Summary - Business Finance - ثاني ثانوي

M Business Finance SUMMARY The core components of the financial system are financial markets, financial intermediaries, and regulators. Financial markets transfer savings by individuals, firms, and governments into productive Investments. This transfer occurs directly when new securities are issued or indirectly through financial intermediaries. Financial markets also transfer existing securities among Investors. Money is anything that is generally acceptable to pay for goods and services and to retire debt. Liquidity refers to the ease of converting nonmonetary assets into money. The narrow definition of the money supply (M-1) is the sum of cains, currency, and demand deposits A broader definition (M-2) adds saving accounts and small certificates of deposit to M-I. In many locations and markets around the world, interest rates help allocate scarce credit among competing uses for the funds. The structure of yields relates the interest rate to the length of time that the debt will be outstanding. The structure of yields is often summarized by a yield curve. Generally the yield curve is positively sloped, which indicates that the longer the borrower has the use of the funds, the greater is the cost of funds. However, there have been periods in same markets when the yield curve was negative and short-term rates exceeded long-term rates. There have also been periods in some markets when the yield curve was flat; short-term and long-term rates were equal; and there was no differentiation between the cost of short-term and long-term funds. Funds are transferred from savers to borrowers through a system of financial intermediaries. The intermediaries borrow from savers and then lend the funds to their ultimate users. Financial Intermediaries include commercial banks, mutual savings banks and savings & loan associations, insurance companies, pension plans, and money market mutual funds. All financial intermediaries compete for funds, since an individual intermediary can acquire a portfolio of assets only if it can obtain funds. In terms of size, commercial banks are the most important financial intermediary. These banks make a variety of loans but tend to stress loans that are quickly repaid. Other financial Intermediaries, such as savings and loan associations and insurance companies, make longer-term loans. Recent developments in financial intermediaries Include the large growth in money market mutual funds. Money market mutual funds compete directly with banks; they offer the advantages of somewhat higher yields and almost comparable safety. While the shares are not protected as are the deposits in banks, the short-term nature of their portfolios affords the saver safety of principal. Money market mutual funds own a variety of short-term debt securities issued by corporations (commercial paper), commercial banks, and governments. Government short-term debt obligations include Treasury bills. Other short-term

money market Instruments include repurchase agreements and banker's acceptances. Each of these securities is a means for the issuer to raise short-term funds, and each is a place for investors, especially money market mutual funds, to commit funds for a short period of time. PROBLEMS 1. Explain what is meant by liquidity in finance, drawing upon examples to illustrate the concept. 2. Describe the difference between M-1 and M-2 in relation to measures of money supply, 3. Explain why money is crucial to an advanced economy. 4. Describe what a syndicate is in relation to investment banking and explain its advantages. 5. Explain what a money market mutual fund is and briefly describe its function.. حرارة التعليم CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 75

76 Business Finance ASSESSMENT QUESTIONS Choose the correct answer. 1. Individuals are able to invest indirectly in a variety of short-term securities through purchasing: a. stocks. b. mutual funds. c. bonds. d. debt. 2. In Saudi Arabia, the supply of money is controlled by the: a. Ministry of Finance. c. Saudi Central Bank. b. Public Investment Fund. d. Saudi National Bank. 3. play a role in the allocation of scarce credit among competing uses for the funds a. Finance rates b. Interest rates 4. A mutual savings bank is owned by: a. a commercial bank. b. its depositors. c. Central banks d. Customer demands c. a board of trustees. d. the government 5. The Saudi Vision 2030 has a program to help improve efficiency of Saudi Arabia's pension administration. True/False 6. A correspondent bank may help smaller banks by: a. facilitating check clearing. b. giving management advice. c. giving Investment counsel. d. Correspondent banks can provide all these things. 7. A commercial bank will have required reserves but can hold secondary reserves. True/False

KEY TERMS Match the terms listed with their definitions. Write the letters of the correct definitions. Term 1. Banker's acceptances 2. Banknote 3. Commercial paper 4. Correspondent bank 5. Excess reserves 6. Liquidity 7. M-1 8. M-2 9. Money 10. Money market mutual fund 11. Money supply 12. Required reserves 13. Repurchase agreement (repo) 14. Secondary reserves 15. Term structure of interest rates 16. Vield curve Your Choice Definition a. The amount of funds a bank holds in addition to the amount of funds it is required to hold b. Unsecured short-term promissory note issued by the most creditworthy corporations c. The amount of money in circulation in the form of coins, currency, demand deposits savings accounts, and small certificates of deposit d. Funds that banks must hold against their deposit liabilities e. The sale of a short-term security in which the seller agrees to buy back the security at a specified price at a specified date f. Short-term promissory notes for payment guaranteed by a bank g. The ease of converting an asset into cash without loss h. Anything that is generally accepted as a means of payment i. The relationship between yields and the time to maturity for debt with a given level of risk j. A form of paper money in which the government of issue's central bank promises to pay the bearer the sum of its stated value k. The total amount of currency in circulation L. A graph relating interest rates and the term to maturity m. Short-term securities held by banks to increase their liquidity n. A financial institution which performs services for one or more other financial institutions and often serves as a point of liaison between domestic and international financial institutions o. An investment company that invests solely in short-term money market instruments p. The amount of money in circulation in the form of coins, currency, and demand deposits وزارة التعليم CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 77

