4-1 Business Finance (MGT 232) Lecture 3

4-2 Business Finance Introduction Introduction (Financial Environment)

4-3 Overview of the Last Lecture Role of Management Agency Theory Social Responsibility Organization of the Financial Management Business Environment – Four types of Businesses Financial Environment – Financial Markets and Institutions

4-4 What is a market? A market is a venue where goods and services are exchanged. A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds. The purpose of financial markets is to efficiently allocate savings to ultimate users.

4-5 Types of financial markets Physical assets market: A market for exchange of Physical assets (e.g: Cell phones, wheat, cloths etc) Financial assets A market specifically for the financial assets ad their exchange and tranfer (e.g bonds, stocks, swaps, certificate of deposits etc)

4-6 Money Market A market for short-term and highly liquid asset (MM Instruments: Treasury bills, commercial paper, deposits, certificates of deposit, bills of exchange, repurchase agreements etc) Capital Market A market in which individuals and institutions trade financial securities. this type of market is composed of both the primary and secondary markets. Types of financial markets

4-7 Primary Market Market for raising new capital – Initial public offering (IPO) – Second public offering Types of financial markets

4-8 Secondary Market Market for already existing and outstanding securities For Example: o Karachi Stock Exchange o London Stock Exchange o New York Stock Exchange Types of financial markets

4-9 Stock Exchanges A very important secondary market There are two basic types of Stock exchanges – The Physical Location Exchanges – Electronic dealer-based markets

4-10 Physical location stock exchanges vs. Electronic dealer-based markets Auction market vs. Dealer market (Exchanges vs. OTC) NYSE vs. Nasdaq (National Association of Security Dealer based Automated Quotation) Differences are narrowing now-a-days

4-11 Spot Market Market where goods and services are exchange on the spot (the price and date is determined on the spot) Futures market Market where goods and services are exchange on some future date with pre-determined price, quantity and date Types of financial markets

4-12 Public Market Market for exchange of goods and services held publically, require to get into proper formal contracts and is liquid Private Market Market for private contracts which are informal in nature and are not liquid Types of financial markets

4-13 Mortgage Market: Market for mortgage loans including the House financing, Business loans etc which require to mortgage something in return of getting a loan Consumer Credit: Consumer loans including the student loan, short term loans, car financing, credit card loans etc Types of financial markets

4-14 How is capital transferred between savers and borrowers? Direct transfers Investment banking house Financial intermediaries

4-15 Transferring Capital Direct Transfer of Funds saver

4-16 Transferring Capital Direct Transfer of Funds saver firm

4-17 Cash Transferring Capital Direct Transfer of Funds saver firm

4-18 Cash Securities Transferring Capital Direct Transfer of Funds saver firm

4-19 Transferring Capital Indirect Transfer using Investment Banker saver

4-20 Transferring Capital Indirect Transfer using Investment Banker saver investment banker

4-21 Funds Transferring Capital Indirect Transfer using Investment Banker saver investment banker

4-22 Funds Transferring Capital Indirect Transfer using Investment Banker saver investment banker firm

4-23 Funds Transferring Capital Indirect Transfer using Investment Banker Funds saver investment banker firm

4-24 Funds Transferring Capital Indirect Transfer using Investment Banker Funds Securities saver investment banker firm

4-25 Funds Transferring Capital Indirect Transfer using Investment Banker Securities Funds Securities saver investment banker firm

4-26 Investment Banking How do investment bankers help firms issue securities? Advising the firm. Underwriting the issue. Distributing the issue. Enhancing Credibility.

4-27 Transferring Capital Indirect Transfer using a Financial Intermediary saver

4-28 Transferring Capital Indirect Transfer using a Financial Intermediary financial intermediary saver

4-29 Funds Transferring Capital Indirect Transfer using a Financial Intermediary financial intermediary saver

4-30 Funds Transferring Capital Indirect Transfer using a Financial Intermediary financial intermediary firm saver

4-31 Funds Transferring Capital Indirect Transfer using a Financial Intermediary Funds financial intermediary firm saver

4-32 Funds Transferring Capital Indirect Transfer using a Financial Intermediary Funds financial intermediary firm saver FirmSecurities

4-33 Funds Transferring Capital Indirect Transfer using a Financial Intermediary IntermediarySecurities Funds FirmSecurities financial intermediary firm saver

4-34 Types of financial intermediaries Commercial banks Life insurance companies Mutual funds Pension Funds Finance Companies

4-35 Summary Financial Market Types of Financial Markets – Physical Vs Financial asset – Money Vs Capital – Primary Vs. Secondary – Spot Vs. Future – Public Vs. Private – Mortgage Vs Consumer Credit Types of Capital transfer Types of Financial Intermediaries