the financial system i

7/23/2019 The Financial System I

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The Financial System-I

(The Rationale of Saving

Decision)

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Surplus and Deficit

Spending UnitsSurplus spending unit (SSU) a spending unit who

prefers to spend on current consumption and/or

investment goods less than his or her current incomeat current market rates of interest.

Surplus spending unit (SSU) a spending unit who

prefers to spend on current consumption and/or

investment goods less than his or her current incomeat current market rates of interest.

Deficit spending unit (DSU) a spending unit who

prefers to spend more on current consumptionand/or investment goods than his or her current

income at current market rates of interest.

Deficit spending unit (DSU) a spending unit who

prefers to spend more on current consumptionand/or investment goods than his or her current

income at current market rates of interest.


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FACTORS AFFECTING THE DIISION OF S!ENDING

UNITS "ET#EEN SUR!$US AND DEFICIT

FACTORS AFFECTING THE DIISION OF S!ENDING

UNITS "ET#EEN SUR!$US AND DEFICIT

current income

current income

expected income

expected income

wealth

wealth

age

age

health

health

education

education

family status

family status

tastes

tastes

current interest rates

current interest rates


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The surplus spending units

have three primary options.

The surplus spending units

have three primary options.

Hold their surplus income asmoney balances

Repurchase and retire their own

outstanding financial claims soldat times they were DSs

!emporarily rent out purchasingpower to current DSs bypurchasing financial claimsissued by them"


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The deficit spending units

alsohave three primary

options.

The deficit spending units

alsohave three primary

options.

Reduce their money

balances

Sell claims on othersac#uired when they wereSSs

Sell new claims onthemsel$es to current SSs"


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The choice of adjustments

depends, in part, on thecharacteristics of.

The choice of adjustments

depends, in part, on thecharacteristics of.

F!"!#"$ #$"%&

F!"!#"$ #$"%&

F!"!#"$

!&TT'T(!&

F!"!#"$

!&TT'T(!&

F!"!#"$ %")*+T&

F!"!#"$ %")*+T&


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!hese are future claims on real resources" ntil maturity'they transfer purchasing power from spending units whopurchase the claims (SSs) to spending units who sellthe claims (DSs)"

ntil the claim is con$erted intoreal goods and ser$ices' ittypically generates interest" !hisrewards the claim for leasing hisor her purchasing power and forabstaining from using it"

F!"!#"$ #$"%&F!"!#"$ #$"%&


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FACTORS EXPAI!I!" DIFFERE!CES I! I!TEREST

RATES O! FI!A!CIA CAI#S

FACTORS EXPAI!I!" DIFFERE!CES I! I!TEREST

RATES O! FI!A!CIA CAI#S

!he longer the term to maturity is' the higher the interestrate demanded by the claim purchaser"

!he greater the mar+etability of a claim prior to its maturity in termsof both lower transaction costs and ability to obtain #uic+ly thepurchase price or close to purchase price' the lower the interest ratedemanded"

!he greater the ris+ the default is' the higher the interestrate demanded by the purchaser"


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#A$OR FI!A!CIA CAI#S

RA!%ED &' #O!E'!ESS


RA!%ED &' #O!E'!ESS

1" -RR.-0.S mong the currencies regarded asbeing maor are the ritish point sterling ()' the.uropean nion euro (6)' the 7apanese yen (8)' andthe -anadian dollar (-9)' and of course' the "S"dollar (S9)" !he $alue of two currencies with respectto each other' or their foreign exchange rate' is

e:pressed as follows;S91"


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11/25/12 1>.R-0 ES b" >! SB0CS E

c" SB0CS D @ SS@-0!0@Sd" -R.D0! 0@S

4" -.R!0F0-!.S @F D.?@S0! !-@>>.R-0 ES a" -onsumer certificates of deposit issued indesignated denominations' ha$e fi:ed maturity dates'

and bear fi:ed rates of interest to maturity" !hey canbe redeemed prior to maturity" !hey can be redeemedprior to maturity only in emergency and at a penalty"

b" egotiable certificates of deposit G commonlyreferred to as -Ds' are $ery large certificates ofdeposit' usually issued in denominations of 91 million

to business firms and go$ernment units"


