Monetary Assets, Money, Financial Transactions, and Financial Institutions

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? Learning Objectives ?. To find out about the channels through which subsidizes stream in the middle of banks and borrowers inside of the worldwide money related system.To find the nature and attributes of budgetary resources

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2 Financial Assets, Money, Financial Transactions, and Financial Institutions C h a p t e r Money and Capital Markets Financial Institutions and Instruments in a Global Marketplace Eighth Edition Peter S. Rose McGraw Hill/Irwin Slides by Yee-Tien (Ted) Fu

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 Learning Objectives  To find out about the channels through which stores stream amongst loan specialists and borrowers inside the worldwide monetary framework. To find the nature and qualities of money related resources – how they are made and resigned by leaders inside the monetary framework. To investigate the basic parts played by cash and the linkages amongst cash and swelling.

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 Learning Objectives  To look at how monetary middle people and other money related organizations loan and get finances and make and resign budgetary resources inside the worldwide arrangement of business sectors.

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Introduction The monetary framework is the instrument through which loanable assets achieve borrowers. Through the operation of the budgetary markets, cash is traded for money related claims as stocks, securities, and different securities, adequately changing funds into venture so that generation, business, and salary can develop.

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The Creation of Financial Assets A monetary resource is … a case against the pay or abundance of a business firm, family unit, or unit of government, spoke to typically by a declaration, receipt, PC record, or other authoritative archive, and normally made by or identified with the loaning of cash.

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Characteristics of Financial Assets Financial resources are looked for after in light of the fact that they guarantee future comes back to their proprietors and fill in as a store of significant worth (buying power).

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Characteristics of Financial Assets They don't deteriorate like physical merchandise, and their physical condition or frame is generally not important in deciding their reasonable worth. Their cost of transportation and capacity is low, with the end goal that they have next to zero an incentive as a product. Money related resources are fungible – they can without much of a stretch be changed in frame and substituted for different resources.

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Different Kinds of Financial Assets Any monetary resource that is by and large acknowledged in installment for the buys of products and enterprises is a type of cash . Cases incorporate money and financial records. Values speak to possession partakes in a business firm and are cases against the company's benefits and continues from the offer of its advantages. Normal stock and favored stock are values.

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Different Kinds of Financial Assets Debt securities qualifies their holders for a need assert over the holders of values to the advantages and salary of a monetary unit. They are either debatable or nonnegotiable. Illustrations incorporate securities, notes, creditor liabilities, and reserve funds stores. Subsidiaries have a market esteem that is fixing to or impacted by the esteem or profit for a budgetary resource. Cases incorporate fates contracts, alternatives, and swaps.

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The Creation Process for Financial Assets To gain resources, families and business firms may utilize current pay and gathered reserve funds – interior financing . A monetary unit may likewise raise subsidizes by issuing budgetary liabilities (obligation) or stock (values), gave that a purchaser can be discovered – outer financing .

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Financial Assets and the Financial System The demonstration of obtaining or of issuing new stock at the same time offers ascend to the making of an equivalent volume of monetary resources. For instance, a $10,000 budgetary resource held by a family unit that had loaned cash will be precisely coordinated by a $10,000 obligation of the business firm that had obtained the cash. Volume of budgetary resources made for loan specialists = Volume of liabilities issued by borrowers

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Financial Assets and the Financial System For the accounting report of any monetary unit , Total resources = Total liabilities + Net worth where resources = genuine resources + money related resources For the entire economy and money related framework, Total budgetary resources = Total liabilities So, for the economy all in all, Total genuine resources = total assets

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Financial Assets and the Financial System So, society builds its riches just by sparing and expanding the amount of its genuine resources, for these benefits empower the economy to deliver more merchandise and enterprises later on. Be that as it may, the monetary framework gives the fundamental channel important to the creation and trade of money related resources amongst savers and borrowers so that genuine resources can be procured.

