Chapter 1 Role of Finance © 2000 John Wiley & Sons, Inc.

2 Chapter Outcomes n Define what is meant by finance n Explain why finance should be studied n Describe the basic requirements in a modern financial system n Identify the major financial intermediaries and their roles in the U.S. financial system

3 Chapter Outcomes (Continued) n Identify and explain measures of wealth that are traded in U.S. financial markets n Describe the financial functions performed in the U.S. financial system n Identify and discuss some career opportunities in finance

4 What Is Finance? FINANCE: Study of how individuals, institutions,and businesses acquire, spend, and manage financial resources

5 Types Of Finance MACRO FINANCE: Study of how financial intermediaries, financial markets, and policy makers interact and operate within financial systems BUSINESS FINANCE: Study of financial planning, asset management, and fund raising by businesses and financial institutions

6 Types Of Finance (Continued) PERSONAL FINANCE: Study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth

7 Why Study Finance? n As an individual you should want to make informed economic decisions n Knowledge of finance should help you better manage existing financial resources and accumulate wealth over time n To be successful in the business world, it is important to have an understanding of business finance

8 Basic Requirements Of A Financial System n Monetary system n Savings-investment process n Financial markets

9 Five Types Of Financial Intermediaries n Depository institutions n Contractual savings organizations n Investment organizations n Finance/credit organizations n Securities markets-related organizations

10 Basic Types Of Securities Markets n PRIMARY SECURITIES MARKET: market involved in creating and issuing new securities, mortgages, and other claims to wealth n SECONDARY SECURITIES MARKET: market for transferring existing securities between investors

11 Measures Of Wealth n MONEY: anything that is generally accepted as payment n REAL ASSETS: land, buildings, machinery, inventory, and precious metals n FINANCIAL ASSETS: claims against the income or assets of others

12 Types Of Financial Markets n MONEY MARKETS: where debt instruments of one year or less are traded n CAPITAL MARKETS: markets for longer-term debt securities and corporate stocks

13 Types Of Money Market Instruments n U.S. Treasury bills n Negotiable certificates of deposit n Bankers’ acceptances n Federal funds n Commercial paper n Repurchase agreements

14 Types Of Capital Market Securities And Instruments n U.S. Treasury notes and bonds n U.S. Government agency bonds n State and local government bonds n Corporate bonds n Corporate stocks n Real estate mortgages

15 Financial Functions In The U.S. Financial System n Creating money n Transferring money n Accumulating savings n Lending/investing savings n Marketing financial assets n Transferring financial assets

16 Career Opportunity Areas In Finance n Business financial management n Financial intermediaries n Securities markets field n Government or non-for-profit organizations n Personal financial planning

17 Plan Of Study n PART 1: THE FINANCIAL SYSTEM covers the environment of finance including the role of financial institutions in it n PART 2: INVESTMENTS covers financial markets and the process of investing in financial securities such as stocks and bonds

18 Plan of Study (Continued) n PART 3: BUSINESS FINANCE covers financial management and how the business sector interacts with the financial system