Transcript Financial Markets and Institutions

Financial Markets
and Institutions
Leng Ling
Department of Economics & Finance
Georgia College & State University
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CHAPTER 1
The Role of Financial
Markets and Institutions
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CHAPTER 1 OVERVIEW
This Chapter will:
A. describe the 3 types of financial markets that
accommodate various transactions,
B. introduce the concept of security valuation
within financial markets,
C. describe the role of financial institutions
within financial markets,
D. identify the types of financial institutions that
facilitate transactions in financial markets.
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Questions
Why do people create financial markets?
What are traded in financial markets?
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Overview of Financial Markets
1. Three Types of Financial Markets
a. Money versus Capital Markets
b. Primary versus Secondary Markets
c. Organized versus Over-the-Counter
Markets
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Securities
2. Securities Traded in Financial Markets
a. Money Market Securities
Treasury Bill (T-bill); Commercial paper;
negotiable CD by banks
b. Capital Market Securities
1)
2)
Bonds and Mortgages
Stocks
c. Derivative Securities
1)
2)
Speculation
Risk Management – hedging
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Question
How to measure the value of a securities?
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Time Value of Money
1. Receive $100 today
2. Receive $100 one year from now
Would you choose 1 or 2?
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Time Value of Money
Money has time value
• People prefer receiving $100 today to receiving
$100 one year from now because they place a
LOWER value on cash flow received at a later
date. The worth of $100 received one year from
now is less than $100 received today.
• You cannot simply add sums of money received at
different points in time. the amounts received (or
paid) at different time must firstly be converted to a
common basis: the same point in time
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Time Value of Money
If you put $100 in a bank deposit account
earning 10% annually, how much will be in
the account after one year?
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Time Value of Money
Future Value
Number of periods
FV  PV  (1  r )
Present Value
n
Interest rate
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Time Value of Money
FV  PV  1  r 
n
Solving for PV, we get
FV
PV 
n
(1  r )
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Valuation of Securities
1. Market Pricing of Securities
a. Impact of Information on Valuations
• Economic
• Industry
• Firm-specific
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Valuation of Securities
b. Impact of Valuations on Pricing
• Valuation affects the supply and demand
for a security
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Valuation of Securities
c. Impact of the Internet on the Valuation
Process
•More timely pricing
•More accurate pricing
•More informative pricing
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Market Efficiency
When security prices fully reflect all available
information, the market is said to be efficient.
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Question
Do financial markets need regulation?
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Financial Market Regulation
a. Disclosure
securities Act of 1933
Securities Exchange Act of 1934
Securities and Exchange Commission
b. Regulatory Response to Financial
Scandals
Sarbanes-Oxley Act of 2002
c. Other Regulations
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Role of Financial Institutions
1. How Financial Markets Influence Economic
Development
2. Global Integration
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Types of Financial Institutions
1. Depository Institutions
a. Commercial Banks
Bank of America, Citigroup, Suntrust
b. Savings Institutions
c. Credit Unions
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Types of Financial Institutions
2. Nondepository Financial Institutions
•
•
•
•
•
Finance Companies: American Express, Ford Motor
Mutual Funds: Fidelity, Vanguard
Securities Firms: Merrill Lynch, Morgan Stanley
Insurance Companies: State Farm, Allstate, CNA
Pension Funds
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Exhibit 1.4 Asset Sizes of Financial Institutions (in
Billions of Dollars)
Source: Board of Governors, Federal Reserve System, 2007.
Types of Financial Institutions
1. Competition between Financial Institutions
2. Consolidation of Financial Institutions
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Exhibit 1.6 Organizational Structure of a Financial
Conglomerate
Question
Is it true that the bigger the better?
What is the tradeoff?
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Summary
1. Financial markets facilitate the transfer of
funds from surplus units to deficit units.
2. The valuation of a security represents the
present value of future cash flows
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In-class Discussion Assignment
 What is the story of Enron, WorldCom? What
happened to their stocks?
 Tell me some of the regulation in Sarbanes-Oxley
Act.
 What can you infer, tell or predict from the following
statement made by WSJ analyst and investment
managers
1. The price of IBM stock will not be affected by the
announcement that its earnings have increased as
expected.
2. The lending operations at BOA should benefit from
strong economic growth.
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