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RA!%ED &' #O!E'!ESS


RA!%ED &' #O!E'!ESS

5" R.S.RB.S @F 0F. 0SR-. -@>?0.S reser$es or protection against the loss of income fromactuarially premature death or retirement"

%" [email protected]>.! 0SS.S;

a" !R.SR SB0CS @DS the longest termsecurities issued by the !reasury" !hey ha$e original terms tomaturity of ten years or more"

b" !R.SR 0S are issued with a term to maturityof one year or less" !hey are sold at a discount from maturity$alue" !hese bills are auctioned wee+ly"

c" !R.SR @!.S coupon issues sold from one toten years to maturity" nli+e bills' notes are sold not on aregular schedule but at times when new funds must be raisedto finance a federal budget deficit"


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RA!%ED &' #O!E'!ESS


RA!%ED &' #O!E'!ESS

&" E.RAS --.?!-.S being issued byban+s that ser$e as guarantee of a businesstransactionI sold at a discount from maturity $alue"!hese ha$e maturity of 1 to 3 months"

*" SH@R!G!.R> -@R?@R!. D.!(-@>>.R-0 ??.R) a form of financing thatconsists of shortGterm' unsecured promissory notesissued by firms with a high credit standing" >ostcommercial paper issues ha$e maturities ranging from3 to 2&< days"


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RA!%ED &' #O!E'!ESS


RA!%ED &' #O!E'!ESS

," >0-0? [email protected]>.! D.! G sold by state'city' and other local go$ernments" !hey arecollateraliJed either by full ta:ing powers of the issuingmunicipality (general obligation bonds) or by re$enuesderi$ed from the particular proect the bonds financed

(re$enue bonds)" >aturities $ary from a few wee+s to3< or more years"

1ostbonds are issued with maturities of 1< to 3< years andwith a par $alue' or face $alue' of 91'


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RA!%ED &' #O!E'!ESS


RA!%ED &' #O!E'!ESS

11" -@R?@R!. .K0! consists of longGtermfunds pro$ided by the firmAs owners' the stoc+holders" firm can obtain e#uity capital either internally' byretaining earnings rather than paying them out asdi$idends to its stoc+holders' or externally' by sellingcommon or preferred stoc+"


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F!"!#"$ !&TT'T(!&F!"!#"$ !&TT'T(!&

!hese ser$e as intermediaries by channeling thesa$ings of indi$iduals' businesses' and go$ernments intoloans or in$estments" !he financial institutions e:peditethe e:change of claims for money"

Sa$ers and lenders are

brought together on thepri$ate capital mar+et byinvestment bankers"

Sa$ers and lenders arebrought together on thepri$ate capital mar+et by

investment bankers"


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INEST%ENT "AN&ERS

"RO&ERS ' pride a pure searc* serice+ t*e,

d nt ta-e legal pssessin f t*e clai.s traded/

"r-ers lcate t*e participants in a pending

trade 0efre t*e trade ccurs and receie a

c..issin fr. 0t* parties fr *is serice

upn ding t*e trade/

DEA$ERS ta-e legal pssessins f t*e clai.s

0, 0u,ing t*e clai.s fr. DSUs fr t*eir 1ninentries and su0se2uentl, selling t*e clai.s

t SSUs fr. t*ese inentries/ Dealers3 inc.e

is deried fr. t*e spread 0et1een t*e 0u,ing

and selling prices f t*e clai.+ t*e greater t*e

spread4 t*e greater t*e earnings/


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F$O# OF FUNDS FOR FINANCIA$

INSTITUTIONS AND %AR&ETS

!riate

!lace.ents

Financial

Institutins

Financial

%ar-ets

De.anders f

Funds (DSUs)

Suppliers f

Funds (SSUs)

Funds Funds

SecuritiesSecurities

Deposits/Shares

Loans

FundsFunds

Funds

Securities

Funds

Securities


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Private placementmeansthat the firm sells new

securities directly to anin$estor or group of in$estors"

Private placementmeansthat the firm sells new

securities directly to anin$estor or group of in$estors"


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T'PES OF FI!A!CIA I!TER#EDIARIEST'PES OF FI!A!CIA I!TER#EDIARIES

COMMERC!L "!#$S the largest' most important'and most di$ersified of all financial intermediaries" !heyare commonly referred to as the Ldepartment stores offinance"M

