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1、1,CAPITAL MARKETS AND FINANCIAL INSTITUTIONS(BUS 498),ByARTURO RUBALCAVA,2,This course examines:The way in which Financial Markets function The pivotal role played by Financial institutions Main emphasis:Coverage of Canadian markets and institutions Coverage of risk measurement and management Risk-r
2、eturn tradeoffs available to investors.,3,Introduction,Financial SystemFinancial MarketsFinancial InstitutionsEconomic functions of FIsFinancial InnovationRegulation of the Financial SystemConclusions,4,1.Financial System,Its main role is to gather money from parties that have more money than they n
3、eed right now and route those funds to those that can use them for either business or consumer expenditures.This is facilitated by Financial Markets and Financial Institutions,5,2.Financial MarketsMarkets where parties buy and sell financial instruments including stocks,bonds,options,foreign exchang
4、e contracts.Example:BCE needs to finance a$400 million telecom project.It can get the money via:A)Financial Markets by borrowing directly from investors(e.g.,households)B)By borrowing indirectly from households via a Financial Intermediary(e.g.,a commercial bank).,Households,Nortel,$,$,Bonds,Bonds,F
5、inancial Markets,A),6,Financial markets:ClassificationMoney Market.Short term debt instrumentsMaturity of securities 1 yearDebt Markets(Government Securities Market,Municipal Bond Markets,Corporate Debt Markets)Stock Market(TSX),Depositary Receipts MarketForeign Exchange markets.Markets in which for
6、eign currencies are tradedOther Markets:Financial Derivative Markets,7,Financial Markets:Alternative classificationPrimary Market.Market for new issue of securities sold to initial buyers by investment bankers.Secondary Market.Market in which already-issued securities are traded among investors Brok
7、ers.Match buyers and sellers for a fee.Dealers.Sell and buy securities from buyers and sellers.,8,Types of secondary markets,1.Exchange MarketTransaction are centralized in a physical location via communication network.Examples:TSX,TSX Venture Exchange(formerly CDNX),Montreal Exchange,Winnipeg Commo
8、dities Exchange,NYSE,AMEX.2.Over-the-counter Market:Transaction made through communications network with no physical centralization of tradesExamples:CDN,(Canadian government bonds),NASDAQ.Foreign exchange market,9,Domestic and International Financial Markets,Domestic MarketBanksMoney MarketBond Mar
9、ketStock MarketInternational MarketInternational Bond MarketForeign BondsEurobondsEurocurrenciesForeign stock markets,10,International Bond MarketA)Foreign BondsA bond issued by a foreign firm or government for sale in another country in the currency of that country.Example?Yankee bonds.U.S.dollar d
10、enominated bonds issued within the U.S.by a foreign borrower(e.g.Bombardier).Others:Samurai bonds,Bulldogs B)Eurobond Market:EurobondsA bond issued by a foreign firm or government for sale outside the country in whose currency it is denominated.Example?A Canadian dollar-denominated bond for sale to
11、investors outside of Canada.,11,c)Eurocurrency market:EurocurrenciesInternational currencies that are deposited in banks outside their home countries.Examples:Eurodollars.A US dollar deposited in a bank outside the US.Other examples:Euroeuros,Euroyens,etc.International Bank Loans and Syndicate Credi
12、ts:Ex.Loans in Eurocurrency(Eurocredits)Foreign Stock Markets E.g.,Shares of Potash Corp.are listed on the TSX,and NYSE.,12,Reasons of the significant growth in foreign financial Markets,Deregulation of financial marketsGlobalization of tradeEasy accessibility of information via advances in computer
13、 technology,13,Financial Markets(Continued),How borrowers obtain funds?Money Market.-Short term debt Capital Markets.-Long term debt and equityWhen to finance in the Money Mkt?When in the Capital Mkt?When to finance with Long Term Debt?When with Equity?What type of firms will finance more with equit
14、y than with debt?When to finance in the domestic or in international markets?Advantages for lendersDebt vs.Equity,14,3.Financial Institutions(FIs),The flow of funds from lenders to borrowers is facilitated by Financial InstitutionsThis can be done A)Directly In the financial markets through the assi
15、stance of securities firms(investment banks).B)Indirectly Through Other financial intermediaries(e.g.,via a commercial bank).,15,A)Direct Finance,Process by which funds move directly from lenders to borrowers assisted by an investment bank.It does not imply an asset asset transformation function.For
16、 example:Research in motion issues$1-billion of stock directly to investors with the assistance of CIBC World Markets(investment bank)Once the financial claims have been issued,they may be resold to other investors also by Investment banks through their brokerage or dealer units.,16,B)INDIRECT FINAN
17、CE,Process by which funds move from lenders to borrowers by a financial intermediary that smoothes the flow of funds between the lender-savers and the borrower-spenders.It implies an asset asset/risk transformation function.For example:BCE gets a loan for$400-million from Bank of Montreal.Households
18、 instead of lending$400-million directly to Nortel,they prefer to lend$400-million to Bank of Montreal(for example,by investing in short-term deposits with a guaranteed interest rate).Bank of Montreal makes a$400-million long-term loan to BCE.Primary route for moving funds from lenders to borrowers,
19、17,The Financial System,.,FinancialInstitutions,FinancialMarkets,Lender-Savers1.Households2.Business Firms3.Governments4.Foreigners5.FIs,Borrower Spenders1.Business Firms2.Government3.Households4.Foreigners5.FIs,DIRECT FINANCE(Assisted by Securities firms),INDIRECT FINANCE,Funds(e.g.,deposits),Funds
20、(e.g.,loans),Funds,Funds,Funds(e.g.,Govt bonds),(e.g.,shares),(e.g.,shares),18,Financial Intermediaries,A)Depository Institutions.FIs that take deposits and make loansChartered(commercial)banks and near banks(trust and mortgage loan companies,and credit unions)Main business.Take deposits(e.g.,demand
21、 deposits,short and long term deposits)that are used to provide loans(consumer,commercial,mortgage),19,B:Non-Depository Institutions,Contractual Savings Institutions.FIs that acquire funds at periodic intervals on a contractual basis.Life Insurance companies.Life and health risk protectionP&C Insura
22、nce companies.Protection against theft,fire,accidents.Pension Funds.Provide retirement income Investment IntermediariesMutual Funds.Diversified portfolios of securities at a low cost.Finance Companies.Consumer and business loans(Do not take deposits)Securities Firms(Investment Dealers,Broker-Dealers,Investment Banks),
