Chapter 16.pptx

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Chapter No. 16The Financial SystemPresented ByMuhammad Shahid IqbalMP-13-20The Financial SystemThe process by which money flows from savers to users.SaversFinancial MarketsFinancial InstitutionsUsersTypes of SecuritiesSecurities are financial instruments that represent obligations on the part of the issuers to provide the purchasers with expected stated returns on the funds invested or loaned.Also called financial instrumentsMoney Market InstrumentsMoney market instruments are short-term debt securities issued by governments, financial institutions, and corporations.Matures within one yearPay interest to the investorTreasury bills, commercial paper, and bank certificates of deposit.BondsBondholders are creditors of a corporation or government body.Types of Bonds:Government bondsState and local governments (municipal bonds)revenue bondgeneral obligation bondBondsCorporations (Secured bonds).debentures (Unsecured bonds).mortgage pass-through securityQuality Ratings for Bonds:Bonds with the lowest level of risk are rated AAA.As ratings descend, risk increases.BondsInvestment grade:AAA, AA, A , BBBSpeculative grade:BB, B, CCC, CC, CBond price is effected by Interest rateBond price is also effected by marketed Interest rateCall Provision.

StocksCommon stock, The basic form of corporate ownership.Preferred Stock, stocks whose holders receive preference in the payment of dividends.Convertible Securities, the right to exchange the bond or preferred stock for a fixed number of shares of common stock.

Financial Marketsfinancial markets, market in which securities are issued and traded.primary markets, financial market in which firms and governments issue securities and sell them initially to the general public.Initial public offering (IPO), company offers stock for sale to the general public for the first time.Financial MarketsUnderwriters , institutions purchase the issue from the firm or government and then resell the issue to investors.secondary market, collection of financial markets in which previously issued securities are traded among investors.The New York Stock Exchange (NYSE), The Karachi Stock Exchange are examples of secondary market.Financial MarketsElectronic communications networks (ECNs), buyers and sellers meet in a virtual stock market and trade directly with one another. No specialist or market maker is involved.Market order, instructs the broker to obtain the best possible pricethe highest price when selling and the lowest price when buying.limit order, price ceiling when buying or a price floor when selling.Financial Institutionsfinancial institutions, the intermediary between savers and borrowers, collecting funds from savers and then lending the funds to individuals, businesses, and governments.Commercial Banks, provides various services that includes a wide range of checking and savings deposit accounts, consumer loans, credit cards, home mortgage loans, business loans, and trust services. Financial InstitutionsElectronic Banking, computerized systems for conducting financial transactions over electronic links.Automated teller machine (ATM), allow customers to make banking transactions at any time by inserting an electronic card into the machine and entering a personal identification number (PIN).Financial InstitutionsOnline Banking, in which consumers do some or all of their banking on the Internet.

Federal Deposit Insurance Corporation (FDIC), federal agency that insures deposits at commercial and savings banks.Savings Banks and Credit UnionsAlso called savings and loan associations or thrift institutions, raised funds by accepting only savings deposits and then lent these funds to consumers to buy homes.Credit unions are cooperative financial institutions that are owned by their depositors, all of whom are members.Savings Banks and Credit UnionsCredit unions are not-for-profit institutions, they often pay savers higher rates of interest, charge lower rates of interest on loans, and have fewer fees than other financial institutions.Non-depository Financial InstitutionsInsurance CompaniesPension FundsMutual Funds:Mutual funds are financial intermediaries that raise money from investors by selling shares.The Role of the State Bank of PakistanThe State Bank of Pakistan is the central bank and is an important part of the nations financial system and has four basic responsibilities:1- Regulating commercial banks2- performing banking-related activities3- providing services for banks4- setting monetary policyMonetary PolicyThe SBPs most important function is controlling the supply of money and credit, or monetary policy.The two common measures of the money supply are called M1 and M2.M1 consists of currency in circulation and balances in bank checking accounts.M2 equals M1 plus balances in some savings accounts and money market mutual funds.Monetary PolicyThe SBP has four major policy tools for controlling the growth in the supply of money and credit.Reserve requirements Discount rateOpen market operations.Term Auction Facility loansMonetary PolicyThe Fed requires banks to maintain reserves, a certain percentage of what the banks hold in deposits.The higher the reserve requirement, the less banks can lend out to consumers and businesses and Vice versa.Monetary PolicyDiscount rate, the interest rate at which Central Bank make short-term loans to member banks. If Central Bank wants to slow the growth rate in the money supply, it increases the discount rate.Open market operations, the technique of controlling the money supply growth rate by buying or selling the securities.Monetary PolicyTerm auction facility, the Central Bank makes extra funds available to banks at low interest rates. The more funds Central Bank offers, and the lower the rate, the greater the impact on market interest rates, the supply of credit, and economic activity.