Transcript Options for Organizing Small and Large Businesses
Chapter
16
The Financial System
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Learning Objectives
1
Outline the structure and importance of the financial system.
2
List the various types of securities.
3
Define financial market, and distinguish between primary and secondary financial markets.
4
Describe the characteristics of the major stock exchanges.
5
Discuss the organization and functioning of financial institutions.
6
Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit.
7
Evaluate the major features of regulations and laws affecting the financial system.
8
Describe the global financial system.
The Financial System
The
financial system
is the process by which money flows from savers to users.
Understanding the Financial System Financial System Savers Users Financial Institutions Financial Markets Savings is a function of many variables.
Funds can be transferred between users and savers directly or indirectly.
Types of Securities
Securities Financial instruments Obligations on the part of the issuer Businesses and governments Provide rate of return to purchasers Money market instruments Bonds Stock
Money Market Instruments
Short-term debt securities Issued by governments, financial institutions, and corporations Investors are paid interest for the use of their funds Generally low-risk U.S. Treasury bills, commercial paper, and bank certificates of deposit
Bonds
Government Bonds
Bonds sold by the U.S. Department of the Treasury
Municipal Bonds
Bonds issued by state or local governments Revenue bonds are used toward a project that will produce revenue, general obligation bonds are not
Corporate Bonds
A diverse group and often vary based on the collateral
Types of Bonds
Bond Ratings
Price is determined by risk and interest rate.
Several firms rate bonds Standard & Poor’s (S&P) Moody’s Investment-grade Speculative/Junk
Stocks
Common stock
–
ownership
corporations claims in Vote on major company decisions Cash dividends Price appreciation
Preferred stock
– stockholders who receive preference in the payment of dividends
Convertible Securities
Stockholder has the right to exchange the bond or preferred stock for a fixed number of shares of common stock.
Financial Markets
Primary market
– firms and governments issue securities and sell them initially to the public When a firm offers a stock for sale to the general public for the first time
Secondary market
– collection of financial markets in which previously issued securities are traded among investors
Understanding Stock Markets
Stock market (exchange) – market in which shares are bought and sold by investors, such as the New York Stock Exchange.
Stock Exchanges
The New York Stock Exchange
listed on the NYSE.
– the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are The
Nasdaq
firms.
Stock Market – the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq, but many are smaller Other U.S. Stock Markets: The American Stock Exchange/AMEX Regional stock exchanges Foreign markets
ECNs and the Future of Stock Markets
ECNs – Electronic Communication Networks
The 4 th market Buyers and sellers meet in a virtual market and exchange with one another Take place on INET or Archipelago INET and Archipelago have been purchased by Nasdaq and the NYSE
Investor Participation in the Stock Market
Investors use brokerage firms to: 1. Establish an account 2. Enter orders 3. Trade stock The brokerage firm executes the trade on behalf of the investor, charging a fee for the order.
Market order Limit order
Financial Institutions
Commercial Banks Savings Banks and Credit Unions Non-depository Institutions
Financial Institutions
Electronic Banking
An increasing amount of funds move through electronic funds transfers (EFTs).
Millions of businesses and consumers now pay bills and receive payments electronically.
Most employers directly deposit employee paychecks.
Social Security and other federal payments are made each year electronically.
Most banks now offer customers debit cards More than 1/3 of American households use some online banking.
Federal Deposit Insurance Corporation
Enacted by the Banking Act of 1933 Restored public confidence in the banking system Before deposit insurance, runs were common as people rushed to withdraw their money from the bank Deposit insurance shifts the risk of bank failures from individuals to the FDIC
Savings Banks and Credit Unions
Offer a variety of consumer services 80+% of their loans are real estate loans Credit unions are cooperative financial institutions owned by depositors/members Credit unions are created to serve consumers Insured by National Credit Union Administration (NCUA), which functions the same as the FDIC
Nondepository Financial Institutions
Insurance Companies Pension Funds Finance Companies Mutual Funds
The Role of the Federal Reserve
The Federal Reserve Created In 1913 Central bank of the United States Regulates commercial banks Performs banking-related activities for the U.S. Department of Treasury Provides services for banks Sets monetary policy
Organization of the Federal Reserve
12 Federal reserve districts Own federal reserve bank District banks are run by a nine-member board of directors The board of governors is the governing body Politically independent
Federal Open Markets Committee (FOMC)
sets most policies concerning monetary policy and interest rates
Check Clearing and the Fed
Americans still write billions of paper checks.
The process by which funds are transferred from the check writer to receiver is a multiple-step process managed and cleared by the Fed.
The Check Clearing for the 21st Century Act is making this process more electronic.
Monetary Policy
Controlling supply of money and credit Measures of the money supply: M1 & M2 The Fed requires banks to maintain reserves Set the discount rate Open market operations
M1 & M2
Tools Used by the Federal Reserve to Regulate the Growth in the Money Supply
Regulation of the Financial System Bank regulation Government regulation of the financial markets ( SEC ) Industry self-regulation Rules of conduct by professional organizations like National Association of Securities Dealers Market surveillance
The Financial System: A Global Perspective
The financial system is more
connected
.
Financial institutions are more global.
Only
3 of the 30
largest banks in the world are U.S. institutions.
Most nations have a central bank.