CECN506 - Chapter 2

Chapter 2: The Financial System

Financial system
Matching those who have savings with those who want to borrow
With or without the use of financial intermediaries
The securities, intermediaries, and markets that exist to match savers and borrowers
Essential part of a well- functioning economy

The Financial System

Financial Securities

Financial security
A contract in which a borrower
Who seeks to obtain money from someone
Promises to compensate the lender in the future
Debt security
Equity security [stock]
Investor
Owner of a financial security
Debt security
A contract that promises to pay
A given amount of money to the owner of the security
At specific dates in the future
Equity security [stock]
A contract that makes the owner of a security a part owner of the company that issued the security

U.S. Debt and Equity Securities – Fourth Quarter 2010

Financial Securities

Who borrows using debt and equity?
Debt: households, business firms, foreigners, governments, and financial intermediaries
Equity: domestic and foreign business firms and financial intermediaries

Debt and Equity, by Issuer, Fourth Quarter 2010

Financial Securities

Households
Mortgage debt
To buy homes
Consumer credit
Credit cards
Loans for large purchases
Business firms (domestic and foreign)
Borrow using both debt and equity
Financial intermediaries
Borrow using both debt and equity
Governments
Borrow substantial amounts by issuing debt securities
Who owns these securities?
Households, business firms
Foreigners
Governments, and financial intermediaries

Debt and Equity, by Investor, Fourth Quarter 2010

Financial Securities

Differences between debt and equity
Maturity
Type of periodic payment being made
In case of bankruptcy
Maturity
The time until borrowed funds are repaid
Debt security -