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Chapter 17
importance of the financial system. List the various types of securities. Define financial market, and distinguish between primary and secondary financial markets.
Reserve System and the tools it uses to control the supply of money and credit. Evaluate the major features of regulations and laws affecting the financial system. Describe the global financial system.
The financial system is the process by which money flows from savers to users.
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.
Securities
Financial instruments Obligations on the part of the issuer
Businesses and Governments
Investors are paid interest for the use of their funds. Generally low-risk U.S. Treasury bills, commercial paper, and bank certificates of deposit
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.
Price is determined by risk and interest rate. Several firms rate bonds
Standard & Poors (S&P) Moodys
Investment-grade Speculative/Junk
Stockholder has the right to exchange the bond or preferred stock for a fixed number of shares of common stock.
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.
Stock market (exchange) market in which common stocks are traded, such as the New York Stock Exchange.
The New York Stock Exchange the Big Board is the most famous and one of the oldest stock markets in the world. More than 3,000 stocks are listed on NYSE. The Nasdaq Stock Market the second largest stock market. Over 5,000 companies have their stocks listed on Nasdaq but many are smaller firms.
Other U.S. Stock Markets
The American Stock Exchange/AMEX Regional Stock Exchanges Foreign Markets
The brokerage firm executes the trade on behalf of the investor, charging a fee for the order
Market Order Limit Order
Deposit insurance shifts the risk of bank failures from individuals to the FDIC
Offer a variety of consumer services 85% of their loans are real estate loans Credit unions are cooperative financial institutions that are 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
Created In 1913
Central bank of the United States Regulate commercial banks Perform banking-related activities for the U.S. Department of Treasury
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.
The Check Clearing for the 21st Century Act is making this process more electronic.
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
The financial system is more connected. Financial institutions are more global. Only 3 of the 30 largest banks in the world are US institutions. Most nations have a central bank.