FN1024 Summary of Chapter 2 - Introduction to Financial Systems

PRINCIPLES OF BANKING
AND FINANCE
- Chapter 2: Introduction to financial systems –

Note: We suggest first studying this chapter from the Subject
Guide. Notes for ch2 are based on the essential readings.




Good luck studying!


short manual:
- includes a graph
- includes a schema/diagram
- includes an introduction
- includes additional information that
is not in the main textbook updated: 16/02/2018

, CONTENTS
CHAPTER 1: WHY STUDY FINANCIAL MARKETS AND INSTITUTIONS?
- Mishkin chapter 1 -
1.1. Why study financial markets? .......................................................... 1
1.2. Why study financial institutions? .................................................... 3

CHAPTER 2: OVERVIEW OF THE FINANCIAL SYSTEM
- Mishkin chapter 2 -
2.1. Function of financial markets .......................................................... 5
2.2. Structure of financial markets
2.2.1. Debt and equity markets ................................................... 6
2.2.2. Primary and secondary markets ....................................... 7
2.2.3. Money and capital markets ............................................... 9
2.3. Internalization of financial markets ................................................. 10
2.4. Benefits of indirect finance .............................................................. 11
2.5. Types of financial intermediaries
2.5.1. Introduction ........................................................................ 13
2.5.2. Depository institutions vs. S&L associations ....................... 14
2.5.3. Depository institutitons ...................................................... 15
2.5.4. Contractual savings institutions .......................................... 16
2.5.5. Investment intermediaries ................................................. 17
2.6. Regulation of the financial system
2.6.1. Reasons ............................................................................... 18
2.6.2. How to ensure soundness of the financial system ............. 19

CHAPTER 3: THE BOND MARKET
- Mishkin chapter 12 -
3.1. Introduction to the bond market .................................................... 20
3.2. Long-term government notes and bonds ........................................ 22
3.3. Municipal bonds .............................................................................. 24
3.4. Corporate bonds
3.4.1. Introduction ........................................................................ 25
3.4.2. Characteristics (features) .................................................... 26
3.4.3. Types ................................................................................... 27
3.5. Financial guarantees for bonds ....................................................... 28
3.6. Current yield .................................................................................... 29
3.7. Finding the value of coupon bonds ................................................. 30
3.8. Investing in bonds ........................................................................... 31

, CONTENTS
CHAPTER 4: INTERNATIONAL COMPARISON OF FINANCIAL SYSTEMS
- Comparing Financial Systems chapter 3 -
4.1. Introduction to international comparison of financial systems ...... 32
4.2. United States ................................................................................... 34
4.3. United Kingdom ............................................................................... 38
4.4. Japan ................................................................................................ 41
4.5. France .............................................................................................. 46
4.6. Germany .......................................................................................... 49
4.7. Conclusion ....................................................................................... 52




-1-

, 1.1. Why Study Financial Markets?

WHAT IS THE ROLE OF FINANCIAL MARKETS?
 greater economic efficiency
 by channeling funds from people who do not have a productive use for them to those
who do

FINANCIAL MARKETS HAVE DIRECT EFFECTS ON ...
1. personal wealth
2. behaviour of consumers and businesses
3. cyclical performance of the economy

KEY TERMS
 SECURITY (financial instrument)
o claim on the issuer’s future income or assets (any financial claim subject to own.)
 STOCKS
o claim on the earnings and assets of the corporation
 BONDS
o debt security that promises to make payments periodically for a specified period of
time

1) DEBT (BOND) MARKETS
 INTEREST RATES
o cost of borrowing or the price paid for the rental of funds (usually %)
o they are determined on debt markets
 INFLUENCE OF INTEREST RATES
o consumers’ willingness to spend 
o consumers’ willingness to save 
o businesses’ investment decisions 
 different interest rates usually move in unison, so we call them „the interest rate“