2 FinTour - A Quick Tour of the Financial System Prof....

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Unformatted text preview: A Quick Tour of the Financial System Prof. Irina A. Telyukova UBC Economics 345 Fall 2008 2 As we discovered, financial markets and financial intermediaries provide funds to firms and individuals who need them by transferring them from those who have an excess of them: e.g. a bank makes a loan to a household who wants to buy a car/house, funded by deposits of other customers; a large auto company issues and sells bonds (or stocks) to households and other firms, uses proceeds to pay for a new plant; government sells bonds to households to finance construction of a new highway system - or a defense project, or welfare programs; an entrepreneur takes out a bank loan to start a new small business loan financed by depositors (households, firms, etc.) Today we look at the general structure and operation of the financial system: financial markets and financial intermediaries. Outline 3 Financial markets: function (direct finance) structure instruments international financial markets Financial intermediaries : function (indirect finance) structure regulation Outline 4 Flow of Funds Through Financial System 5 Firms and individuals can enter financial contracts with lenders, promising to repay with interest at a specified date. Firms: the contract is a bond; repayment date is the bonds maturity date. For individuals, these are mortgage and consumer loan contracts. Firms can instead issue equities (stocks), which are claims to a share of the firms income net of expenses and taxes. Sales of equities bring in revenue that can be used for investment projects. Equities pay dividends to holder, with no maturity date. Shareholders are partial owners of the firm. Shareholders wealth goes up when the value of the firm increases, and goes down when the value of the firm declines. Structure of Financial Markets: I. Debt and Equity Markets 6 Debt markets are larger than equity markets in volume. Money and capital markets are distinguished by instrument maturity: Money markets are markets where only instruments with maturity under a year are traded. Capital markets are markets where instruments with maturity >1 year and equity are traded....
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This note was uploaded on 06/21/2011 for the course ECON 345 taught by Professor Sumaila during the Spring '09 term at The University of British Columbia.

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2 FinTour - A Quick Tour of the Financial System Prof....

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