1、Money and Capital Markets,2,C h a p t e r,Eighth Edition,Financial Institutions and Instruments in a Global Marketplace,Peter S. Rose,McGraw Hill / Irwin,Slides by Yee-Tien (Ted) Fu,Financial Assets, Money,Financial Transactions, and Financial Institutions, Learning Objectives ,To learn about the ch

2、annels through which funds flow between lenders and borrowers within the global financial system. To discover the nature and characteristics of financial assets how they are created and retired by decision-makers within the financial system. To explore the critical roles played by money and the link

3、ages between money and inflation., Learning Objectives ,To examine how financial intermediaries and other financial institutions lend and borrow funds and create and retire financial assets within the global system of markets.,Introduction,The financial system is the mechanism through which loanable

4、 funds reach borrowers. Through the operation of the financial markets, money is exchanged for financial claims in the form of stocks, bonds, and other securities, effectively transforming savings into investment so that production, employment, and income can grow.,The Creation of Financial Assets,A

5、 financial asset is a claim against the income or wealth of a business firm, household, or unit of government, represented usually by a certificate, receipt, computer record file, or other legal document, and usually created by or related to the lending of money.,Characteristics of Financial Assets,

6、Financial assets are sought after because they promise future returns to their owners and serve as a store of value (purchasing power).,Characteristics of Financial Assets,They do not depreciate like physical goods, and their physical condition or form is usually not relevant in determining their ma

7、rket value. Their cost of transportation and storage is low, such that they have little or no value as a commodity. Financial assets are fungible they can easily be changed in form and substituted for other assets.,Different Kinds of Financial Assets,Any financial asset that is generally accepted in

8、 payment for the purchases of goods and services is a form of money. Examples include currency and checking accounts. Equities represent ownership shares in a business firm and are claims against the firms profits and proceeds from the sale of its assets. Common stock and preferred stock are equitie

9、s.,Different Kinds of Financial Assets,Debt securities entitle their holders to a priority claim over the holders of equities to the assets and income of an economic unit. They are either negotiable or nonnegotiable. Examples include bonds, notes, accounts payable, and savings deposits. Derivatives

10、have a market value that is tied to or influenced by the value or return on a financial asset. Examples include futures contracts, options, and swaps.,The Creation Process for Financial Assets,To acquire assets, households and business firms may use current income and accumulated savings internal fi

11、nancing. An economic unit may also raise funds by issuing financial liabilities (debt) or stock (equities), provided that a buyer can be found external financing.,Financial Assets and the Financial System,The act of borrowing or of issuing new stock simultaneously gives rise to the creation of an eq

12、ual volume of financial assets. For example, a $10,000 financial asset held by a household that had lent money will be exactly matched by a $10,000 liability of the business firm that had borrowed the money. Volume of financial assets created for lenders = Volume of liabilities issued by borrowers,F

13、inancial Assets and the Financial System,For the balance sheet of any economic unit, Total assets = Total liabilities + Net worth where assets = real assets + financial assets For the whole economy and financial system, Total financial assets = Total liabilities So, for the economy as a whole, Total

14、 real assets = Total net worth,Financial Assets and the Financial System,So, society increases its wealth only by saving and increasing the quantity of its real assets, for these assets enable the economy to produce more goods and services in the future. However, the financial system provides the es

15、sential channel necessary for the creation and exchange of financial assets between savers and borrowers so that real assets can be acquired.,Lending and Borrowing in the Financial System,Economists John Gurley and Edward Shaw (1960) pointed out that each business firm, household, or unit of governm

16、ent active in the financial system must conform to: R E = FA D whereR=Current income receipts E=Current expenditures FA=Change in holdings of financial assets D=Change in debt and equity outstanding,Lending and Borrowing in the Financial System,So, for any given period of time, the individual econom

17、ic unit falls into one of three groups: Deficit-budget unit (DBU): E R, D FA i.e. net borrower of funds Surplus-budget unit (SBU): R E, FA D i.e. net lender of funds Balanced-budget unit (BBU): R = E, D = FA i.e. neither net lender nor net borrower,Lending and Borrowing in the Financial System,2 - 1

18、6,Lending and Borrowing in the Financial System,The global financial system permits businesses, households, and governments to adjust their financial position from that of net borrower (DBU) to net lender (SBU) and back again, smoothly and efficiently.,What is Money?,All financial assets are valued

19、in terms of money, and flows of funds between lenders and borrowers occur through the medium of money. Money itself is a true financial asset, because all forms of money in use today are claims against some institution, public or private.,What is Money?,Source: /pihome/fedpoint/f

20、ed49.html,2 - 20,U.S. Money Aggregates,The Functions of Money,Money serves as a standard of value (or unit of account) for all goods and services. Money serves as a medium of exchange, such that buyers and sellers no longer need to have an exact coincidence of wants in terms of quality, quantity, ti

21、me, and location. Money serves as a store of value a reserve of future purchasing power although the value of money can experience marked fluctuations.,The Functions of Money,Money functions as the only perfectly liquid asset in the financial system. It exhibits price stability, ready marketability,