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Lending and Borrowing in the Financial System Economists John Gurley and Edward Shaw (1960) brought up that every business firm, family, or unit of government dynamic in the monetary framework must adjust to: R – E = FA – D where R = Current salary receipts E = Current uses FA = Change in property of money related resources D = Change in the red and value remarkable

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Lending and Borrowing in the Financial System So, for any given timeframe, the individual financial unit can be categorized as one of three gatherings: Deficit-spending unit (DBU): E > R, D > FA i.e. net borrower of assets Surplus-spending unit (SBU): R > E, FA > D i.e. net moneylender of assets Balanced-spending unit (BBU): R = E, D = FA i.e. neither net loan specialist nor net borrower

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2 - 16 The U.S. Economy, 3 rd Quarter of 2001 (Annualized) Major Sectors of the Economy Net Acquisitions of Financial Assets Net Increase in Liabilities Net Lender (+) or Net Borrower (- ) of Funds Households $857.8 $853.1 $ 4.7 Nonfinancial business 216.0 247.2 -31.2 firms State and local 29.2 68.6 -39.4 governments Federal government 179.5 252.2 -72.7 International part: 435.4 58.6 376.8 foreign speculators and borrowers Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts Lending and Borrowing in the Financial System

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Lending and Borrowing in the Financial System The worldwide budgetary framework licenses organizations, family units, and governments to alter their money related position from that of net borrower (DBU) to net bank (SBU) and back once more, easily and proficiently.

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What is Money? Every monetary resource are esteemed regarding cash, and streams of assets amongst loan specialists and borrowers happen through the medium of cash. Cash itself is a genuine monetary resource, since all types of cash being used today are cases against some establishment, open or private.

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M 3 M 2 M 1 Institutional cash reserves and certain oversaw liabilities of storehouses, in particular extensive time stores, repurchase assentions, and Eurodollars. The most fluid types of cash, to be specific money and checkable stores. Family property of reserve funds stores, little time stores, and retail currency advertise shared assets. + What is Money?

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2 - 20 Money Supply Measures September 2001 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 $7.8 trillion Euros & Repos Institutional MMFs $5.3 trillion Large Time Deposits Retail Money Funds Billions of Dollars Small Time Deposits M2 Savings Deposits $1.2 trillion Checkable Deposits M1 Currency M1 M2 M3 U.S. Cash Aggregates Source:

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The Functions of Money fills in as a standard of significant worth (or unit of record ) for all products and enterprises. Cash fills in as a medium of trade , to such an extent that purchasers and venders no longer need a correct occurrence of needs regarding quality, amount, time, and area. Cash fills in as a store of significant worth – a hold of future obtaining influence – despite the fact that the estimation of cash can encounter checked vacillations.

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The Functions of Money works as the main impeccably fluid resource in the budgetary framework. It displays value solidness, prepared attractiveness, and reversibility.

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The Value of Money and Other Financial Assets and Inflation alludes to an ascent in the normal value level of all products and enterprises. Swelling brings down the esteem or buying influence of cash and is an extraordinary issue in the monetary markets since it can harm the estimation of money related contracts. The inverse of expansion is flattening , where the normal level of costs for merchandise and ventures really decreases.

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The Value of Money and Other Financial Assets and Inflation is generally measured utilizing value files ,, for example, the Consumer Price Index (CPI), the Producer Price Index (PPI), or the Gross Domestic Product (GDP) Deflator Index.

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The Evolution of Financial Transactions Financial frameworks change always because of moving requests from people in general, the advancement of new innovation, and changes in laws and directions. After some time, the methods for doing money related exchanges have developed in unpredictability. Specifically, the exchange of assets from savers to borrowers can be refined in no less than three distinctive ways.

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Flow of assets (advances of spending force for an endless supply of time) Primary Securities (stocks, bonds, notes, and so forth., confirming direct claims against borrowers) Lenders (SBUs) Borrowers (DBUs) The Evolution of Financial Transactions Direct Finance – Direct loaning offers ascend to direct claims against borrowers.  Simple  Difficult to coordinate & dangerous

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Primary Securities (coordinate cases against borrowers) Primary Securities (coordinate cases against borrowers) Security merchants, merchants, & venture investors Lenders (SBUs) Borrowers (DBUs) Proceeds of security deals (less charges and commissions) Flow of assets (advances of spending force) The Evolution of Financial Transactions Semidirect Finance – Direct loaning with the guide of market producers who aid the offer of direct claims against borrowers.  Lower look (data) costs  Risky & m atching is still required .: