Tài chính doanh nghiệp - Chapter 2: Financial assets, money, financial transactions, and financial institutions

Chapter 2Financial Assets, Money,Financial Transactions, and Financial Institutions Learning Objectives To learn about the channels through which funds flow between lenders and borrowers within the global system of money and capital markets.To discover the nature and characteristics of financial assets – how they are created and destroyed by decision-makers within the financial system. Learning Objectives To explore the critical roles played by money within the financial system and the linkages between money and inflation in the prices of goods and services. To examine the important functions carried out by financial intermediaries in lending and borrowing and in creating and destroying financial assets.Introduction: The Role of Financial AssetsThe financial system is the mechanism through which loanable funds reach borrowers.Through the operation of the financial markets, money is exchanged for financial claims in the form of stocks, bonds, and other securities, thereby transforming savings into investment so that the economy can grow.The Creation of Financial AssetsA financial asset is a claim against the income or wealth of a business firm, household, or unit of government,represented usually by a certificate, receipt, computer record file, or other legal document, and usually created by or related to the lending of money.Characteristics of Financial AssetsFinancial assets are sought after because they promise future returns to their owners and serve as a store of value (purchasing power).Characteristics of Financial AssetsThey do not depreciate like physical goods, and their physical condition or form is usually not relevant in determining their market value.They have little or no value as a commodity and their cost of transportation and storage is low.Financial assets are fungible – they can easily be changed in form and substituted for other assets.Different Kinds of Financial AssetsAny financial asset that is generally accepted in payment for purchases of goods and services is money. Currency and checking accounts are forms of money.Equities represent ownership shares in a business firm and are claims against the firm’s profits and against proceeds from the sale of its assets. Common stock and preferred stock are equities.Different Kinds of Financial AssetsDebt securities entitle their holders to a priority claim over the holders of equities to the assets and income of an economic unit. They can be negotiable or nonnegotiable. Examples include bonds, notes, accounts payable, and savings deposits.Derivatives have a market value that is tied to or influenced by the value or return on a financial asset. Examples include futures contracts, options, and swaps.How Financial Assets Are BornTo acquire assets, households and business firms may use current income and accumulated savings – internal financing.An economic unit may also raise funds by issuing financial liabilities (debt) or stock (equities), provided that a buyer can be found – external financing.Balance Sheets of Units in a Simple Financial SystemUnit Balance Sheets Following the Purchase of Equipment and the Issuance of a Debt SecurityUnit Balance Sheets Following the Purchase of Equipment and the Issuance of StockFinancial Assets and the Financial SystemThe act of borrowing or of issuing new stock simultaneously gives rise to the creation of an equal volume of financial assets.All financial assets are recorded as a liability or claim on some other economic unit’s balance sheet.Volume of financial assets created for lenders= Volume of liabilities issued by borrowersFinancial Assets and the Financial SystemFor the balance sheet of any economic unit,Total assets = Total liabilities + Net worthwhere assets = real assets + financial assetsFor the whole economy and financial system,Total financial assets = Total liabilitiesSo, for the economy as a whole,Total real assets = Total net worthFinancial Assets and the Financial SystemSo, society increases its wealth only by saving and increasing the quantity of its real assets, for these assets enable the economy to produce more goods and services in the future.However, the financial system provides the essential channel necessary for the creation and exchange of financial assets between savers and borrowers so that real assets can be acquired.Lending and Borrowing in the Financial SystemEconomists John Gurley and Edward Shaw pointed out that each business firm, household, or unit of government active in the financial system must conform to:R – E = FA – D where R = Current income receipts E = Expenditures out of current income FA = Change in holdings of financial assets D = Change in debt and equity outstandingLending and Borrowing in the Financial SystemSo, for any given time period, each economic unit must fall into one of three groups:Deficit-budget unit (DBU): E > R, so D > FA (net borrower of funds)Surplus-budget unit (SBU): R > E, so