22、 and reversibility.,The Value of Money and Other FinancialAssets and Inflation,Inflation refers to a rise in the average price level of all goods and services. Inflation lowers the value or purchasing power of money and is a special problem in the financial markets because it can damage the value of

23、 financial contracts. The opposite of inflation is deflation, where the average level of prices for goods and services actually declines.,The Value of Money and Other FinancialAssets and Inflation,Inflation is commonly measured using price indices, such as: the Consumer Price Index (CPI), the Produc

24、er Price Index (PPI), or the Gross Domestic Product (GDP) Deflator Index.,The Evolution of Financial Transactions,Financial systems change constantly in response to shifting demands from the public, the development of new technology, and changes in laws and regulations. Over time, the ways of carryi

25、ng out financial transactions have evolved in complexity. In particular, the transfer of funds from savers to borrowers can be accomplished in at least three different ways.,The Evolution of Financial Transactions,Direct Finance Direct lending gives rise to direct claims against borrowers., Simple D

26、ifficult to match & risky,The Evolution of Financial Transactions,Semidirect Finance Direct lending with the aid of market makers who assist in the sale of direct claims against borrowers., Lower search (information) costs Risky & matching is still required,The Evolution of Financial Transactions,In

27、direct Finance Financial intermediation of funds., Low risk & affordable,2 - 29,Relative Size and Importance ofMajor Financial Institutions,Classification of Financial Institutions,Depository institutions derive the bulk of their loanable funds from deposit accounts sold to the public. Commercial ba

28、nks, savings and loan associations, savings banks, credit unions. Contractual institutions attract funds by offering legal contracts to protect the saver against risk. Insurance companies, pension funds.,Classification of Financial Institutions,Investment institutions sell shares to the public and i

29、nvest the proceeds in stocks, bonds, and other assets. Investment companies, money market funds, real estate investment trusts.,Portfolio (Financial-Asset) Decisions by Financial Institutions,A number of factors affect the making of portfolio decisions deciding what financial assets to buy or sell.

30、The relative rate of return and risk attached to different financial assets. The cost, volatility, and maturity of incoming funds provided by surplus-budget units. Hedging principle the approximate matching of the maturity of financial assets held with liabilities taken on.,Portfolio (Financial-Asse

31、t) Decisions by Financial Institutions,The size of the individual financial institution. Larger financial institutions tend to have greater diversification in their sources and uses of funds and economies of scale. Regulations and competition.,Disintermediation of Funds,Disintermediation refers to t

32、he withdrawal of funds from a financial intermediary by the ultimate lenders (savers) and the lending of those funds directly to the ultimate borrowers. Disintermediation involves the shifting of funds from indirect finance to direct and semidirect finance.,Disintermediation of Funds,Disintermediati

33、on of Funds,Some new forms of disintermediation have appeared over the past two decades. Initiation by financial intermediaries: Some banks sell off their loans because of difficulties in raising capital. Initiation by borrowing customers: Some borrowing customers learned how to raise funds directly

34、 from the open market.,Bank-Dominated Versus Security-Dominated Financial Systems,Lesser-developed financial systems are often bank-dominated financial systems, in which banks and other similar institutions dominate in supplying credit and attracting savings. The more mature systems today are becomi

35、ng security-dominated financial systems, in which traditional intermediaries play lesser roles and growing numbers of borrowers sell securities to the public to raise the funds they need.,Money and Capital Markets in Cyberspace,One popular money management site is Money Magazines which helps individ

36、uals track the assets they already hold or wish to hold. To determine how much things are worth after the effects of inflation and to work our way back into the past to see how the purchasing power of our money has changed over time, visit ,Chapter Review,Introduction The Creation of Financial Asset

37、s Characteristics of Financial Assets Different Kinds of Financial Assets The Creation Process for Financial Assets Financial Assets and the Financial System Lending and Borrowing in the Financial System,Chapter Review,Money as a Financial Asset What is Money? The Functions of Money The Value of Mon

38、ey and Other Financial Assets and Inflation The Evolution of Financial Transactions Direct Finance Semidirect Finance Indirect Finance,Chapter Review,Relative Size and Importance of Major Financial Institutions Classification of Financial Institutions Portfolio (Financial-Asset) Decisions by Financi

39、al Intermediaries and Other Financial Institutions Disintermediation of Funds New Types of Disintermediation,Chapter Review,Bank-Dominated Versus Security-Dominated Financial Systems,Money and Capital Markets,3,C h a p t e r,Eighth Edition,Financial Institutions and Instruments in a Global Marketpla

40、ce,Peter S. Rose,McGraw Hill / Irwin,Slides by Yee-Tien (Ted) Fu,Key Sources of Financial Information, Learning Objectives ,To identify important sources of information about the global financial system. To understand why the efficient distribution of information within the financial system is impor

