the term " finance " in our simple understanding it is perceived as equivalent to " money ". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus finance does does not mean the money with the government, but it refers to sources of raising revenue for the activities and functions of a government.
Draw a diagram to illustrate how financial system work
what is financial system?
the word "system ", in the term " financial system " implies a set of complex and closely connected or interlined institution, agents, practices, market, transacions, claimns and liabilities in the economy.
the financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other.
Indian financial system consists of financial market, financial instruments and financial intermediation.
Draw a diagram for the structure of a financial system
what is financial markets?
- a financial market can be defined as the market in which financial assets are created or transferred
- as against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of financial asset
- financial assets or financial instruments represents a claim to payment of a sum of money sometime in the future and / or periodic payment in the form of interest or dividend.
what is money market?
wholesale debt market for
- low risk
- high liquidity
- short-term => single day up to a year
- dominated by government, banks and financial institution
- example :
- high risk
- low liquidity
- long-term => more than a year
- example :
what is Forex market?
- deal with multi-currency
- depending on the exchange rate
- place where banks, financial institution, non bank financial company provided / supply short, medium & long term loan to corporate & individual
what is the difference between a bond price and an interest rate?
they are both relative prices
interest rate = price of a current money in terms of foregone future dollars
bond price = price of a future money in terms of foregone current dollars
Financial Intermediation
- having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to gained the requisite amount.
- when the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. adequate information of the issue, issuer and the security should be passed on to take place. there should be a proper channel within the financial system to ensure such transfer.
- to serve this purpose, financial intermediaries came into existence
- this service was offered by banks, FIs, brokers and dealers
- some of the important intermediaries operating in the financial market include, investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds and ect.
Money Market Instruments
the money market can be defined as a market for short term money and financial assets that are near substitutes for money.
The term short-term means generally a period up to one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transportation cost
example : call / notice money. treasury bills, term money, certificate of deposit, commercial papers.
Level Of Interest Rates
How many theories about interest rates & briefly explain it ?
A . The Classical Theory
B . The Loanable Funds Theory
C . The Keynesian
A . The Classical Theory
equilibrium of the interest depend on supply of saving and demand for investment
B. The Loanable Funds Theory
equilibrium of the interest determine by the demand and supply of the loanable funds
C . The Keynesian
equilibrium of interest determine by the monetary factors alone which are demand and supply of the money itself.
Stated 7 reasons why the interest rate change.
political short term gain -
deferred consumption - postpone of purchase
inflationary expectations -
alternative investments -
risks of investment - probability of losses relative to the expected return
liquidity preference -
taxes -
how interest rate affect the inflation?
- Inflation refers to the rate at which prices for goods and services
rises.
- as interest rates are lowered, more people are able to borrow more money
- the result is that consumers have more money to spend, causing the economy to grow and inflation to increase.
- The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns from savings are higher.
- with less disposable income to spend as a result of the increase in savings, the economy slows and inflation decreases.
- as interest rates are lowered, more people are able to borrow more money
- the result is that consumers have more money to spend, causing the economy to grow and inflation to increase.
- The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns from savings are higher.
- with less disposable income to spend as a result of the increase in savings, the economy slows and inflation decreases.
