An overview of the financial system

Résumé du document

Financial markets are markets in which funds are transferred from people who have an excess of available funds to people who have a shortage. They are very important in the channeling funds from people who do not have a productive use for them to people who do have productive use for them. Financial markets activities also have direct effects on personal wealth, on the behavior of business (firm, company), consumers and more generally on the overall performance of the economy.

Security
Security is a financial instrument: it is a claim on the issuer's future income and assets. It's financial claim or a peace of property that is subject to ownership (legal term which means the fact of owning something legally).Share is a certificate of ownership.

Bond
Bond is a debt security that promises to make payments regularly (periodically) for aspecified period of time. Bond markets are very important to economic activity because they enable corporations and government to borrow in order to finance their activities andprojects.Bond markets are important places because they are places where interest rates aredetermined. There is a second reason why the bond markets are important places : they aredebt certificates. It's why the bond market is called the debt market in the press.

Extraits

[...] They have the capacity to reduce transaction costs. Moreover, low transaction costs mean that they can provide customers with equity services that is to say services that make it easier for customers to conduct transactions. For example, banks provide depositers with checking account that allow them to pay their bills. Problem of information costs: When dealing with information costs ,we meet with the problem of asymmetric information. This problem develops in two directions which are adverse selection and moral hazard. [...]

[...] This is a key characteristic of these funds. However, the checkwriting privilege is restricted. It means that no check the amount of money is more than five hundreds dollars can be return. The second requirement is that substantial amount of money is required initially to open an account. In effect, shares in money market mutual funds function like checking account deposits. And these checking account deposits pay interest but there is a restriction on check-writing. The first money market mutual funds appeared in 1971 and they have been very, very, very popular, successful. [...]

[...] The pool of savings, in countries like Japan or the countries of Western Europe, has grown and the deregulation process has enabled financial market to expand their activities and the consequence is the extraordinary growth of financial market which provide bonds and corporations with the funds they need. As a consequence, American investors seek investment opportunities abroad and similarly European and Japanese investors raise funds from Americans. This globalization process of financial market is particularly visible in international bond market and in world stock markets. International bon market, Euro bonds, Euro currencies The traditional instrument in international bond market is the foreign bond. Foreign bonds are sold in a foreign country and are denominated in that country's currency. [...]

[...] One of these two routes is what we call direct finance. As the name implies in direct finance, we borrow funds directly from lenders in financial market by selling them securities which are also called financial instruments. Securities are assets for the person who buy them but liabilities for the person or the firm that serves or issues them. An asset is any item owned or right possessed by a firm or an individual which has an economic, commercial, or exchangeable value. [...]

[...] Why study financial institutions? Financial institutions are what make financial market work. In other words, without financial institutions, financial markets will not be able to move funds from people who save to people who have productive investment opportunities. There are several financial institutions and the most important of them is the central bank ( American Federal Reserve). A central bank is a government agency which is responsible for the conduct of monetary policy. In USA, this government agency is the federal reserve system and more family the FED. [...]