Upload
makhmoor-syed
View
233
Download
0
Embed Size (px)
Citation preview
7/28/2019 Lecture002 IBF
1/25
Jamil Ahmed
Assistant Professor
7/28/2019 Lecture002 IBF
2/25
1-2
Financial System
Financial System channels funds from savors(lenders/saving surplus units) to users (borrowers/savingdeficit units).
Therefore, a Financial System comprises of some
intermediaries and financial markets who bridge gapebetween the surplus units and deficits units.
The system actually provides a meeting point or focal pointfor who have recourses to spare and who need them.
The intermediaries in turn are composed of institutionsclassified under three categories i.e. Deposit Institutions,Investment Institutions and Contractual Institutions.
7/28/2019 Lecture002 IBF
3/25
1-3
Flow of Funds
7/28/2019 Lecture002 IBF
4/25
4
Components of Financial System
Individuals, businesses, national governments,
govt. agencies, local/state governments who
form financial market.
Financial Intermediaries.
Regulators i.e. SBP/SECP & other participants
like security exchanges.
7/28/2019 Lecture002 IBF
5/25
1-5
Financial Markets
Financial markets provide a forum in which
suppliers of funds and demanders of funds can
transact business directly.
Its a market where financial assets are
traded/exchanged.
7/28/2019 Lecture002 IBF
6/25
1-6
Real Assets / Financial Assets
Real Assets: Assets owned by an entityhaving physical shape or are tangible in
nature i.e. Land, building, equipment etc.
Financial Assets: They are intangible assetsrepresenting claim against the future cash
flows.
Both assets are linked as to acquire the realassets a firm has to issue financial assets.
7/28/2019 Lecture002 IBF
7/25
1-7
The Role of Financial Assets
They help in transfer of funds from those
have the surplus to the ones who are in
deficit.
They redistribute the risk associated with cash
flow generated by tangible assets among
those seeking and those providing the assets.
7/28/2019 Lecture002 IBF
8/25
1-8
Role of Financial Markets
Determine the price or required rate of return
of an asset.
Provide liquidity i.e. ability to convert anasset to cash.
Reduces the transaction cost, which consists
of search costs and information costs. Payment Mechanism
7/28/2019 Lecture002 IBF
9/25
1-9
Classification of Financial Markets
- Primary Vs Secondary Markets
Primary Markets
A financial market dealing with financial claims that
are newly issued, is called the primary market.
These markets distribute the newly issued securitiesto investors.
Market Participants:
Corporations & governments as issuers.
Various investors i.e. which include individuals, all
categories of businesses and governments.
Investment bankers who act as agents for issuers.
7/28/2019 Lecture002 IBF
10/25
7/28/2019 Lecture002 IBF
11/251-11
The fee earned by underwriter is difference between the pricepaid to the issuer and security re-offered to the investors, termedas Gross Spread or Underwriter Discount.
However, when underwriter only facilitates issue using itsexpertise, the arrangement is referred as best Effort.
The New issue of securities issued through Primary Markets arereferred to as IPOs Initial Public Offerings.
Due to risk intaking whole issue, usually a number ofinvestment banker undertake an IPOs issue, called a Syndicate.The spread in this case is divided among syndicate members.
Primary MarketsProcess of issuing the new Securities (Cont) :
7/28/2019 Lecture002 IBF
12/251-12
The IPOs may also be issued by followingprocesses:
Bought dealsAuction Process
Preemptive Rights offering
Private Placements: The distribution of sharesto a limited number of institutional investors.
Primary MarketsProcess of issuing the new Securities (Cont) :
7/28/2019 Lecture002 IBF
13/251-13
Secondary Markets
The financial Market where already issued
financial assets are traded.
Key feature is that the issuer of the security
does not benefit from and does not play any
role in this market i.e. issuer does not get
funds from buyers of his securities.
Existing issue change hands.
7/28/2019 Lecture002 IBF
14/25
1-14
Secondary Market
Functions of Secondary Markets
Provides information about the value of a financialassets and in turn a firm issuing the securities. Howinvestors value both.
