1. Copyright © 2012 Pearson Prentice Hall. All rights reserved. CHAPTER 1 Why Study Financial Markets and Institutions?

2. 1-1 © 2012 Pearson Prentice Hall. All rights reserved. Chapter Preview The evening news features a segment about interest rates, the Fed Chairman Ben Bernanke, and liquidity in credit markets.news What does all this mean? Do I care about interest rates? What is “the Fed?” Will this impact my firm’s ability to get a bank loan?the Fed

3. 1-2 © 2012 Pearson Prentice Hall. All rights reserved. Chapter Preview These are good questions. And this course will help you answer these questions by addressing a variety of topics ranging from the functioning of the bond and sock markets to the behavior of the Fed and banks.

4. 1-3 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Markets? Financial markets, such as bond and stock markets, are crucial in our economy. 1.These markets channel funds from savers to investors, thereby promoting economic efficiency. 2.Market activity affects personal wealth, the behavior of business firms, and economy as a whole

5. 1-4 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Markets?  Well functioning financial markets, such as the bond market, stock market, and foreign exchange market, are key factors in producing high economic growth.  We will briefly examine each of these markets, key statistics, and how we will examine them throughout this course.

6. 1-5 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Markets? Debt Markets & Interest Rates  Debt markets, or bond markets, allow governments, corporations, and individuals to borrow to finance activities.  In this market, borrowers issue a security, called a bond, that promises the timely payment of interest and principal over some specific time horizon.  The interest rate is the cost of borrowing.

7. 1-6 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Markets? Debt Markets & Interest Rates  There are many different types of market interest rates, including mortgage rates, car loan rates, credit card rates, etc.  The level of these rates are important. For example, mortgage rates in the early part of 1983 exceeded 13% vs near 4.5% over the past several years.past several years

8. 1-7 © 2012 Pearson Prentice Hall. All rights reserved. Bond Market and Interest Rates

9. 1-8 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Markets? The Stock Market  The stock market is the market where common stock (or just stock), representing ownership in a company, are traded.  Companies initially sell stock (in the primary market) to raise money. But after that, the stock is traded among investors (secondary market).  Of all the active markets, the stock market receives the most attention from the media. Why?attention from the media

10. Stock Market 1-9 © 2012 Pearson Prentice Hall. All rights reserved.

11. 1-10 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Markets? The Foreign Exchange Market  The foreign exchange market is where international currencies trade and exchange rates are set.  Although most people know little about this market, it has a daily volume around $1 trillion!

12. 1-11 © 2012 Pearson Prentice Hall. All rights reserved. Foreign Exchange Market

13. 1-12 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Institutions? We will also spend considerable time discussing financial institutions—the corporations, organizations, and networks that operate the so-called “marketplaces.” 1. Structure of the Financial System ─Helps get funds from savers to investors 2. Financial Crises ─The financial crises of 2007–2009 was the worst financial crisis since the Great Depression. Why did it happen?

14. 1-13 © 2012 Pearson Prentice Hall. All rights reserved. Why Study Financial Institutions? 3.Banks and Other Financial Institutions ─Includes the role of insurance companies, mutual funds, pension funds, etc. 4.Financial Innovation ─Focusing on the improvements in technology and its impact on how financial products are delivered 5.Managing Risk in Financial Institutions ─Focusing on risk management in the financial institution.

15. 1-14 © 2012 Pearson Prentice Hall. All rights reserved. Applied Managerial Perspective  Financial institutions are among the largest employers in the U.S. and often pay high salaries.  Knowing how financial institutions are managed may help you better deal with them.

16. 1-15 © 2012 Pearson Prentice Hall. All rights reserved. How We Study Financial Markets and Institutions Basic Analytic Framework 1.Simplified approach to demand for assets. 2. Basic supply & demand approach to understanding behavior in financial markets.

17. 1-16 © 2012 Pearson Prentice Hall. All rights reserved. How We Study Financial Markets and Institutions Basic Analytic Framework 3. Equilibrium forces & profit seeking behavior 4.Transactions cost & asymmetric information approach to financial structure

18. Learning Objectives  You should be familiar with and able to explain key elements of financial markets and how they function, including ─the basic theory of asset demand and determination of asset prices, ─the role of arbitrage and profit motive in financial markets, ─the role of information in financial markets, ─and the causes and consequences of financial crises. 1-17

19. Learning Objectives  You should be able to use appropriate models to analyze the issues listed above, and to draw appropriate conclusions about the effects of economic developments and policy interventions. 1-18

20. 1-19 © 2012 Pearson Prentice Hall. All rights reserved. Exploring the Web Web Exercise The next three slides (starting on page 10 in the text) show you how to (1) find historical interest rates from the Fed and save the information, (2) how to import the data into Excel, and (3) how to examine the information.

21. Exploring the Web 1-20 © 2012 Pearson Prentice Hall. All rights reserved.

22. Exploring the Web 1-21 © 2012 Pearson Prentice Hall. All rights reserved.

23. Exploring the Web 1-22 © 2012 Pearson Prentice Hall. All rights reserved.