Ch 26 the financial system
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Transcript of Ch 26 the financial system
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Chapter 26
Saving, Investment, and the
Financial System
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I. O. UI Owe YouPromises
Name Amount
DateSignature
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Promissory Note
Trading paper for paper
I.O. U.
10 SARDr. Gale
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Financial System
Institutions that match people who save
money with people who need money
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Financial Instruments
I.O.UsSimple to Complex
RelationshipContract
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Financial System
Two categories
Financial Markets
Financial Intermediaries
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Financial Markets
Bond Market
Stock Market
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Financial Markets
Bonds - Borrow - Debt
Stocks - Sell OwnershipsEquity
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Bond Markets
What is a Bond?
Certificate of Indebtedness
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Riyadh Pizza Company
Saudi Style Supreme
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Riyadh Pizza Company
Borrowor
Sell ownership shares
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Riyadh Pizza Company
Bond
100Riyals
Dr. GaleCEO
10% 2023
Pays 10 Riyals each yearPays 100 riyals at maturity
2014Coupon
2015Coupon
2016Coupon
2017Coupon
2018Coupon
2019Coupon
2020Coupon
2021Coupon
2022Coupon
2023Coupon
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Bond
Term - Length of time
Credit Risk - chance of default
Tax - How is the interest or profit taxed
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Stock
Ownership ShareCompany sells once
Then resold to other buyersLimited Liability
No promises of profitEquity position
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Riyadh Pizza Company
Need to raise 1,000 SAR
Create 1,000 shares and sell for 1 SAR each
Each share is worth 1/1,000 of the company
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Riyadh Pizza Company
Stock Certificate
One Share
Dr. GaleCEO
Current Share Owner: Prince Alwaleed
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Stock Markets
“Circulation”169 Companies
http://en.wikipedia.org/wiki/Tadawulwww.tadawul.com
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Stock Valuation
Share PriceDividend
Price-Earnings Ratio
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Share Price
Every time a share sells it sets the current price
Share prices go up and down
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Dividend
Company Earnings or Profits
Declare dividendKeep - Retained Earnings
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Dividend
Earnings: 500Dividend: 300Retained Earnings: ?
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Price - Earnings Ratio
P/E Ratio
Current Share Pricedivided by
Earnings last year
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P/E Ratio
Current Share Price: 75
Earnings last year: 5
P/E Ratio: ?
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P/E RatioPrice
Last SaleEarnings
Last 12 monthsP/E
Ratio
Equation Earnings x P/E Ratio Price ÷ P/E Ratio Price ÷ Earnings
Apple 460 44
Google 792 24.8
STC 12.4
10.45
31.93
62
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Financial Intermediaries
Banks
Mutual Funds
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Banks
SaversBorrowe
rs
Bank Pays5%
Bank Charges7%
Make moneyon spread
7% - 5% = 2%
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We are rich today because
people yesterday were willing to save and not consume
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Mutual Funds
Allows small investors to pool and diversify
their savings
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460 792 40
smallsavers
323
smallsavers
323
smallsavers
323
smallsavers
323
Mutual FundTotal:1292
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Index Fund
Buy one share of all the companies in the
market
Tadawul All Share Index (TASI)
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Exchange IndexesDow Jones Industrial Average
(DJIA)30 biggest U.S. Companies
S&P 500500 biggest U.S. companies
Tadawul All Share Index (TASI)
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0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0 100 200 300 400 500 600 700 800 900 1000
InterestProfitRate
%
Loanable Funds
Supply
Demand
Market for Loanable Funds
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Intellectual
Financial Physical
Human
Culture
Entrepreneur
trust knowledge skills personality health relationships
natural resources time buildings equipmentthings than make things
money and risksavers and borrowers time is money
(1+r)n
insurance limited liability corporations
ideas technologymethods