Financial Market and Institutions Lecture-1, 2, 3
Financial Market and Institutions Lecture-1, 2, 3
Lecture-1, 2, 3
Financial market:
Financial markets facilitate the flow of funds from surplus units to deficit units. Those
individuals/ households business or government who supply funds to the financial market are called
surplus units and among these thee the households is the major group in the surplus units.
On the other hand those who use the financial markets to obtain funds are called deficit units
and among the users business is the major group in the deficit units. Funds are transferred to deficit
units through the issuance of different instruments (called securities) in the financial markets by the
deficit units. The deficit units sell securities to the surplus units in order to obtain funds as par their
requirements. (Short- term or long-term)
A security is a certificate that expresses a claim on the issuer. Generally financial markets are
viewed as a system comprised of individuals and institutions, instruments and procedures that that
bring together the savers and the borrowers. It is comprised of different markets that deal with
different types of securities/ instruments in terms of different maturities and asset backing. In sum the
financial markets facilitate:
1.
2.
3.
4.
5.
6.
Lawliet Prokash
Lecture-1, 2, 3
securities by non-financial institutions take place such as corporate bonds and stocks are the
examples of non-intermediate financial market securities.
g. Derivate markets: A market which provides different instruments for the management of
financial risk that arises due to transaction in the financial market. Example of the derivative
instruments are forward, future and option contracts, insurance and foreign exchange market
are also the part of financial market.
Intermediary functions
Financial functions
Liquidity adjustment functions
Accelerating economic growth and employment.
These are described below1. Intermediate functions: intermediate functions of financial markets includea. Transfer of resources- Financial market facilitates the transfer of real economic
resources from lenders to ultimate borrows.
b. Enhancing income- Financial markets allow lenders toward interest or dividend on
their surplus funds and thus contributing to enhancement of their ultimate income.
c. Productive usage- Financial markets allow for the productive use of the funds
borrowed and thus augmenting income and national production.
d. Capital formation- Financial markets provide facilities through which new savings
flow to aid capital formation of a country.
e. Price determination- Financial markets allow for the determination of the traded
financial assets through the interactions of the buyers and sellers. They provide a
sign for the allocation of funds in the economy based on demand and supply through
the mechanism of price discovery process.
Lawliet Prokash
Lecture-1, 2, 3
f.
Lawliet Prokash
Lecture-1, 2, 3
Securities
Issued by
b. Certificate of
deposits (CDs)
c.
Negotiable
CDs
d. Commercial
paper
Banks and
saving
institutions
Large banks
and saving
Institutions
Banks,
Finance co.
and firms
Banks
e. Bankers
acceptance
f. Repurchase
Banks and
agreement
Firms
(REPO)
Capital market securities
a. Corporate
Corporate
bonds
Firms
b. Equity
Corporate
Securities
Firms
c. Mortgages
Financial
Institutions
and Firms
Common
Investors
Common Maturity
Secondary
market status
Different firms,
companies,
financial
Institutions
Households
13 weeks 1 year
Very high
7 days 5 years
Non-existent
Business firms
2 weeks 1 year
Moderate
Other firms
Low
High
1 day 15 days
Non-existent
10 years 30
years
No maturity
Moderate
15 years 30
years
Moderate
Firms
Firms and
Financial
Institutions
Households and
Firms
Households and
Firms
Financial
Institutions
Lawliet Prokash
Very high