ECON305, Maclachlan, Fall 2006 Money & Banking Introduction Chapters 1 & 2 Week 1.

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Presentation transcript:

ECON305, Maclachlan, Fall 2006 Money & Banking Introduction Chapters 1 & 2 Week 1

ECON305, Maclachlan, Fall

ECON305, Maclachlan, Fall 2006 Why do we need a financial system? Coordination problem facing savers and businesses requiring capital. Transactions costs.

ECON305, Maclachlan, Fall 2006 Function of Financial Markets...

ECON305, Maclachlan, Fall 2006 Financial Intermediaries (Indirect Finance) Depository institutions Contractual savings institutions (insurance companies, pension funds) Investment intermediaries (finance companies, mutual funds)

ECON305, Maclachlan, Fall 2006 Three Major Financial Markets Bond market (debt, fixed income securities) Stock market (equities) Foreign exchange market

ECON305, Maclachlan, Fall 2006 Bond Market

ECON305, Maclachlan, Fall 2006 Some Distinctions Primary vs. secondary markets. Exchanges vs. over-the-counter markets. Money vs. capital markets. Brokers vs. dealers. Eurocurrencies vs. Eurobonds.

ECON305, Maclachlan, Fall 2006 Money market instruments Less than a year in maturity. Low risk. High denomination. Examples: Treasury bills, commercial paper, bankers acceptances, repurchase agreements.

ECON305, Maclachlan, Fall 2006 Debt Fixed cash flows (interest). Principal to be repaid. Default leads to bankruptcy. Equity Cash flows tied to profits (dividends). No principal to be repaid. Investors are residual claimants.

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