The Role of Financial Markets and Financial Intermediaries - Business Finance - ثاني ثانوي

The Role of Financial Markets and Financial Intermediaries What will investors gain from their investment? Javestors discussing recent developments in financial markets at a conference

LEARNING OBJECTIVES Once you have completed this chapter, you should be able to Describe the core components of the 1 financial system. Define money and determine how the 2 money supply is measured.. Understand the difference between 3 positive, negative, and flat yield curves. Differentiate the direct and indirect 4 transfer of savings to users of funds. 5 Describe the services of insurance companies. Contrast the various money market 6 instruments. Describe regulations that apply to the 7 banking system. 8 Differentiate required and excess banks' reserves. 47

N FIGURE 2.1 Major Components of the Financial System Business Finance he three core components of the financial system are financial markets, financial intermediaries, and financial regulators, as illustrated in Figure 2.1. Financial markets facilitate the flow of funds in order to finance investments by corporations, governments, and individuals. Financial markets BALEY minen T Finandal intermediaries merman Iml Financial regulators LM Reeve Financial institutions are the key players in the financial markets as they perform the function of intermediation and thus determine the flow of funds. The financial regulators perform the role of monitoring and regulating the participants in the financial system. This chapter addresses these interlinking components, citing examples of each and how they function. Before discussing financial markets in further detail, the concept is introduced by explaining the roles of money and interest rates. This is followed by transfer of savings to investments and the purpose of financial intermediaries through which these savings are channeled to the ultimate users of the funds. Financial intermediaries borrow from one group and lend to another, a process that channels resources into productive investments. Consider how firms would be constrained if they could not borrow funds to purchase plant and equipment. In many parts of the world. individuals rely on borrowing funds through mortgage loans in order to purchase homes. This transfer of savings through financial intermediaries-from individuals with funds to firms, governments, and other individuals who need funds-is one crucial component of the financial system.

The central part of this chapter provides a basic introduction to financial intermediaries, with an emphasis on commercial banks, their sources of funds, and the types of loans they make. Commercial banks must compete with other intermediaries for the funds of savers. Attracting these savings is obviously important, since the individual intermediary can lend only what savers have lent it. The subsequent sections of the chapter consider insurance companies, pension plans, money market mutual funds, and money market instruments. Money market mutual funds offer individuals an alternative to the checking accounts, savings accounts, and savings certificates issued by banks. By acquiring shares in money market mutual funds, individuals are able to invest indirectly in a variety of short-term securities. Since these securities are usually issued in large denominations, most investors have insufficient funds to purchase them. By selling shares in small units, money market mutual funds permit individuals to participate in the market for money market securities. Since money market mutual funds tend to offer marginally higher yields than traditional savings accounts, shares in these funds have become a major competitor with other financial intermediaries for individuals savings. Finally, the chapter concludes by addressing regulation of the financial system and the role of reserves. Exercises Choose the correct answer. 1. Financial markets facilitate the flow of funds in order to finance investments by corporations, governments, and individuals. True/False 2. A bank is a financial Intermediary, True/False وزارة التعليم " CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 49