FA > D (net lender of funds)Balanced-budget unit (BBU): R = E, so D = FA (neither net lender nor borrower)Lending and Borrowing in the Financial SystemSource: Board of Governors of the Federal Reserve System, Flow of Funds AccountsHouseholds $770.9 $912.6 $ - 141.7Nonfinancial business 709.3 540.1 + 169.2 firmsState and local 70.0 141.6 - 71.6 governmentsFederal government - 3.0 421.5 - 424.5International sector: foreign investors 810.5 234.6 + 575.9 and borrowersNet Acquisitions of Financial AssetsNet Increase in LiabilitiesNet Lender (+)or NetBorrower (-)Major Sectorsof the EconomyThe U.S. Economy in 2003($ Billions)Lending and Borrowing in the Financial SystemThe global financial system permits businesses, households, and governments to adjust their financial position from that of net borrower (DBU) to net lender (SBU) and back again, smoothly and efficiently.What is Money?All financial assets are valued in terms of money, and flows of funds between lenders and borrowers occur through the medium of money.Money itself is a financial asset, because all forms of money in use today are claims against some public or private institution.Institutional money funds and certain managed liabilities of depositories, namely large time deposits, repurchase agreements, and Eurodollars. +M 3Household holdings of savings deposits, small time deposits, and retail money market mutual funds.+M 2Alternative Definitions of MoneyThe most liquid forms of money, namely currency and checkable deposits.M 1Source: Definitions of MoneyMoney Supply MeasuresSavings DepositsSmall Time DepositsRetail Money Funds$5.3 trillionM2Large Time DepositsInstitutional MMFsEuros & Repos$7.8 trillionM2M3Billions of Dollars9,0008,0007,0006,0005,0004,0003,0002,0001,0000$1.2 trillionM1M1CurrencyCheckable DepositsSeptember 2001September 2004$1.3 trillion$6.3 trillion$9.3 trillionThe Functions of MoneyMoney serves as a standard of value (or unit of account) for all goods and services.Money serves as a medium of exchange, such that buyers and sellers no longer need to have an exact coincidence of wants in terms of quality, quantity, time, and location.Money serves as a store of value – a reserve of future purchasing power. However, the value of money can experience marked fluctuations.The Functions of MoneyMoney functions as the only perfectly liquid asset in the financial system. It exhibits price stability, ready marketability, and reversibility.The Value of Money and Other FinancialAssets and InflationInflation refers to a rise in the average price level of all goods and services.Inflation lowers the value or purchasing power of money and is a special problem in the money and capital markets because it can damage the value of financial contracts.The opposite of inflation is deflation, where the average level of prices for goods and services actually declines.The Value of Money and Other FinancialAssets and InflationInflation is commonly measured using price indices, such as:the Consumer Price Index (CPI),the Producer Price Index (PPI), orthe Gross Domestic Product (GDP) Deflator Index.The Value of Money and Other FinancialAssets and InflationSuppose the U.S. CPI rises from 100 to 125 over a five-year period.Over the five-year period, the cost-of-living index climbed and the U.S. dollar’s relative purchasing power fell toThe Evolution of Financial TransactionsFinancial systems change constantly in response to shifting demands from the public, the development of new technology, and changes in laws and regulations.Over time, the ways of carrying out financial transactions have evolved in complexity.In particular, the transfer of funds from savers to borrowers can be accomplished in at least three different ways.The Evolution of Financial TransactionsDirect Finance – Direct lending gives rise to direct claims against borrowers.Borrowers(DBUs)Lenders(SBUs)Flow of funds(loans of spending power for an agreed-upon period of time)Primary Securities(stocks, bonds, notes, etc., evidencing direct claims against borrowers) Simple  Difficult to match & riskyThe Evolution of Financial TransactionsSemidirect Finance – Direct lending with the aid of market makers who assist in the sale of direct claims against borrowers. Lower search (information) costs Risky & matching is still requiredBorrowers(DBUs)Lenders(SBUs)Flow of funds(loans of spending power)Security brokers, dealers, & investment bankersPrimary Securities(direct claimsagainstborrowers)Primary Securities(direct claimsagainstborrowers)Proceeds ofsecurity sales(less fees and commissions)The Evolution of Financial TransactionsIndirect Finance – Financial intermediation of funds. Low risk & affordableUltimate borrowers(DBUs)Ultimate lenders(SBUs)Flow of funds(loans of spending power)Financial intermediaries(banks, savings and loan associations, insurance companies, credit unions, mutual funds, finance companies, pension funds)Secondary Securities(indirect claims against ultimate borrowers issued by financial intermediaries in the form of deposits, insurance