Non Corporate companies analyze the prices of theirbonds and the rate of interest investors expect anddemand.
They provide the investors/financial assets liquidity.Reduces the cost of transactions.
7/28/2019 Lecture002 IBF
15/25
1-15
Secondary Markets
What constitutes Secondary Markets:
Stock Exchange
Stock Indices:
Market Value Weighted Index: measures the total
value of all the outstanding stock issued by thevarious companies in the index.
Float Adjusted Index: the value of the index
reflects the value available in the public markets.
Price Weighted Index: index is calculated using astock price instead of the company value.
OTC Markets: Represents group of traders
dispersed in a geographical area and linked to an
stock exchange.
7/28/2019 Lecture002 IBF
16/25
1-16
Debt Vs Equity Market:
Debt Market: is a financial market where all sorts ofdebt instruments or financial assets characterized asdebt are traded.
Examples of debt instruments includes T-Bills, notes, bonds
and CDs. Participants: Institutional Investors, Govt.s, Traders,
Individuals.
Equity Market: is financial market where equity
instruments or financial assets representing equity aretraded.
Participants: Institutional Investors, traders and individuals,Govt.s etc.
7/28/2019 Lecture002 IBF
17/25
1-17
Money Vs Capital MarketMoney Market: A financial Market where Short
Term Debt securities are traded e.g. bankersacceptance, commercial papers, repos,negotiable certificates of deposits, Treasury billsof maturity of one year or less.
Capital Market: is the market of financial assets,where issuers can raise long term funds and suchassets are traded e.g. stocks and bonds.
7/28/2019 Lecture002 IBF
18/25
1-18
Broker Markets and Dealer Markets
Broker markets consists of national and regional
securities exchanges, which are organizations that
provide a marketplace in which firms can raise funds
the sale of new securities and purchasers can resell
securities
Dealer markets consist of both the Nasdaq market
and and the over-the-counter (OTC) market, where
the (unlisted) shares of smaller firm are sold and
traded.
7/28/2019 Lecture002 IBF
19/25
1-19
The key difference between broker and dealermarkets is a technical point dealing with the waytrades are executed.
When a trade occurs in a broker market, buyers andsellers are brought together and the trade takes placeon the floor of the exchange.
In contrast, buyers and sellers are never actuallybrought together in a dealer transactions areexecuted by securities dealers that make markets incertain securities.
Broker Markets and Dealer
Markets (continued)
7/28/2019 Lecture002 IBF
20/25
1-20
The New York Stock Exchange (NYSE) is the most
famous of all broker markets and accounts for about
60% of the value of shares traded in the U.S. stock
markets. Trading is conducted through an auction process
where specialists make a market in selected
securities.
As compensation for executing orders, specialists
make money on the spread (bid priceask price).
Broker Markets and Dealer Markets
(cont.)
7/28/2019 Lecture002 IBF
21/25
1-21
The over-the-counter (OTC) market is anintangible market for securities transactions.
Unlike organized exchanges, the OTC is both a
primary market and a secondary market.
The OTC is a computer-based market wheredealers make a market in selected securities and arelinked to buyers and sellers through the NASDAQ
System.
Dealers also make money on the spread.
Broker Markets and Dealer Markets
(cont.)
7/28/2019 Lecture002 IBF
22/25
7/28/2019 Lecture002 IBF
23/25
1-23
International Capital Markets (cont.)
Finally, the international equity market
allows corporations to sell blocks of shares to
investors in a number of different countries
simultaneously.
This market enables corporations to raise far
larger amounts of capital than they could raise
in any single national market.
7/28/2019 Lecture002 IBF
24/25
24
Money Market Instruments Following are commonly used money market
instruments:
Treasury Bills
Federal Funds
Repurchase Agreements
Negotiable Certificates of Deposit
Commercial Papers
Bankers Acceptance
Eurodollars
7/28/2019 Lecture002 IBF
25/25
25
Capital Market Instruments
Following are commonly used money market
instruments:
T Bonds
Corporate Bonds
Municipal Bonds
Stocks