1. Financial Markets

2. Saving and Capital Formation
Saving money makes economic growth possible
One’s person savings can represent another person’s loan
Savings make investments possible

3. Financial Assets and the Financial System
Consist of a network, including
Savers
Investors
Financial institutions
Work together to Transfer savings to investors

4. Financial Assets and the Financial System
Claims on the property and the income of the borrower
Open a Savings accounts
Certificates of deposits
Government bonds
Corporate bonds

5. Financial Assets and the Financial System
Financial Intermediaries
Financial institutions that bring together savers and lenders
Commercial banks
Savings and loan Asso.
Savings bank
Mutual savings banks
Credit unions
Life insurance companies
Mutual funds
Pension Funds
Real Estate Investment Trust
Finance Companies

6. Circular flow of funds: shows how funds are transferred from savers to borrowers
Any part of the economy can supply and borrow savings
Largest Borrowers = Government and businesses

7. Nonbank Financial Intermediaries
Non-depository institutions that channel savings to borrowers
Finance companies
Life Insurance
Mutual Funds
Pension Funds
Real Estate Investment Trust

8. Investment Strategies and Financial Assets

9. Basic Investment Considerations
Risk: a situation in which the outcome is not certain but can be estimated
Higher risk = higher rate of return
Low risk = lower rate of return

11. Basic Investment Considerations
Investments depends on goals of the investor
Consistent investment can yield large returns
Avoid complex investments
401K Plan: tax deferred investment plan that acts as a personal pension fund for employees

12. Basic Investment Considerations

13. Bonds as Financial Assets
Three main components
The Coupon: stated interest on debt
The Maturity: life of the bond
The par value: principal or the total amount initially borrowed that must be repaid at maturity
Prices are determined by supply and demand
Yield = annual interest rate divided by the purchase price

14. Bond Ratings Rated on Range from D (lowest) to AAA (highest)
the financial health of the investor
The ability to make future coupon
Principal payments
Issuer’s past credit history
Range from D (lowest) to AAA (highest)
Default = the issuer has not kept up with the interest of the par value payments

15. Financial Assets and Their Characteristics
Most common form of investment = Certificates of deposit
Corporate Bonds
Issued by corporations
Usually used for long term investment
Municipal bonds
Issued by the state and local gov’t
Safe, tax exempt investment

16. Financial Assets and Their Characteristics
Savings bonds
Low-denomination, non-transferable
Issued by federal gov’t
Virtually no risk
Treasury and Bonds
Long-term obligations
Issued by fed gov’t
Safest of all financial assets

17. Financial Assets and Their Characteristics
Treasury Bills
Short-term obligations
Issued by federal gov’t
Individual Retirement Accounts (IRA’s)
Long-term
Tax sheltered time deposits
Intended for retirement

18. Markets for Financial Assets
Capital markets: money is loaned for more than one year
Money Markets: money is loaned for more less one year
Primary Markets: only the original issuer can repurchase or redeem a financial asset
Secondary Markets: financial assets can be resold to new owners

19. Markets for Financial Assets

20. Investing in Equities, Futures, and Options

21. Market Efficiency Efficient Market Hypothesis (EMH)
Argument that stocks are always priced about right and that bargains are hard to find
It is not possible to “beat the market” regularly
Investors should diversify their portfolios
Or enlist the assistance of a stock broker

22. Organized Stock Exchanges
New York Stock Exchange (NYSE)
List share of 2,800 large companies
1,400 seats or memberships
American Stock Exchange (AMEX)
List shares of 750 companies
Regional Stock Exchanges
list shares too small or to new to be listed on NYSE or AMEX
Global Stock Exchange
Include stock exchanges around the world

23. Over the Counter Markets (OTC)
Electronic Marketplace for securities not traded on an organized exchange
I.E. National Association of Securities Dealers Automated Quotation (NASDAQ)
List information on companies traded on (OTC)

24. Measure of Stock Performance
Dow-Jones Industrial Average (DJIA)
Index made up of 30 stocks
Most popular and widely publicized measure of stock market performance on the NYSE
Standard & Poor’s 500
Index made up of 500 representative stocks
Bull Market: prices are rising
Bear Market: prices are falling

25. Trading in the Future Spot Market “Spot” meaning immediate
Transactions are made at the prevailing price
Futures contract
Futures market
Futures contract
futures contracts are bought and sold
Futures market
futures contracts, or “futures” are bought and sold

26. Trading in the Future Option Market
Put and Call options are bought and sold
Call option
Gives the owner the right to buy at a specific price in the future
Put option
Gives the owner the right to sell at a specific price in the future
Contracts that provide the right to purchase or sell commodities or financial assets at some point in the future at a price agreed upon today