Business Finance MINI CASE 2.1 Investment For Starting a New Business Saudi Vision 2030 has introduced many initiatives to support SMES (small and medium enterprises), encouraging entrepreneurs to start new businesses. Rasheed has decided to set up his own smart-tech company but needs funds in order to build prototypes of his products. He thinks that some financial institutions might offer him a loan. However, he has also heard that funds can be raised through investors instead. Rasheed is unsure which is the best funding option for his business so he decides to carry out some research. Task 1. Describe some of the typical financial institutions that offer loans to entrepreneurs like Rasheed. 2. List some of the advantages and disadvantages of taking out a loan compared with raising capital through investors.

MINI CASE 2.2 Financial Intermediaries for Investors Nora was never particularly interested in investing in shares until she heard about the record-breaking IPO (initial public offering) of Saudi Aramco in 2019. Now she is keen to invest some money that she has inherited. However, she has never invested in a business before and doesn't know where to start. Nora's brother has heard about an amazing investment opportunity, while her sister suggests she should spread her investment across several companies. Nora is unsure what to do, and decides to carry out some research to find out more about the opportunities available. Task 1. Where would Nora find information about shares that are currently available to buy, and details of the companies? 2. Through which institution would she need to buy the shares? حرارة التعليم CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 79

pul30Business Finance CASE STUDY: THE SAUDI EXCHANGE'S ROLE IN SUPPORTING SAUDI VISION 2030 Many of the world's major or capital cities have a stock exchange, typically located In a grand building in the heart of the financial district. The stock exchange is one of the key institutions underpinning business across the globe It is where company stocks and other securities are listed, bought and sold-a hub connecting potential investors with businesses that require investment. These businesses raise capital by selling a stake (shares) in the company. In return, Investors can profit with the rise in value of those shares though, equally, they can make a loss if the share price falls).. The Saudi Exchange loften referred to as the Tadawull is headquartered in Riyadh and is owned by the Saudi Tadawul Group. The Saudi Exchange is ranked 13th in the world by market capitalization (as of 2021), 9th largest of the World Federation of Exchanges (WFE), and is the largest stock exchange in the Middle East. It is regulated by the internationally-recognized body, the Capital Market Authority (CMA), and is an affiliate member of the Arab Federation of Exchanges. Stock market activity is often regarded as an important indicator of an economy's health. Financial experts keep a close eye on the markets to anticipate change. As well as its key function connecting buyers and sellers, the Saudi Exchange provides a range of supporting financial services and online tools to assist Investors. A dally summary provides headline information at aglance on the top gainers', 'top losers, 'movers by volume', and 'movers by value'. Saudi Exchange also offers a Trading Simulator for practicing virtual trading in asimulated environment without the associated risk of using real money. As a key financial Institution, the Saudi Exchange commands a position of influence in the sector, playing a broader advisory role in financial policy and economic developments in Saudi Arabia. A recent example is its role in the formation of the Sharlah Advisory Committee in April 2022. Given its national importance, it is perhaps unsurprising that the Saudi Exchange is central to the Saudi Vision 2030 plans. In line with the Financial Sector Development Program, the exchange is assisting and facilitating the privatization of businesses, and hence the growth of the private sector, encouraging "Saudi and GCC private companies to list" According to Saudi Vision 2030 "We will continue facilitating access to investing and trading in the stock markets. We will smooth the process of listing private Saudi companies and state-owned enterprises, including Aramco. This will require deepening liquidity in our capital markets, fortifying the role of the debt market, and paving the way for the derivatives market. Another tool in supporting the private sector is the Saudi Parallel Market (Nomu), a separate market with less stringent listing requirements, which according to the official website, promotes increased diversification and deepening the Saudi capital market." Saudi Exchange's official vision statement is: "Shaping what comes next in capital market development in Saudi Arabia, supported by a strong,

innovative, and technologically advanced market infrastructure" According to Saudi Exchange's official website, it hopes to achieve these aims by. "Providing markets that are reliable, resilient, transparent, and efficient. Protecting market participants and offering tallored services that are attractive to domestic and International stakeholders." Study Questions 1. What is the function of a stock exchange? 2. Explain some ways in which the Saudi Exchange is playing a vital role in helping to facilitate Saudi Vision 2030. Online Activity Visit the Saudi Exchange webpage (www.saudiexchange sa) and search a company that is listed on the exchange Find out details about that company. Assuming that you were of legal age and had the necessary funds for investment, would you choose to invest in this company, based on the information available? Give reasons for your answer. حرارة التعليم CHAPTER 2 The Role of Financial Markets and Financial Intermediaries 81