41、tant. To learn how market participants keep track of the prices of financial assets. To learn about the content and concepts behind the main social accounting systems.,Introduction,Sound financial decisions require adequate and accurate financial information. We may divide the sources of information

42、 relied on by financial decision makers into: debt security prices and yields, stock prices and dividend yields, information on security issuers, general economic and financial conditions, and social accounting data.,Efficient Markets & Asymmetric Information,The efficient markets hypothesis (EMH) c

43、ontends that information relevant to the pricing (valuation) of loans, securities, and other financial assets is readily available to all borrowers and lenders at negligible cost.,Efficient Markets & Asymmetric Information,On the other hand, the concept of asymmetric information argues that the fina

44、ncial marketplace contains pockets of inefficiency in the availability and use of information, such that insiders can earn excess returns by selectively trading assets based on the special information they have been able to acquire.,Efficient Markets & Asymmetric Information,In an efficient marketpl

45、ace, each individual investor will rationally use all the relevant information that is available to value stocks and bonds. Hence, each financial asset will generate an ordinary or normal rate of return commensurate with its level of risk.,Efficient Markets & Asymmetric Information,According to the

46、capital asset pricing model (CAPM), the expected return on financial asset (or portfolio of assets) i, E(Ri), is:,The CAPM indicates that E(Ri) depends on rF, the time value of money (risk-free interest rate) E(RM) rF, the reward for bearing systematic risk i, asset is level of systematic risk,Effic

47、ient Markets & Asymmetric Information,The line or curve described by the CAPM equation is usually called the security market line (SML).,Efficient Markets & Asymmetric Information,If the EMH holds, any temporary deviation of actual returns from the SML should be quickly eliminated as investors react

48、 to temporary underpricing or overpricing of assets.,Different Forms of the EMH,The weak form of the EMH argues that the current price of a financial asset already reflects all its price and trading volume history. The semistrong form contends that the current price of a financial asset already refl

49、ects all publicly available and relevant information. The strong form argues that the current price of a financial asset already captures all relevant public and private information.,Different Forms of the EMH,Repeated research studies have essentially confirmed the weak and semistrong forms of the

50、EMH. The strong form, however, has been the most controversial, especially because of the existence of insider trading activities and because of the apparent asymmetrical scattering of pockets of special information throughout the financial system.,Problems Informational Asymmetries Can Create,Lemon

51、s and Plums. A loan officer (buyer) cannot be sure without incurring substantial costs whether his or her potential customer (seller) is a lemon (sour) or plum (sweet). Result: Plums may be driven away from the market.,Problems Informational Asymmetries Can Create,Adverse Selection. A bank that sets

52、 one price for all its checking account customers runs the risk of being adversely selected against by its high-balance, low-activity (and hence most profitable) customers. Solution: Enabling customer signaling via a price schedule for different account plans.,Problems Informational Asymmetries Can

53、Create,Moral Hazard. One party to a principal-agent contract may decide to pursue its own self-interest at the expense of the other party. Solution: Contracts drawn with the appropriate incentives and monitoring.,Asymmetry, Efficiency, & Real-World Markets,All real-world markets seem to have element

54、s of both efficiency and asymmetry. Perhaps, real-world markets can be split into two segments: A highly efficient segment in which well-informed individuals and institutions trade. A market segment in which less-well-informed small investors and small businesses trade.,Possible Remedies for Informa

55、tional Asymmetries,Some laws and regulations are designed to improve the flow of information between buyers and sellers and to protect the public against deception in valuing financial assets. Examples (U.S. ): 1934 Securities Exchange Act 1940 Investment Company Act 1970 Securities Investor Protect

56、ion Act Regulation FD (Fair Disclosure), 2000,Sources of Information,Debt Security Prices and Yields Data: bid & ask prices, yields-to-maturity Sources: real-time computer networks (e.g. Reuters, Bloomberg), televised reports (e.g. CNN, CNBC), financial press (e.g. The Wall Street Journal) Data: bon

57、d yield indexes Sources: Moodys Investor Service, The Daily Bond Buyer, U.S. Treasury, Dow Jones,Sources of Information,Stock Prices and Dividend Yields Data: prices (year-high, year-low, day-high, day-low, closing), sales volume, most recent dividend, dividend yield, P-E ratio, stock price indexes

58、(e.g. DJIA, S&P500), foreign stock prices Sources: computer networks (e.g. Internet), financial press, television, radio, financial institutions (e.g. S&P, Morningstar),Sources of Information,Security Issuers Data: firm history, principal products/services, key officers, recent operation summary, fi

59、nancial statements, credit ratings, industry performance indicators Sources: regulatory agencies (e.g. SEC), trade associations, commercial institutions (e.g. Moodys, S&P, Dun & Bradstreet), directories & databases, journals & magazines, credit bureaus,Sources of Information,General Economic and Financial Conditions Data: interest rates, money supply measures, industrial output, international transactions, unemployment rate, inflation, forecasts Sources: central banks (e.g. the Federal Reserve), statistical bureaus (e.g. Bureau of Economic Analysis), financial press,Social Ac