policies, retirement savings accounts, etc.)Primary Securities(direct claims against ultimate borrowers in the form of loan contracts, stocks, bonds, notes, etc.)Flow of funds(loans of spending power)Relative Size and Importance ofMajor Financial InstitutionsSource: Board of Governors of the Federal Reserve System, Flow of Funds Accounts ($ billions at year-end) 1970 1980 1990 2000 2004Q1Financial intermediaries: Commercial banks $489 $1,248 $3,340 $6,488 $8,044 S&L assoc. and savings banks 252 794 1,358 1,219 1,557 Life insurance companies 201 464 1,357 3,204 3,849 Private pension funds 110 413 1,629 4,587 4,260 Investment co. (mutual funds) 47 64 602 4,457 4,890 State & local gov’t pension funds 60 198 820 2,290 2,303 Finance companies 63 199 611 1,138 1,401 Property-casualty insurance co. 50 174 534 872 1,069 Money market funds –– 74 498 1,812 1,972 Credit unions 18 72 202 441 635 Mortgage companies –– 16 49 36 32 Real estate investment trusts 4 6 13 62 133Other financial institutions: Security brokers and dealers 16 36 262 1,221 1,725Total Financial Assets Held by U.S. Financial InstitutionsClassification of Financial InstitutionsDepository institutions derive the bulk of their loanable funds from deposit accounts sold to the public. Commercial banks, savings and loan associations, savings banks, credit unions.Contractual institutions attract funds by offering legal contracts to protect the saver against risk.Insurance companies, pension funds.Classification of Financial InstitutionsInvestment institutions sell shares to the public and invest the proceeds in stocks, bonds, and other assets.Mutual funds, money market funds, real estate investment trusts.Portfolio (Financial-Asset) Decisions by Financial InstitutionsPortfolio decisions – deciding what financial assets to buy or sell – are affected by:The relative rate of return and risk attached to different financial assets.The cost, volatility, and maturity of incoming funds provided by surplus-budget units.Hedging principle – the approximate matching of the maturity of financial assets held with liabilities taken on.Portfolio (Financial-Asset) Decisions by Financial InstitutionsThe size of the individual financial institution.Larger financial institutions tend to have greater diversification in their sources and uses of funds and economies of scale.Regulations and competition.Disintermediation of FundsDisintermediation refers to the withdrawal of funds from a financial intermediary by the ultimate lenders (SBUs) and the lending of those funds directly to the ultimate borrowers (DBUs).Disintermediation involves the shifting of funds from indirect finance to direct and semidirect finance.Disintermediation of FundsPrimary SecuritiesUltimate borrowers(DBUs)Ultimate lenders(SBUs)Financial intermediariesLoanable fundsFinancial DisintermediationDisintermediation of FundsSome new forms of disintermediation have appeared in recent years.Initiation by financial intermediaries: Some banks sold off some of their loans because of difficulties in raising capital.Initiation by borrowing customers: Some borrowing customers learned how to raise funds directly from the open market.Bank-Dominated Versus Security-Dominated Financial SystemsLesser-developed financial systems are often bank-dominated financial systems, in which banks and other similar institutions dominate in supplying credit and attracting savings.The more mature systems today are becoming security-dominated financial systems, in which traditional intermediaries play lesser roles and growing numbers of borrowers sell securities to the public to raise the funds they need.Markets on the NetBondsonline at www.bondsonline.comEncyclopedia.com at encyclopedia.comFederal Reserve Bank of Atlanta at www.frbatlanta.orgFederal Reserve Bank of New York at www.ny.frb.orgMoody’s Investor Service at www.moodys.comMarkets on the NetMoney Magazine at www.money.comNew York Stock Exchange at www.nyse.comStandard & Poor’s Corporation at www.standardandpoor.comThe Bond Market Association at www.investinginbonds.comU.S. Bureau of Economic Analysis at www.bea.govMarkets on the NetU.S. Bureau of Labor Statistics at www.bls.govChapter ReviewIntroduction: The Role of Financial AssetsThe Creation of Financial AssetsCharacteristics of Financial AssetsDifferent Kinds of Financial AssetsHow Financial Assets Are BornFinancial Assets and the Financial SystemChapter ReviewLending and Borrowing in the Financial System Money as a Financial AssetWhat is Money?The Functions of MoneyThe Value of Money and Other Financial Assets and InflationChapter ReviewThe Evolution of Financial TransactionsDirect FinanceSemidirect FinanceIndirect Finance and Financial IntermediationRelative Size and Importance of Major Financial InstitutionsClassification of Financial InstitutionsChapter ReviewPortfolio (Financial-Asset) Decisions by Financial Intermediaries and Other Financial InstitutionsDisintermediation of FundsNew Types of DisintermediationBank-Dominated Versus Security-Dominated Financial Systems