services, and supplying a channel for government policy in helping achieve the nation's economic goals (including maximum employment, low inflation, and sustainable economic growth).
• The markets that serve the financial system may be classified in several different ways, including money markets, supplying short-term loans (credit) of less than a year, and capital markets, supplying long-term loans (credit) lasting longer than a year. There are also open markets where anyone may participate as buyer or seller versus negotiated markets where only a few bidders seek to trade assets. There are primary versus secondary markets; in the former, new financial instruments are traded in contrast to the latter where existing instruments are exchanged. Additional types of financial markets that make up the global financial system include markets that deal in the immediate purchase or sale of goods or services, called spot markets, and those that promise future delivery, known as futures, forward, or option markets.
• While many different segments make up the money and capital markets around the globe, all these markets share the common purpose of supplying credit to answer global demands for borrowed funds and all encourage saving to make investment (and, therefore, economic growth) possible. Funds flow easily and, for the most part, smoothly from one segment of the marketplace to another, spurred by such forces as arbitrage and speculation. For example, arbitrage causes credit, savings, and investment to flow toward those market segments that offer the most favorable returns, helping different markets to price resources more consistently and to eliminate price disparities for the same goods and services. Prices are also brought into balance from market to market by the force of speculation, which seeks out underpriced and overpriced services and assets.
• The financial system of money and capital markets is rapidly becoming a new financial system due to dynamic trends sweeping through the system. Among the most prominent trends are innovation, improvements in communications technology, deregulation to reduce the burden of government rules, and increasingly intense competition to find and hold new customers.

Chapter 2
Chapter Summary
(See related pages)

The global financial system of money and capital markets performs the important function of channeling savings into investment. In that process a unique kind of asset—a financial asset —is created.
• Financial assets represent claims against the income and assets of individuals and institutions issuing those claims. There are three major categories of financial assets— money, debt, and equities. A fourth instrument, derivatives, is closely related to financial assets, deriving its value from these assets.
• Money is among the most important financial assets because it serves as a medium of exchange to facilitate purchases of goods and services, a standard for valuing all items bought and sold, a store of value (purchasing power) for the future, and a reserve of liquidity (immediate spending power). Despite all these advantages, money has a weakness—susceptibility to inflation (i.e., a rising price level), because its rate of return is normally so low. In contrast, the financial assets represented by debt or equity securities, and often by derivatives as well, carry greater average yields but, unlike money, may incur loss when converted into immediately spendable funds.
• The creation of financial assets occurs within the financial system through three different channels—direct, semidirect, or indirect finance. Direct finance involves the direct exchange of financial assets for money in which borrowers (deficit-budget units, or DBUs) and lenders (surplus-budget units or SBUs) meet directly with each other to conduct their business. Semidirect finance involves the use of a broker or dealer to help bring borrower and lender together and reduce information costs. Indirect finance refers to the creation of financial assets by financial intermediaries who accept primary securities from ultimate borrowers (DBUs) and issue secondary securities to ultimate savers (SBUs) to raise funds.
• Financial intermediaries (such as banks, pension funds, and insurance companies) have grown to dominate most financial systems today due to their greater expertise and efficiency in diversifying away some of the risks involved in lending money.
• One of the most serious management problems encountered by some financial intermediaries is disintermediation —the loss of funds from an intermediary to direct or semidirect finance. Much of the disintermediation experienced by modern intermediaries has occurred due to financial innovation. Borrowers have found new ways to obtain the funds they need without going through an intermediary. However, in times of heightened uncertainty, this process may be reversed with reintermediation occurring as funds flow back into financial intermediaries from direct and semidirect finance as investors seek a “safe haven” for their investments.
• Finally, financial systems around the world appear to fall into one of two broad categories— bank-dominated financial systems and market-dominated financial systems. In bank-dominated systems the majority of financial assets arise from the banking system. When banks get into trouble the financial system itself may experience difficulties with risk exposure and slower growth. In market dominated financial systems, by contrast, security brokers and dealers tend to be leaders in the financial system and often provide the greatest volume of funds to those in need of new capital. Market-dominated financial systems are heavily dependent upon direct and semidirect finance (i.e., the open market), while bank-dominated systems tend to rely upon financial intermediaries (indirect finance) for raising funds.