S!%#&S !#D LO!# !SSOC!'O#S primarilypersonal sa$ings and mortgage lending institutions"!hey effecti$ely borrow shortG and intermediateGterm

through passboo+ sa$ings and sa$ings certificates forwhich they compete with commercial ban+s' and lendlongGterm on real estate collateral"


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@CG!.R> D.!0S!R>.!S

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Financial Markets categorized by theterm to maturity of the claims traded

Financial Markets categorized by theterm to maturity of the claims traded


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Financial Markets categorized by theUnit size of trade

Financial Markets categorized by theUnit size of trade

+* CE#'R!L=ED M!R$E'S , the mar1et -herein securities in largeunits3 sa.3 of 5+ million or more3 are traded* 'he trades are centrali2ed tolimited numer of ma9or cities called >financial centers* 'hese -ouldinclude the countr.?s ten largest an1s3 four largest insurancecompanies3 the largest mutual savings an13 largest organi2ed stoc1exchanges3 and almost all large securit. dealers and ro1ers*

7* DECE#'R!L=ED M!R$E'S ,mar1ets for smaller trading units

that exist in ever. cit. throughoutthe countr.*


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Financial Markets categorized by theLocation

Financial Markets categorized by theLocation

+* OR&!#=ED M!R$E'S , commonl. referred to as an >exchange*"u.ers and sellers fre0uentl. trade through agents of an exchange3 not-ith each other* 'he exchange matches the orders and estalishes thee0uilirium prices* 'he largest organi2ed exchange in the (nited Statesis the #e- )or1 Stoc1 Exchange*

7* O%ER4'@E4CO(#'ER M!R$E'S , exists-herever financial claims are sold underconditions different from those for an organi2edexchange* Ever. dealer and intermediar. operates

an over4the4counter mar1et in their o-n shop -henthe. u. or sell claims for their o-n account*"u.ers and sellers trade directl. -ith each otherconducted largel. . telephone*


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8hat is 8E!L'@A8hat is 8E!L'@A

#ealt* is an,t*ing 1*ic* *as

ecn.ic alue/

T*is .eans it *as a price ' and itals generates prestige and p1er/

One 1a, t create 1ealt* is

t*rug* SAINGS/


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8h. do -e S!%E mone.A8h. do -e S!%E mone.A

To finance the needs of old age.To finance the needs of old age.

To give insurance against the

contingency of -eing unemployed.

To give insurance against the

contingency of -eing unemployed.

To give protection for the family.To give protection for the family.

To enjoy fully the retirement period in

comfort and leisure.

To enjoy fully the retirement period in

comfort and leisure.

To earn interest or additional income.To earn interest or additional income.

To save -ecause there is no other

alternative -ut to save.

To save -ecause there is no other

alternative -ut to save.


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SAING E5UATIONSSAING E5UATIONS

Asset ' $ia0ilities 6#ealt*Asset ' $ia0ilities 6#ealt*

Inc.e ' Cnsu.ptin 6 SaingsInc.e ' Cnsu.ptin 6 Saings

Cnsu.ptin 7 Saings 6 Inc.eCnsu.ptin 7 Saings 6 Inc.e

Saings 6 8 #ealt*Saings 6 8 #ealt*

T*is is -n1n as t*e 9"alance S*eet Identit,:/ An indiidual .a, 0e

descri0ed as 9net creditr: if 1ealt* is psitie+ if n t*e ppsite4 *e is

referred t as 9net de0tr:

T*ese are -n1n as t*e 9Saing Identit,:/ T*ese e;e.plif, t*e fact t*at

cnsu.ptin and saings are t*e t1 alternatie functins f inc.e/

T*is is -n1n as t*e 9Accu.ulatin Identit,:/ It prides t*e tie


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&RO(P !C'%');Re$iew the !erminologies about money and financial

systemsFor group acti$ity' answer and e:plain the following;

a" Nhy do we sa$eO 0s it good to sa$e money in theban+ during prolonged inflationO NhyO

b" 0f current consumption is greater than currentincome' how could this be sustainedO .:plain yourbeha$ioral aspects in sa$ing decision"

the financial system i

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