1. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Chapter 1 Introduction To Financial Markets And Financial Institutions Chapter Objectives The specific objectives of this chapter are to: ■ describe the types of financial markets that facilitate the flow of funds, ■ describe the types of securities traded within financial markets, ■ describe the role of financial institutions within financial markets, and ■ identify the types of financial institutions that facilitate transactions in financial markets. 1

2. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Definition of Financial Markets Financial Markets are markets in which financial products are traded. TIpSarhirBaØvtßúmaneKaledABI rTak;TinKña ³ - - CYysMrYldl;hirBaØb,TanpÞal; tamry³ecjpSaymUlb½RtfµI - - erobcMkarCYjdUrnUvmUlb½RtE dl)anecjpSay.

3. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Role of Financial Markets 1.Surplus units: participants who receive more money than they spend such as investors. 2.Deficit units: participants who spend more money than they receive, such as borrowers. 3- Securities: Financing or investment instruments (some negotiable, others not ) bought and sold in financial market.

4. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Role of Financial Markets 1.Types of Financial Markets a.Money versus capital markets b.Primary versus secondary markets Money Market : Debt securities with maturity of less than one year. Capital Market : Debt securities with maturity of longer than one year. Primary Market : kardak;lk;mUlb½RtCaelIkdM bUgedayRkumh‘une)aHpSay eTA

5. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 eGayvinieyaKKin RtUv)aneKehAfaCakarlk;EckcayCael IkdMbUg. TIpSardMbUg. TIpSardMbUg KWCaTIkEnøgEdl mUlb½RtRtUv)anlk;CaelIkTImYy eTA[saFarNCn ehIyGñkTij)anTijmUlb½RtedaypÞal;B IRkumh‘une)aH pSayEdlGacCaRkumh‘unsaCIvkmµ (Corporation) b¤GgÁPaBrdæaPi)al (Government Entity) mYyEdl)ane)aHpSaylk;mUlb½Rt. sac;R)ak;sMrab; TUTat;mUlb½RtRtUvbg;eTA[Rkumh‘ une)aHpSay ehIyGñkTijPaKh‘unTaMgenH køayCaGñkkan;kanb;¬m©as;¦ PaKh‘undMbUgeK.

6. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 PaKh‘unikdMbUgeKGackan; kab;PaKh‘unTaMgenH b¤k_lk;PaKh‘unTaMgGs; eTA[GñkepSgeTot. dMeNIkar lk;PaKh‘uneTA[saFarN³Cn CaelIkdMbUg RtUveKsÁal;faCa : karnaMRkumh‘uneTAkan;saFarN³ (Talking the company Public). enHmann½yfa Rkumh‘un Elgkan;kab;edayvinieyaKindMbUg b¤sßabnik (Founder) eTotehIy.

7. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Rkumh‘unEdllk;PaKh‘unrbs;xøÜne TAkan;saFarN³Cn RtUv)aneK snµt; fa : sMeNIlk;mUlbRtCasaFarN³ (going public) ekItmaneLIg. enAkñúgRbeTsmYycMnYn EdlCaRbeTskumµúynIsþ eKeRbIBakü Taking the company private CMnYsBakü (Talking the company Public). cMeBaHdMeNIkarlk;PaKh‘unCaelIk dMbUgenAkm<úCa RtUv)aneKehAfa : sMeNIe)aHpSaylk;mUlbRtCasaFar N³elIkdMbUg ( Initial Public Offering / IPO )

8. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Secondary Market : TIpSarbnÞab; KWCaTIkEnøgEdlkarCYjdUrmUlb ½RtRtUv)anekIteLIgCaRbcaM rvagGñklk; nigGñkTijmUlb½Rt. TwkR)ak;EdlekItecjBIskmµPaB CYjdUrenH RtUvbg;eTA[PaKh‘unikEdllk; minEmn[eTARkuh‘une)aHpSay dMbUgenaHeT. mUlb½RtTaMgGs;EdlCYjdUrenATI pSarbnÞab;GacRtUv)aneK CYjdUrenAkñúgTIpSarmUlb½Rt (Securities Exchanges) b¤enAeRkATIpSar mUlb½Rt EdleKehAfa TIpSarrMlgbBa¢r ( Over-The-Counter).

9. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 PaBxusKñarvag Securities Exchanges nig Over-The-Counter - KWRtg;fa Securities Exchanges manTIkEnøgCak;lak;sMrab;[BaNiC ¢kr Securities Dealer b¤QµÜjeCIgsarmUlb½Rt Securities Brokers CYbTl;KñakñúgkarCYjdUrmUlb½Rt. -cMENkÉ Over-The-Counter vij BaNiC¢krmUlb½Rt b¤QµÜjeCIgsarmUl bRteFVIkarCYjdUrPaKh‘untamry³k arP¢ab; computer system b¤tamry³ TUrs½BÞ ehIyEdlskmµPaBrbs;eKmintamry³b NþajTIpSarmUlb½RteT.

10. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 kt;sMKal; ³ edaysarbec©kviTüarIkcMerIn PaBxusKñarvsgTIpSarTaMgBIr manlkçN³minc,as;las; enAeBlEdlTIpSarmUlbRtnaeBlbc© úb,nñ BwgEp¥kkan;EteRcInelIbNþajkMB üúT½r CaCagkareRbIR)as;TIkEnøgenAelI TIpSarmUlbRtsMrab;karCYjdUrPa Kh‘un.

11. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 - enAkñúgTIpSarrMlgbBa¢r Over-The- Counter Market ³ CaFmµta GñkCYjdUrmUlb½Rt edIrtYnaTICaBaNiC¢krmUlb½Rt ¬ Securities Dealer ¦ RBmTaMgbegáItTIpSarmYy ( Make a market) edayxøÜnÉg kñúgkarCYjdUr RbePTmUlbRtCaeRcIn. eKCaGñkbegáItTIpSar ( Market maker).

12. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 - Market maker eFVI[manTIpSarEdlEckecjCaBIrEp ñk KW ³ EpñkTij nigEpñklk; tamry³kardak;témø (Quoting a price) mYy EdlGñk begáItTIpSarGacTUTat;[Gñklk; (Bidding Price) b¤kñúgtémømYyEdl BYkeKGaclk;[GñkTij (Asking Price). PaBxusKñarvag témølk; nigtémøTij (Bid and Ask) RtUv)aneKehAfa Kmøat (Spread).

13. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Securities Traded in Financial Markets 1.Money Market Securities: -T-Bill -Certificate of deposit (CD) -Commercial paper (CP) -Banker’s Acceptance (BA) -Fed Funds -Repurchase agreements (REPO)

14. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Securities Traded in Financial Markets 2-Capital Market Securities a.Bonds : Long term debt obligations issues by firms or government b.Mortgages : Long term debt obligations created to finance the purchase of real estate. c.Stocks

15. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Sources and Uses of funds of Financial Institutions - Depository Financial Institutions Generate funds from deposit - Non depository Financial Institutions Generate funds from sources others than deposits

16. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 - Depository Financial Institutions Source of funds Uses of funds Commercial Banks : various deposits Commercial Loan Securities Purchase Saving Institutions : Deposit Residential Mortgage Loan Securities Purchase Credit Union: Deposit Various Loan Non-profit Serve credit union members Small size

17. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 - Non depository Financial Institutions Source of funds Uses of funds Financial companies : Securities Loans ServicesInvestment Mutual Funds : Share Bonds Stocks Securities Firms : ServicesSecurities Securities Brokers Underwriter Dealer

18. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 - Non depository Financial Institutions (Cont) Source of funds Uses of funds Insurance Companies : Insurance policiesLong-Term bonds Stocks Pension Funds : Pensions Contribution Long-Term bonds Stocks

19. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Exhibit 1.3 Comparison of Roles Among Financial Institutions

20. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Exhibit 1.4 Asset Sizes of Financial Institutions (in Billions of Dollars)

21. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Exhibit 1.5 Summary of Institutional Sources and Uses of Funds

22. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22