CHAPTER 3
Chapter Summary
(See related pages)

This chapter examines the key role that information plays in the money and capital markets. Among its key points are the following:
• An unimpeded flow of relevant, low-cost information is vital to efficient functioning of the financial markets. If the scarce resource of credit is to be allocated efficiently and an ample flow of savings made available for investment, accurate financial information must be made readily available at low cost to all market participants.
• Two different types of markets operate within the financial system every day: an information market and a market for financial assets. The two types of markets must work together in coordinated fashion to accomplish the desired result—directing the flow of scarce funds (coming primarily from savings) toward their most beneficial uses (primarily into investments that help create jobs, expand the economy, and improve our standard of living).
• If the market for financial information is truly efficient, so that all relevant information for valuing financial assets is readily available at negligible cost, these assets will be correctly priced based on their expected return and risk. Scarce resources will flow to those uses of funds promising the highest expected returns.
• When asymmetries exist in the flow and availability of information, however, the financial marketplace will operate imperfectly. Some market participants, armed with special information not available to all participants, will earn excess profits that is, they will generate returns that exceed the normal or expected rate of return for the amount of risk taken on).
• With imperfections in the quality and availability of information, scarce resources will be allocated less efficiently than otherwise might be the case. Research evidence to date suggests that most financial markets tend to be relatively efficient at some level but that important asymmetries (information imperfections) still remain.
• Some of the key problems informational asymmetries can create include (1) the lemons problem, in which vital information about the quality of assets is costly and difficult to obtain, with the possible result that lesser-quality assets may drive superior-quality assets from the marketplace; (2) the adverse selection problem, in which sellers of some services have difficulty in correctly pricing what they offer because of inadequate information about the riskiness and other relevant characteristics of buyers, often resulting in multiple prices for the same service; and (3 ) the moral hazard problem, in which agents possessing superior-quality information (for example, the management of a corporation) may use it to their advantage at the expense of principals (for example, the stockholders of the same corporation), unless suitable arrangements can be worked out that better align the interests of agents and principals.
• In this chapter, the principal focus has been on four broad categories of financial information available today: debt security prices and yields, stock prices and dividend yields, the financial condition of security issuers, and general conditions in the economy and financial system. This chapter gives the reader a broad overview of the kinds and quality of information currently available to the public. Knowing where to find relevant, up-to-date information is an essential ingredient in the process of solving economic and financial problems.

