BM-1.docx - Banking Management CH1 Why Study Financial...

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Banking Management CH1 Why Study Financial Markets? Financial markets are crucial in our economy. -Channel funds from savers to investors, promoting economic efficiency. -Market activity affects: personal wealth, business firms, and economy. Well functioning financial markets are key factors in producing high economic growth. Debt markets allow governments, corporations, and individuals to borrow. Borrowers issue a security, called a bond, offering interest and principal over time. The interest rate is the cost of borrowing. Many types of market interest rates: mortgage rates, car loan rates, credit card rates, etc. -The stock market is the market where common stock (or just stock) are traded. Companies initially sell stock (in the primary market) to raise money. After that, the stock is traded among investors. The stock market receives the most attention from the media. -The foreign exchange market is where international currencies trade and exchange rates are set. Central Banks and the Conduit of Monetary Policy -The role of the Fed, and foreign counterparts, in the management of interest rates and the money supply The International Financial System -Capital flows between countries impacts domestic economies -Need to understand exchange rates, capital controls, and the role of agencies such as the IMF Banks and Other Financial Institutions -Includes the role of insurance companies, mutual funds, pension funds, etc. Financial Innovation -Focusing on improvements in technology and the impact on financial product delivery Managing Risk in Financial Institutions -Focusing on risk management in the financial institution 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. Financial Asset Asset Anything of value owned by a person or a firm. Financial asset An asset that represents a claim on someone else for a payment. Security A financial asset that can be bought and sold in a financial market. Financial market A place or channel for buying or selling stocks, bonds, and other securities. -five key categories of assets: 1. Money 2. Stocks 3. Bonds 4. Foreign exchange 5. Securitized loans Money Anything that is generally accepted in payment for goods and services or to pay off debts. Money supply The total quantity of money in the economy. Stock Financial securities that represent partial ownership of a firm; also called equities. Dividend A payment that a corporation makes to its shareholders. Bond A financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money. Interest rate The cost of borrowing funds (or the payment for lending funds), usually expressed as a percentage of the amount borrowed.

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