1 An overview of the financial system Mishkin, Chap 2

2  I. Financial markets - their function and structure: Most important function of financial markets: savers/lenders: dis-savers/borrowers: Funds are transferred via  a direct route (direct finance): example: an institution called an intermediary (indirect finance): example:

3 How do fund transfers help? promotes by firms, businesses allows households to provides to firms, businesses What are “financial intermediaries”?

4 II. Structure of Financial markets: 1. primary vs. secondary markets: primary markets = examples: secondary markets = examples: Who are “dealers” and “brokers”? Suppose you sell off 100 Microsoft shares that you have to a dealer, on NASDAQ. Does Microsoft benefit from the transaction, revenue wise?

5 2. exchanges vs. over the counter markets (OTC) exchanges = examples: over the counter markets= examples: Which experiences greater trading volume?

6 3. money markets vs. capital markets: money markets = examples: capital markets= examples:

7 4. markets for debt assets vs. equity markets debt assets= examples: equities= examples:

8 III. Different types of assets 1. money market instruments (short term debt assets):  Treasury bills or T-bills:  Negotiable certificate of deposits: (CD)  Commercial paper  Repurchase agreement (repos)  Federal funds  Banker’s acceptances

9 2. Capital market instruments (long and intermediate term debt assets): Mortgages: Mortgage backed security Corporate bonds Treasury bonds or T-bonds Common stocks

10 capital market assets (contd.) US government agency bonds: Municipal bonds Consumer and commercial loans:

11 3. instruments traded in international financial markets: foreign bonds: eurobonds: eurocurrencies: eurodollars

12 IV. Role of financial intermediaries: Main functions of intermediaries reduce transaction costs: reduce problems related to asymmetric information reduce risk to small lenders

13 V. Types of intermediaries: A)depository institutions: characteristics examples B)contractual savings institutions: characteristics examples

14 C)investment intermediaries: characteristics examples

15 Chief sources and uses of funds by important intermediaries: Intermediaries sources of funds uses of funds 1. commercial banks deposits loans, govt. bonds, mortgages etc. 2. savings and loan assoc. deposits mortgages 3. credit unions deposits mortgages 4. pension funds contributions stocks and bonds 5. mutual funds shares stocks and bonds 6. money market funds shares short term assets

16 VI. Role of regulation provide more information provide insurance ensuring soundness of the financial system