Académique Documents
Professionnel Documents
Culture Documents
Learning Objectives
To learn about the important channels
through which funds flow from lenders
and borrowers and back again within the
global system of money and capital
markets.
To discover the nature and
characteristics of financial assets how
they are created and destroyed by
decision makers within the financial
system.
2-3
Learning Objectives
To explore the critical roles played by
money within the financial system and
the linkages between money and
inflation in the prices of goods and
services.
To examine the important jobs carried
out by financial intermediaries in
lending and borrowing and in creating
and destroying financial assets.
2-4
2-7
Equities
Ownership shares in a business firm
Claims against the firms profits
Claims against proceeds from the sale of its
assets
Examples are common stock and preferred
stock
2-9
Derivatives
Market value tied to or influenced by the value or
return on a financial asset
Examples include futures contracts, options, and
swaps
2-10
2-11
2-12
2-13
2-14
Major Sectors
of the
Economy
Households
Net Acquisitions
Net
Net Lender (+)
of Financial Increase in
or Net
Assets
Liabilities Borrower (-)
$865.1
$1,411.1
$ - 546.0
Nonfinancial business
firms
State and local
governments
Federal government
International sector:
foreign investors
and borrowers
599.0
680.5
+ 87.5
80.0
144.0
- 64.0
- 13.6
634.6
- 648.2
1491.9
545.3
+ 946.6
Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts
2-21
2-22
What is Money?
All financial assets are valued in terms
of money, and flows of funds between
lenders and borrowers occur through
the medium of money.
Money itself is a financial asset,
because all forms of money in use
today are claims against some public
or private institution.
2-23
2-24
Source: http://www.federalreserve.org/releases/H6/hist/h6hist1.txt
2-25
Inflation
Rise in the average price level of all goods
and services
Lowers purchasing power of money
Can damage value of financial contracts
Deflation
The opposite of inflation
Fall in the average price level of all goods
and services
2-27
2-28
1
100 0.8 .
125
2-29
Borrowers
(DBUs)
Primary Securities
Lenders
(SBUs)
Borrowers
(DBUs)
(direct claims
against
borrowers)
Primary Securities
Security
brokers,
dealers, &
investment
bankers
(direct claims
against
borrowers)
Flow of funds
and other
financial services
Lenders
(SBUs)
Proceeds of
security sales and other
(loans of spending
financial services
power)
(less fees and commissions)
Lower search (information) costs
Risky & matching is still required
2-33
2-34
Ultimate
borrowers
(DBUs)
Secondary Securities
Financial intermediaries
Ultimate
lenders
(SBUs)
2-35
74
Credit unions
18
72
Mortgage companies
16
Real estate investment trusts
4
6
Other financial institutions:
Security brokers and dealers
16
36
1990
2000
2006
$3,340
1,358
1,357
1,629
602
820
611
534
498
202
49
13
$6,488
1,219
3,204
4,587
4,457
2,290
1,138
872
1,812
441
36
62
$9,528
1,829
4,479
4,876
6,473
2,791
1,300
1,280
2,014
703
32
385
262
1,221
2,296
Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts
2-36
Contractual institutions
Funds from offering legal contracts to
protect the saver against risk
Insurance companies, pension funds
2-37
Investment institutions
Sell shares to the public
Invest the proceeds in stocks, bonds, and
other assets
Mutual funds, money market funds, real
estate investment trusts
2-38
Portfolio (Financial-Asset)
Decisions by Financial Institutions
Deciding what financial assets to buy
or sell
Depends on various asset factors
Different financial assets relative rate of
return
Different financial assets risk
Cost of incoming funds
Volatility of incoming funds
Maturity of incoming funds
2-39
Portfolio (Financial-Asset)
Decisions by Financial Institutions
Also depends on financial institution
size
Larger financial institutions tend to have
more diversified sources and uses
Larger financial institutions also enjoy
economies of scale.
2-40
Financial
intermediaries
Ultimate
lenders
(SBUs)
Loanable funds
2-42
2-44
Chapter Review
Introduction: The role of financial
assets
The creation of financial assets
Characteristics of financial assets
Different kinds of financial assets
How financial assets are born
Financial assets and the financial
system
2-50
Chapter Review
Lending and borrowing in the financial
system
Money as a financial asset
What is money?
The functions of money
Chapter Review
The evolution of financial transactions
Direct finance
Semidirect finance
Indirect finance and financial
intermediation
Chapter Review
Portfolio (financial-asset) decisions by
financial intermediaries and other
financial institutions
Disintermediation of funds
New types of disintermediation