Financial management 
%&plain how financial institutions ser'e as intermediaries (etween in'estors and firms.
)ro'ide and o'er'iew of financial markets.
%&plain how firms and in'estors trade money market and capital market securities in the financial markets in order to satisfy their needs.
*escri(e the ma+or securities e&changes.
*escri(e deri'ati'e securities and e&plain why they are used (y firms and in'estors.
*escri(e the foreign e&change market.
 
 #n effecti'e financial system must possess three characteristics
Monetary systems that pro'ide an efficient medium for e&changing goods and ser'ices
Facilitate capital formation where(y e&cess capital from sa'ers is made a'aila(le to (orrowers in'estors/
 
Financial institutions ser'e as intermediaries (y channeling the sa'ings of indi'iduals0 (usinesses0 and go'ernments into loans or in'estments.
 
he key customers of financial institutions are indi'iduals0 (usinesses0 and go'ernments.
4a'ings of indi'iduals pro'ide the main supply of funds to (oth (usinesses and other indi'iduals.
 #s a group0 indi'iduals are net suppliers of funds.
Firms0 on the other hand0 are net demanders of funds.
Finally0 like indi'iduals0 go'ernments are net demanders of funds.
 
6 48Ls
6 )ri'ate )ension Funds
In'estment Institutions 6 In'estment Companies
and Mutual Funds
6 Money Market Funds
6 Consumer Finance Companies
6 Commercial Finance Companies
6 In'estment 7ankers and 7rokerage Companies
6 :rgani;ed 4ecurities Markets
6 Credit 9eporting :rgani;ations
6 Go'ernment Credit-9elated #gencies
Commercial Banks
Commercial (anks accumulate deposits from sa'ers and use the proceeds to pro'ide credit to firms0 indi'iduals0 and go'ernment agencies.
7anks pro'ide personal loans to indi'iduals and commercial loans to firms.
 
at Commercial Banks
7anks o(tain most of their funds (y accepting deposits0 primarily from indi'iduals (ut also from firms and go'ernments.
hese deposits are insured (y the F*IC to a ma&imum of >"!!0!!! per depositor.
 
at Commercial Banks
erm loans typically last from 1 to = years.
Lines of credit allow firms to access a specified amount of funds o'er a specified period of time and are generally used to meet working capital re@uirements.
Lines of credit must typically (e renewed each year (y the firm re@uesting them.
 
Commercial (anks ser'e as financial intermediaries in se'eral ways.
First0 they repackage deposits recei'ed from in'estors into loans that are pro'ided to firms.
 
as Financial Intermediaries
hird0 (anks can di'ersify loans across se'eral (orrowers there(y reducing the risk of default.
 
Regulation of Commercial Banks
7anks are regulated (y the Federal 9eser'e 4ystem the Fed/0 which ser'es as the central (ank of the Anited 4tates.
 
Mutual funds are owned (y in'estment companies.
Mutual funds sell shares to indi'iduals and pools the proceeds to in'est in securities.
Money market mutual funds in'est in short-term money market securities issued (y firms and other financial institutions.
7ond mutual funds in'est in (onds.
 
as Intermediaries
$hen mutual funds in'est in newly issued de(t or e@uity securities0 they are helping to finance new in'estment (y firms.
$hen mutual funds purchase de(t or e@uity securities already held (y in'estors0 they help to transfer ownership (y in'estors.
 
Mutual funds also (enefit in'estors (y pro'iding professional management e&pertise that most indi'idual in'estors do not posses.
Mutual funds managers are armed with su(stantial resources with which to make in'estment decisions.
 
Securities Firms
4ecurities firms are a category of firms that include in'estment (anks0 in'estment companies0 and (rokerage firms.
 
Insurance companies pro'ide 'arious types of insurance including life insurance0 property and casualty insurance0 and health insurance.
hey function as intermediaries (y accepting customer premiums and paying claims.
 
"ension Funds
)ension funds in'est payments contri(utions/ from employees andor employers on (ehalf of employees.
)ension funds employ portfolio managers to in'est funds from pooling the contri(utions.
 
In recent years0 financial conglomerates ha'e (een created that offer commercial (anking ser'ices0 in'estment (anking ser'ices0 (rokerage ser'ices0 mutual funds0 and insurance ser'ices.
 
Financial institutions ha'e e&panded internationally in recent years.
 
)u(lic :ffering 'ersus )ri'ate )lacement
 # pu(lic offering is the none&clusi'e sale of securities to the general pu(lic.
)u(lic offerings are normally e&ecuted with the help of a securities firm that pro'ides in'estment (anking ser'ices.
 
)u(lic :ffering 'ersus )ri'ate )lacement
 # pri'ate placement is the sale of new securities directly to an in'estor or a group of in'estors.
 
)rimary Markets 'ersus 4econdary Markets
Marketa(le financial assets can (e categori;ed according to whether they trade in the primary market or the secondary market.
)rimary markets are where new securities I):s/ are issued.
4econdary markets are where securities are (ought and sold after initially issued in the primary markets.
 
A.4. Go'ernment #gency 7onds
Corporate 7onds
Corporate 4tocks
:rgani;ed securities e&changes are tangible  secondary markets where outstanding securities are (ought and sold.
hey account for o'er 5! of the dollar 'olume of domestic shares traded.
 
:rgani;ed %&changes
:nly those that own a seat  on the e&change can make transactions on the floor there are currently "0,55 seats/.
rading is conducted through an auction
 process where specialists Hmake a market in selected securities.
 
)reta& income prior 2 years/ >20!!!0!!! E#
M of pu(lic shares held >"=0!!!0!!! >,!!0!!!
angi(le assets >"50!!!0!!! >10!!!0!!!
he o'er-the-counter :C/ market is an intangi(le market for securities transactions.
Anlike organi;ed e&changes0 the :C is (oth a primary market and a secondary market.
he :C is a computer-(ased market where dealers make a market in selected securities and are linked to (uyers and sellers through the E#4*# 4ystem.
*ealers also make money on the spread .
 
2-,2Copyright 2!!" #ddison-$esley
*erivative Securities arkets
*eri'ati'e securities are financial contracts whose 'alues are deri'ed from the 'alues of underlying financial assets.
*eri'ati'es allow in'estors to take le'eraged/ positions (ased on their e&pectations of mo'ements in the underlying assets.
 
Financial management