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An introduction to financial institutions, investments & Management

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1 An introduction to financial institutions, investments & Management
Basic Finance The Role of Financial Markets and Financial Institutions 2 An introduction to financial institutions, investments & Management Eleventh Edition

2 The Role of Money Medium of exchange Liquidity

3 Measure of the Money Supply
coins, currency and demand deposits M-2 M-1 plus savings accounts and small CDs M-2 is not affected by shifting funds between checking and savings accounts

4 Money Supply

5 The Role of Interest Rates
Allocate scarce credit Short-term rates / Money market Long-term rates / Capital market

6 Term Structure of Interest Rates

7 Structure of Yields Yield curve
Generally long-term debt implies higher rates (positively sloped yield curve)

8 Positively Sloped Yield Curve
Time and Yields Positively Sloped Yield Curve

9 Negatively Sloped Yield Curve
Time and Yields Negatively Sloped Yield Curve

10 Supply and Demand

11 Determinants of Interest Rates
Preference for shorter term Marketability Risk Expectations of future rates

12 from Savers to Business
The Transfer of Funds from Savers to Business Income that is saved is subsequently invested The process of investing creates financial claims The direct and indirect transfers

13 Banks Balance Sheet Equity Assets 900 Loans Deposits Liabilities
Bank R.E. 1,000 Equity Assets 900 Loans Deposits 100 Reserves Cash Banks Balance Sheet Liabilities Assets - Liabilities = Equity Demand Deposits

14 Income Statement Net Income 8 Int. Income 90 Int Expense 50
Salaries Upkeep Pre Tax Tax (20%) Net Income 8

15 Banks Balance Sheet Assets - Liabilities = Equity Balance Sheet 12/31
Bank R.E. 1,000 Equity Assets 900 Loans Deposits 100 Reserves Cash Liabilities Demand Deposits Banks Balance Sheet Assets - Liabilities = Equity 1,008 190 Reserves Balance Sheet 1/1 Balance Sheet 12/31

16 The Direct Transfer The saver directly receives a claim (debt or equity) on the issuer The issuer receives the funds

17 through a Financial Intermediary
The Indirect Transfer through a Financial Intermediary The saver receives a claim on the financial intermediary The financial intermediary receives a claim on the ultimate user of the funds

18 through a Financial Intermediary
The Indirect Transfer through a Financial Intermediary Each financial intermediary creates claims on itself and transfers funds from savers to Firms Governments People who need funds

19 The Variety of Financial Intermediaries
Commercial banks Savings and loan associations Mutual savings banks Credit unions Life insurance companies Pension plans Money market mutual funds

20 Commercial Banks Important source of loans
Deposits are banks’ primary sources of funds Demand deposits Savings accounts Certificates of deposit Small equity base

21 Commercial Banks’ Assets

22 Commercial Banks’ Liabilities and Equity

23 Regulation of Banks and Thrift Institutions
Regulation by the Federal Reserve Required reserves against deposit liabilities Excess reserves Secondary reserves

24 Federal Deposit Insurance Corporation (FDIC)
Insures accounts up to specified limit Provides another source of regulation of banks Adds stability to the banking system

25 Life Insurance Companies and Pension Plans
Alternatives for savers and borrowers to banks and thrift institutions May serve as financial intermediaries

26 Money Market Mutual Funds
Specialized investment company Make only short-term investments Acquire money market instruments Shares in money funds have become popular investments

27 Money Market Instruments
Negotiable CDs U.S. treasury bills Commercial paper

28 Money Market Instruments
Repurchase agreements (repos) Bankers’ acceptances Tax (or revenue) anticipation notes Eurodollar CDs

29 Money Market Instruments
These debt instruments are Safe Liquid Offer competitive short-term rates

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