Chapter 1
Role of Financial Markets and
Institutions
Outline
Overview of Financial Markets
Types of Financial Markets
How Financial Markets Facilitate Corporate Finance and Investment Management
Securities Traded in Financial Markets
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities in Financial Markets
Market Pricing of Securities
Market Efficiency
Financial Market Regulation
Disclosure
Regulatory Response to Financial Scandals
,Global Financial Markets
International Corporate Governance
Global Integration
Role of the Foreign Exchange Market
Role of Financial Institutions in Financial Markets
Role of Depository Institutions
Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Overview of Financial Institutions
Competition between Financial Institutions
Consolidation of Financial Institutions
Global Expansion by Financial Institutions
,Key Concepts
1. Explain the role of financial intermediaries in transferring funds from surplus units to
deficit units.
2. Introduce the types of financial markets available and their functions.
3. Introduce the various financial institutions that facilitate the flow of funds.
4. Provide a preview of the course outline. Emphasize the linkages between the various
sections of the course.
POINT/COUNTER-POINT:
Will Computer Technology Cause Financial Intermediaries to
Become Extinct?
POINT: Yes. Financial intermediaries benefit from access to information. As information
becomes more accessible, individuals will have the information they need before investing
or borrowing funds. They will not need financial intermediaries to make their decisions.
COUNTER-POINT: No. Individuals rely not only on information, but also on expertise. Some
financial intermediaries specialize in credit analysis so that they can make loans. Surplus
units will continue to provide funds to financial intermediaries rather than make direct
loans, because they are not capable of credit analysis, even if more information about
prospective borrowers is available. Some financial intermediaries no longer have physical
buildings for customer service, but they still require people who have the expertise to
assess the creditworthiness of prospective borrowers.
WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion
on this issue.
, ANSWER: Computer technology may reduce the need for some types of financial
intermediaries such as brokerage firms, because individuals can make transactions on their
own (if they prefer to do so). However, loans will still require financial intermediaries
because of the credit assessment that is needed.
Questions
1. Surplus and Deficit Units. Explain the meaning of surplus units and deficit units.
Provide an example of each. Which types of financial institutions do you deal with?
Explain whether you are acting as a surplus unit or a deficit unit in your relationship
with each financial institution.
ANSWER: Surplus units provide funds to the financial markets while deficit units obtain
funds from the financial markets. Surplus units include households with savings, while
deficit units include firms or government agencies that borrow funds.
This exercise allows students to realize that they constantly interact with financial
institutions, and that they often play the role of a deficit unit (on car loans, tuition loans,
etc.).
Role of Financial Markets and
Institutions
Outline
Overview of Financial Markets
Types of Financial Markets
How Financial Markets Facilitate Corporate Finance and Investment Management
Securities Traded in Financial Markets
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities in Financial Markets
Market Pricing of Securities
Market Efficiency
Financial Market Regulation
Disclosure
Regulatory Response to Financial Scandals
,Global Financial Markets
International Corporate Governance
Global Integration
Role of the Foreign Exchange Market
Role of Financial Institutions in Financial Markets
Role of Depository Institutions
Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Overview of Financial Institutions
Competition between Financial Institutions
Consolidation of Financial Institutions
Global Expansion by Financial Institutions
,Key Concepts
1. Explain the role of financial intermediaries in transferring funds from surplus units to
deficit units.
2. Introduce the types of financial markets available and their functions.
3. Introduce the various financial institutions that facilitate the flow of funds.
4. Provide a preview of the course outline. Emphasize the linkages between the various
sections of the course.
POINT/COUNTER-POINT:
Will Computer Technology Cause Financial Intermediaries to
Become Extinct?
POINT: Yes. Financial intermediaries benefit from access to information. As information
becomes more accessible, individuals will have the information they need before investing
or borrowing funds. They will not need financial intermediaries to make their decisions.
COUNTER-POINT: No. Individuals rely not only on information, but also on expertise. Some
financial intermediaries specialize in credit analysis so that they can make loans. Surplus
units will continue to provide funds to financial intermediaries rather than make direct
loans, because they are not capable of credit analysis, even if more information about
prospective borrowers is available. Some financial intermediaries no longer have physical
buildings for customer service, but they still require people who have the expertise to
assess the creditworthiness of prospective borrowers.
WHO IS CORRECT? Use the Internet to learn more about this issue. Offer your own opinion
on this issue.
, ANSWER: Computer technology may reduce the need for some types of financial
intermediaries such as brokerage firms, because individuals can make transactions on their
own (if they prefer to do so). However, loans will still require financial intermediaries
because of the credit assessment that is needed.
Questions
1. Surplus and Deficit Units. Explain the meaning of surplus units and deficit units.
Provide an example of each. Which types of financial institutions do you deal with?
Explain whether you are acting as a surplus unit or a deficit unit in your relationship
with each financial institution.
ANSWER: Surplus units provide funds to the financial markets while deficit units obtain
funds from the financial markets. Surplus units include households with savings, while
deficit units include firms or government agencies that borrow funds.
This exercise allows students to realize that they constantly interact with financial
institutions, and that they often play the role of a deficit unit (on car loans, tuition loans,
etc.).
