Lesson 4

• Financial Institutions


  • Organization that facilitates the flow of funds between investors and borrowers
  • They provide wide range of financial services, including deposit-taking, lending, investing, and insurance
  • Channel funds from savers to borrowers
  • Managing risks
  • Providing liquidity
  • Facilitate financial transactions, offer financial advice, and contribute to economic growth and stability
• Examples of Financial Institutions


  • Banks
  • Credit Unions
  • Insurance Companies
  • Investment Banks
  • Pension Funds
  • Mutual Funds
  • Hedge Funds
  • Central Banks
• Financial Instruments


  • Contracts or documents that represent a financial claim or asset
  • They provide opportunities for investors to earn returns, receive income, or protect against losses
• Examples of Financial Instruments


  • Stocks
  • Equities
  • Bonds (fixed-income securities)
  • Options
  • Call Options
  • Put Options
  • Expiration Date
  • Swaps
  • Futures
  • Certificates of Deposit (CD)
  • Treasury Bills
• Swaps


  • Two parties agree to exchange one set of financial instruments
  • Fixed rate
  • Floating interest rate
  • Traded-over the counter
  • LIBOR (London Interbank Offered Rate)
• Futures


  • Standardized agreements to buy or sell a specified quantity or commodity
  • Risk Management
  • Speculation
  • Price Discovery
  • Standardization
  • Margin Requirements (collateral)
  • Mark-to-Market
  • Settlement Methods (physical, delivery)
• Futures Exchanges

  • Chicago Mercantile Exchange (CME)
  • Intercontinental Exchange (ICE)
• Certificates of Deposit (CD)


  • Fixed Term
  • Fixed Interest Rate
  • Offered by Banks and Credit Unions
  • Time Deposit
  • Interest Payment Frequency
  • Minimum Deposit Requirement
  • Penalties for early withdrawal
• Treasury Bills


  Short-term debt instrument issued by the government of a country
• Financial Market


  • Platforms or systems where the buyers and sellers trade financial assets
  • Categorized into primary (new) and secondary markets (existing securities are traded)
• Financial Markets


  • platforms where individuals and entities trade financial securities, commodities, currencies, and other fungible items at prices determined by supply and demand
  • play a crucial role in allocating capital, facilitating economic growth, and managing financial risks
• Types of Financial Markets


  • Money Market
  • Capital Market
  • Stock Market (Equity Market)
  • Bond Market (Debt Market)
  • Foreign Exchange Market (Forex Market)
  • Commodity Market
  • Derivatives Market
  • Real Estate Market
• Money Market


  • Goal: Facilitate short-term borrowing and lending of funds
  • Role: Provides liquidity to financial institutions, governments, and corporations for short-term financing needs
  • Function: Trading of short-term debt securities such as treasury bills, commercial papers, and certificates of deposit
• Capital Market


  • Goal: Mobilize long-term capital for investment in productive assets
  • Role: Facilitates the issuance and trading of long-term securities such as stocks and bonds
  • Function: Enables corporations and governments to raise funds for capital expenditure, expansion, and infrastructure projects
• Stock Market (Equity Market)


  • Goal: Provide a platform for buying and selling ownership stakes in publicly traded companies
  • Role: Facilitates investment in corporate shares, allowing companies to raise equity capital
  • Function: Determines share prices based on supply and demand, provides liquidity to investors and allows for capital appreciation through stock price appreciation
• Bond Market (Debt Market)


  • Goal: Enable governments and corporations to raise funds by issuing debt securities
  • Role: Facilitates trading of fixed-income securities such as government bonds, corporate bonds, and municipal bonds
  • Function: Allows investors to lend money to borrowers in exchange for periodic interest payments and repayment of principal at maturity
• Foreign Exchange Market (Forex Market)


  • Goal: Facilitate the exchange of currencies between different countries
  • Role: Provides a platform for international trade and investment, hedging currency risks, and speculation
  • Function: Determines exchange rates based on supply and demand for currencies, and enables conversion of one currency into another for conducting cross-border transactions
• Commodity Markets 


  Trading of physical commodities such as gold, oil, agricultural products, and precious metals.
• Derivatives Market


  Trading of financial instruments whose value is derived from underlying assets, indices, or securities.
• Real Estate Markets


  Buying, selling, leasing of residential commercial, and industrial properties.
• Importance of financial markets in promoting economic growth, allocating capital efficiently, and managing financial risks


  Emphasize the diverse range of financial markets catering to different investment needs and objectives.