Solution Manual For Financial Reporting And Analysis 5th Edition By Revsine

Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy



Chapter 1
Functions and Roles of Financial Institutions and Markets
in the Global Economy

Learning Objectives in This Chapter
 You will understand the functions performed and the roles played by the
system of financial institutions and markets in the global economy and in our
daily lives.
 You will discover how important financial institutions and markets, including
the whole financial system, are to increasing our standard of living, generating
new jobs, and building our savings to meet tomorrow’s financial needs.

What’s in This Chapter? Key Topics Outline
 How the System of Financial Institutions and Markets Interfaces with the
Economy
 The Importance of Savings and Investment
 The Nature of Financial Claims in the Financial Markets
 Functions of Financial Institutions and Markets: Savings, Wealth, Liquidity,
Credit, Payments, Risk Protection, and Pursuing Public Policy
 Types of Financial Markets within the Global Financial System
 Factors Tying All Financial Markets Together
 The Dynamic Financial System: Key Emerging Trends

Chapter Outline
1.1. Introduction to the System of Financial Institutions and Markets
1.2. The Global Economy and the System of Financial Institutions and Markets
1.2.1. Flows within the Global Economic System
1.2.2. The Role of Markets in the Global Economic System
1.2.3. Types of Markets
1.2.4. The Financial Markets and the Financial System: Channel for Savings
and Investment
1.2.4.1. Nature of Savings
1.2.4.2. Nature of Investment
1.3. Economic Functions Performed by the Global System of Financial
Institutions and Markets
1.3.1. Savings Function
1.3.2. Wealth Function
1.3.3. Liquidity Function
1.3.4. Credit Function
1.3.5. Payments Function
1.3.6. Risk Protection Function
1.3.7. Policy Function




1-1

, Chapter 01 - Functions and Roles of Financial Institutions and Markets in the Global Economy


1.4. Types of Financial Markets within the Global Financial System
1.4.1. The Money Market versus the Capital Market
1.4.2. Divisions of the Money and Capital Markets
1.4.3. Open versus Negotiated Markets
1.4.4. Primary versus Secondary Markets
1.4.5. Spot versus Futures, Forward, and Option Markets
1.5. Factors Tying All Financial Markets Together
1.5.1. Credit, the Common Commodity
1.5.2. Speculation and Arbitrage
1.6. The Dynamic Financial System
1.7. The Plan of This Book

Key Terms Appearing in This Chapter
financial system, 3 credit, 9
market, 4 money market, 12
financial market, 6 capital market, 12
savings, 6 open markets, 14
investment, 6 negotiated markets, 14
wealth, 8 primary markets, 14
net worth, 8 secondary markets, 14
financial wealth, 8 speculators, 16
net financial wealth, 8 arbitrage, 16
liquidity, 9

Questions to Help You Study
1. Why is it important for us to understand how the global system of financial
institutions and markets works?
Answer: The global financial system of institutions and markets is an integral part of
the global economic system. It is the collection of markets, institutions, laws,
regulations, and techniques through which bonds, stocks, and other securities are
traded, interest rates are determined, and financial services are produced and delivered
around the world.

2. What are the principal links between the financial system and the economy?
Why is each important to the other?
Answer: The principal link between the financial system and the economy is the
Financial Markets. The financial markets channel savings to those individuals and
institutions needing more funds for spending than are provided by their current
incomes. The financial markets are the heart of global financial system, attracting and
allocating saving and setting interest rates and prices of financial assets (stocks,
bonds, etc.).




1-2