1. 1 Financial Markets and Institutions Power Point Lecture Notes By Joseph F. Greco, Ph.D. College of Business and Economics California State University, Fullerton jgreco@fullerton.edu

2. 2 CHAPTER 1 The Role of Financial Markets and Institutions

3. 3 CHAPTER 1 OVERVIEW This Chapter will: A.describe the 3 types of financial markets that accommodate various transactions, B. introduce the concept of security valuation within financial markets, C. describe the role of financial institutions within financial markets, D. identify the types of financial institutions that facilitate transactions in financial markets.

4. 4 A.Overview of Financial Markets 1.Three Types of Financial Markets a.Money versus Capital Markets b. Primary versus Secondary Markets c. Organized versus Over-the-Counter Markets

5. 5 A.Overview of Financial Markets 2. Securities Traded in Financial Markets a. Money Market Securities b. Capital Market Securities 1)Bonds and Mortgages 2)Stocks c. Derivative Securities 1)Speculation using an underlying asset 2)Acts as Risk Management – a form of hedging

6. 6 B. Valuation of Securities in Financial Markets 1. Market Pricing of Securities Impacted by a.Information on Valuations (top-down approach) Economic Industry Firm-specific

7. 7 B. Valuation of Securities in Financial Markets 2. Market Pricing of Securities Impacted by a. Impact of Valuations on Pricing Information affects the supply and demand for a security

8. 8 B. Valuation of Securities in Financial Markets 3. Market Pricing of Securities Impacted by a. Impact of the Internet on the Valuation Process More timely pricing More accurate pricing More informative pricing

9. 9 B. Valuation of Securities in Financial Markets 4. Market Efficiency When security prices fully reflect all available information, the market is said to be efficient.

10. 10 B. Valuation of Securities in Financial Markets 5. Financial Market Regulation a. Disclosure b. Regulatory Response to Financial Scandals c. Other Regulations

11. 11 C. Role of Financial Institutions in Financial Markets Global Financial Markets 1.How Financial Markets Influence Economic Development 2.Global Integration a. Barriers to Global Integration b. Financial Market Integration within Europe 3. Role of the Foreign Exchange Market a. Foreign Exchange Rates

12. 12 D. Types of Financial Institutions in Financial Markets 1.Role of Depository Institutions a.Commercial Banks b.Savings Institutions c.Credit Unions

13. 13 D. Types of Financial Institutions in Financial Markets 2. Role of Nondepository Financial Institutions Finance Companies Mutual Funds Securities Firms Insurance Companies Pension Funds

14. 14 D. Types of Financial Institutions in Financial Markets 3. Comparison of Roles among Financial Institutions a. Role as a Monitor of Publicity Traded Firms

15. 15 D. Types of Financial Institutions in Financial Markets OVERVIEW OF FINANCIAL INSTITUTIONS 1. Competition between Financial Institutions a.Impact of the Internet on Competition 2. Consolidation of Financial Institutions a.Impact of Consolidation on Valuation b.Typical Structure of a Financial Conglomerate