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FINA 3144 - Ch 1: Why Study Financial Markets

by: Michaela Francisco

FINA 3144 - Ch 1: Why Study Financial Markets 3144

Marketplace > East Carolina University > Finance > 3144 > FINA 3144 Ch 1 Why Study Financial Markets
Michaela Francisco

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Pay Attention to: Intermediary, Assets, Bond, Interest Rate, Common Stock, Financial Crisis, Central Bank
Financial Markets
Charmaine Glegg
Class Notes
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This 3 page Class Notes was uploaded by Michaela Francisco on Thursday January 21, 2016. The Class Notes belongs to 3144 at East Carolina University taught by Charmaine Glegg in Spring 2016. Since its upload, it has received 66 views. For similar materials see Financial Markets in Finance at East Carolina University.


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Date Created: 01/21/16
Michela Francisco 1/21/2015 FINA 3144 Ch 1 Why Study Financial Markets and Institutions Financial markets deal with stocks, bonds, and foreign exchange along with banks, mutual funds, and insurance companies. The information regarding financial markets is very relevant to today’s society. It influences our economy as well as the political agendas of our nation. Financial Market: markets in which funds are transferred from people who have excess of available funds to people who have a shortage Ex: Lender  intermediary (bank)  borrower Economic growth depends a lot on how well the financial markets are doing. The financial markets need to function efficiently for an increase in economic growth. Debt Markets and Interest Rates Security: Financial Instrument: a claim on the issuer’s future income or assets Assets: any financial claim or piece of property that is subject to ownership Bond: debt security that promises to make payments periodically for a specified period of time. Debt markets = Bond markets Interest Rate: the cost of borrowing or the price paid for the rental of funds Ex: the interest rate on your student loans is the cost of you borrowing the money For a borrower, the lower the interest rate, the better. You will have to pay less for borrowing that money. An interest rate alone can be the deciding factor in the business decision. A high interest rate can cause a borrower to back out of the deal. The lower the interest rate can cause the borrower to accept the deal. The decisions of consumers to borrow money or save their own money personally impacts the overall economy. Different interest rates will move in unison, but still differ. For example all the interest rates will follow a trajectory, but where they are on the trajectory is in the details. They will not be the same. The Stock Market Common Stock: Stock: represents a share of ownership in a corporation and is a security that is a claim on the earnings and assets of the corporation The stock market runs off the earnings of corporations’ stock being traded. People can get rich or poor very quickly when investing in the stock market. Corporations issue stock and sell it to the public to raise money for these activities. Business investment decisions are strongly influenced by the stock market because the price of shares dictates selling newly issued stock. Selling newly issued stock increases the amount of money to put towards investment spending. The Foreign Exchange Market The foreign exchange market deals with transferring funds between countries. Countries all have different forms of money that are worth different amounts. A dollar here is not worth the same as a dollar in Mexico. Foreign Exchange Market: where the monetary conversion takes place to move funds between countries Foreign Exchange Rates: the price of one country’s currency in terms of another country’s currency. The value of the US dollar is constantly changing and this affects the financial aspect of trading goods and services between countries. - A US dollar with less value makes foreign goods more expensive (decrease in purchases of foreign goods and increase purchases of local goods) - A US dollar with more value it makes foreign goods less expensive (increase in purchases of foreign goods and less purchases of local goods) But if there is a strong US dollar, foreigners will buy less of our exported to them. It is a two way street. Structure of the Financial System The financial system includes many types of entities such as banks, insurance companies, investment banks, etc. Every entity is heavily regulated by the government to ensure trustworthy transactions and truthful information. Financial Intermediaries: entities like commercial banks, savings and loan associations, mutual savings banks, insurance companies, pension funds, and banks who manage lenders and savers. Financial Crisis Financial Crisis: major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms Ex: The “Great Recession” was a time of financial crisis because it was the largest downfall since the Great Depression. The “Great Recession” occurred between 2007 and 2009. Central Banks and the Conduct of Monetary Policy Central Bank: Federal Reserve System (US): the Fed (US): the government agency responsible for the conduct of monetary policy Monetary Policy: the management of interest rates and the quantity of money Money: Money Supply: anything that is generally accepted in payment for goods and services or in the repayment of debt These affect - Interest rates - Business cycles - Inflation The International Financial System The monetary flows between countries affects domestic economies and their performance. Domestic Economies: local economy of a country Banks and Financial Institutions Banks: financial institutions that accept deposits and make loans (an intermediary) The majority of Americans keep most of their money in the banks through checking and savings accounts. Financial Innovation Financial Innovation: the development of new financial products and services with the implementation of technology that can make banking more efficient Ex: Self check outs at Walmart is a more efficient way to make purchases through the implantation of technology Remember: Bond Market: this is where interest rates are determined Stock Market: effects the wealth on firm’s investments as well as everyday people Foreign Exchange Market: changes in the monetary conversions have consequences on the US economy


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