BMGT341 Notes.docx - BMGT341 Financial Markets Chapter 1...

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BMGT341: Financial Markets Chapter 1: Why Study Financial Markets and Institutions Debt Markets and Interest Rates The bond market enables corporations and governments to borrow in order to finance their activities (US Gvt is the biggest debtor in the world) Where interest rates are determined o Determines the supply and demand for funds in the economy Stock Market Black Monday – October 19 th , 1987 o Worst one-day drop in history Fluctuations in stock prices affect the size of peoples’ wealth and may affect their willingness to spend Foreign Exchange Market Where international currencies trade and exchange rates (USD vs Euro) are determined o For funds to be transferred from one country to another, they have to be converted from the currency in the country of origin to the currency of the country they are going to Biggest market with average daily volume of $1 Trillion The exchange rate affects the cost of imports o A weaker dollar raises the cost of foreign goods, decreasing the demand for imported products and increasing demand for national products o A stronger dollar translates to U.S. goods costing more in foreign countries, reducing the demand for them and increasing the demand for foreign goods Structure of the Financial System Complex, comprising various types of private-sector financial institutions (banks, insurance companies, mutual funds, finance companies, and investment banks) which are heavily regulated by government institutions Financial Crisis Mortgage Crisis 2007: caused the failure of Bear Sterns (acquired by JP Morgan Chase) & Lehman Brothers (segments acquired by Barclays and Nomura Holdings) Central Banks and the Conduct of Monetary Policy The central bank is the government agency responsible for the country’s monetary policy, which involves the management of interest rates and the quantity of money in the economy (or money supply) Affects interest rates, inflation, and business cycles The International Finance System International Monetary Fund (IMF) 1/26 Why Study Financial Markets? Debt markets, or bonds markets, allow governments, corporations, and individuals to borrow to finance activities
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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 Bond Market and Interest Rates – relationship between yields Stock Market Foreign Exchange Market Why Study Financial Institutions? Play a crucial role in improving the efficiency of the economy Structure of the Financial System Helps get funds from savers to investors Financial Crisis Central banks and the conduit of monetary policy The role of the Fed, and foreign Banks and Other Financial Institutions Financial Innovation Managing Risk in Financial Institutions 1/31 Function of Financial Markets: channels funds from a person or business without
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