Admin · Admin on Thu Oct 23, 2008 6:43 am

[size=12]Chapter 1 Functions and Roles of the Financial System in the Global Economy & Learning Objectives & • To understand the functions performed and the roles played by the system of financial markets and financial institutions in the global economy and in our daily lives. • To discover how important the financial system is to increasing our standard of living, generating new jobs, and building our savings to meet tomorrow’s financial needs. The financial system is … • the collection of markets, institutions, laws, regulations, and techniques • through which bonds, stocks, and other securities are traded, interest rates are determined, and financial services are produced and delivered around the world. Introduction to the Financial System The primary task of the financial system is … • to move scarce loanable funds • from those who save • to those who borrow to buy goods and services and to make investments in new equipment and facilities, • so that the global economy can grow and the standard of living can increase. Flows within the Global Economic System • The basic function of the economic system is to allocate scarce resources – land, labor, management skill, and capital – to produce the goods and services needed by society. • The global economy generates a flow of production in return for a flow of payments. • The circular flow of production and income is interdependent and never ending. The Role of Markets in the Global Economic System • Most economies around the world rely principally upon markets to carry out the complex task of allocating scarce resources. • The marketplace is dynamic. It determines what goods and services will be produced and in what quantities through their prices. • Markets also distribute income by rewarding superior producers with increased profits, higher wages, and other economic benefits. Types of Markets • There are essentially three types of markets within the global economic system. The factor markets allocate factors of production (land, labor, skills, capital) and distribute income (wages, rent) to the owners of productive resources. ‚ Consuming units use most of their income from factor markets to purchase goods and services in the product markets. Types of Markets ƒ The financial markets channel savings to those individuals and institutions needing more funds for spending than are provided by their current incomes. The Financial Markets and the Financial System: Channel for Savings and Investment • Nature of savings Households: current income – tax payments – consumption expenditures Businesses: retained earnings Governments: current revenues – expenditures • Nature of investment Households: purchase of a home Businesses: expenditures on capital goods and inventories Governments: building/maintaining public facilities The Financial Markets and the Financial System: Channel for Savings and Investment • The financial markets enable the exchange of current income for future income and the transformation of savings into investment so that production, employment, and income can grow, and living standards can improve. The suppliers of funds to the financial system expect not only to recover their original funds but also to earn additional income as a reward for waiting and assuming risk. Functions Performed by the Global Financial System and the Financial Markets • Savings function. The global system of financial markets and institutions provides a conduit for the public’s savings. • Wealth function. The financial instruments sold in the money and capital markets provide an excellent way to store wealth. • Liquidity function. Financial markets provide liquidity for savers who hold financial instruments but are in need of money. Functions Performed by the Global Financial System and the Financial Markets • Credit function. Global financial markets furnish credit to finance consumption and investment spending. • Payments function. The global financial system provides a mechanism for making payments for goods and services, in the form of currency, checking accounts, debit cards, credit cards, digital cash, etc. Functions Performed by the Global Financial System and the Financial Markets • Risk protection function. The financial markets offer protection against life, health, property, and income risks, by permitting individuals and institutions to engage in both risk-sharing and risk reduction. • Policy function. The financial markets are a channel through which governments may attempt to stabilize the economy and avoid inflation. Functions Performed by the Global Financial System and the Financial Markets • The financial services that are most widely sought by the public include: - Payments services - Thrift services - Insurance services - Credit services - Hedging services - Agency services Types of Financial Markets Within the Global Financial System • The money market is for short-term (one year or less) loans, while the capital market finances long-term investments by businesses, governments, and households. • In particular, governments borrow from commercial banks in the money market, while in the capital market, insurance companies, mutual funds, security dealers, and pension funds supply the funds for businesses. Types of Financial Markets Within the Global Financial System • The money market may be subdivided into Treasury bills, certificates of deposit (CDs), bankers’ acceptances, commercial paper, federal funds and Eurocurrencies. • The capital market may be subdivided into mortgage loans, tax-exempt (municipal) bonds, consumer loans, Eurobonds and Euronotes, corporate stock, and corporate notes and bonds. • Types of Financial Markets In open markets, financial instruments are sold to the highest bidder, and they can be traded as often as is desirable before they mature. In negotiated markets, the instruments are sold to one or a few buyers under private contract. Financial capital is raised when new securities are sold in the primary markets. Security trading in the secondary markets then provides liquidity for the investors Types of Financial Markets Within the Global Financial System • In the spot market, assets are traded for immediate delivery (usually within one or two business days). • A futures or forward market is designed to trade contracts calling for the future delivery of financial instruments. • Options markets enable contracts that grant the right to buy or sell certain securities at specific prices within a certain time to be traded. • Factors Tying All Financial Market Credit, the common commodity. The shifting of borrowers among markets helps to weld the financial system together and to balance the costs of credit in the different markets. Speculation and arbitrage. Speculators who gamble on their market forecasts and arbitrageurs who watch for profitable arbitrage opportunities help to level out prices and maintain price consistency among the markets. s Together Factors Tying All Financial Markets Together • Perfect and efficient markets. There is some research evidence suggesting that financial markets are closely tied to one another due to their near perfection and efficiency. • Financial markets in the real world. In the real world however, market imperfection and information asymmetry exist. The Dynamic Financial System • The global financial system is rapidly changing. • In particular, the trend towards the global integration of financial systems has been aided by the gradual deregulation of financial institutions and services as well as the increasing harmonization of their regulations. • The Dynamic Financial System The results have been increasingly intense competition, many new financial services, increased risk, and a wave of mergers among financial institutions. The Plan of This Book • Part One provides an overview of the global financial system – its role in the world’s economy and basic characteristics. • Part Two examines the forces that shape interest rates and the prices of financial instruments. • Part Three draws our attention to the money market and its principal instruments and institutions (including the central bank). The Plan of This Book • Part Four takes a closer look at commercial banks, credit unions, savings and loan associations, money market funds, insurance companies, pension funds, mutual funds, and other private financial-service firms. • Part Five turns to the role of governments (federal, state, and local) and business firms within the global financial system. • Part Six focuses on the financial characteristics of consumers – individuals and families. • Part Seven is devoted to the international financial system and future trends in global finance. Chapter Review • Introduction to the Financial System • The Global Economy and the Financial System - Flows within the Global Economic System - The Role of Markets in the Global Economic System - Types of Markets - The Financial Markets and the Financial System: Channel for Savings and Investment • Functions Performed by the Global Financial System and the Financial Markets - Savings Function - Wealth Function - Liquidity Function - Credit Function - Payments Function - Risk Protection Function - Policy Function • Types of Financial Markets Within the Global Financial System - The Money Market versus the Capital Market - Divisions of the Money and Capital Markets - Open versus Negotiated Markets - Primary versus Secondary Markets - Spot versus Futures, Forward, and Option Markets • Factors Tying All Financial Markets Together - Credit, the Common Commodity - Speculation and Arbitrage - Perfect and Efficient Markets - Financial Markets in the Real World: Imperfection and Asymmetry • The Dynamic Financial System • The Plan of This Book [/size]

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SUMMMARY

Chapter 1 presentation