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The Economics
of Money, Banking,
and Financial Markets
Fifth Canadian Edition
Chapter 2
An Overview
of the Financial System
Copyright 2014 Pearson Canada Inc.
Learning Objectives
1. Summarize the basic function performed by
financial markets
2. Explain why financial markets have several
classifications
3. Describe the principal money market and
capital market instruments
4. Express why the government regulates
financial markets and financial
intermediaries
2-2
2-3
2-4
2-5
Maturity
short-term (maturity < 1 year)
intermediate-term (maturity >1 and < 10 years)
long-term (maturity > 10 year)
2-6
Primary Market
new security issues sold to initial buyers
Secondary Market
securities previously issued are bought and sold
2-7
Dealers
link buyers and sellers by buying and selling
securities at stated prices
2-8
2-9
2-10
Commercial Paper
Repurchase Agreements
Loans to banks, T-bills as collateral
Overnight Funds
2-11
2-12
Stocks
Mortgages and mortgage-backed securities
Corporate bonds
Government of Canada bonds
Canada Savings bonds
Provincial and municipal government bonds
Government agency securities
Consumer and bank commercial loans
2-13
2-14
Internationalization of Financial
Markets
Foreign Bonds
sold in a foreign country and denominated in that
countrys currency
Eurobond
bond denominated in a currency other than that of the
country in which it is sold
Eurocurrencies
foreign currencies deposited in banks outside the home
country
Eurodollars: U.S. dollars deposited in foreign banks
outside the U.S. or in foreign branches of U.S. banks
Copyright 2014 Pearson Canada Inc.
2-15
2-16
Market Capitalization of
Developing Countries
The other 25% is accounted for by the
market capitalization of developing
countries in emerging markets.
Latin America
Asia
Eastern Europe
Mideast/Africa
2-17
2-18
Function of Financial
Intermediaries: Indirect Finance
1. Reduce transaction costs (time and money
spent in carrying out financial transactions)
economies of scale (good at collecting funds)
liquidity services
2-19
Function of Financial
Intermediaries: Indirect Finance
(contd)
b. Moral Hazard
2-20
2-21
2-22
2-23
2-24
2-25
2-26
2-27
2-28