Documente Academic
Documente Profesional
Documente Cultură
Dr.Amr Soliman
Faculty of Commerce & Business Administration
Economics Department
An Overview of the
Financial System
Financial System
Funds
Bond Stock
Financial System
Components of the Financial Markets
Primary Markets
Primary markets are the financial markets
where securities are sold to initial buyers.
This means, they deal with securities (bonds
and stocks) when they are issued for the first
time. In these markets, securities are sold
only at their face values (value written on the
bond).
Primary and Secondary Markets
Secondary Markets
Secondary Markets are markets where
previously-issued securities are resold. In
such markets, securities are traded at their
market value, which may be higher or lower
than the face value depending on the
demand and supply forces, which in turn
depends on the financial position of the
company.
Exchanges and Over-The-Counter Markets
Money Markets:
Money market is the financial market where
only short-term debt instruments are traded.
Capital Markets:
Capital market is the financial market
where longer-term (with maturity of
more than one year) debt and equity
instruments are traded.
Debt and Equity Markets
Debt Markets:
Debt markets are the financial markets concerned with
financing through issuing debt instrument, such as bonds.
A bond is a “contractual agreement by the borrower to pay the
holder of the instrument a fixed payment periodically (interest
payment) until a specified date (maturity date), when a final
payment of the face value is made.
Maturity date is the expiration date of the debt instrument.
According to their maturity, debt instruments may be:
Short term: if maturity is less than one year.
Intermediate term: if maturity is between one year and ten
years
Long term: if maturity is ten years or longer.
Debt and Equity Markets
Debt Markets:
Bonds involve no risk. This is because it does not matter
whether the corporation made losses or profits. A fixed interest
is paid periodically, and the face value will be repaid at the
maturity date, in all cases.
Bond holders are lenders, so they are the first claimants to the
issuing company in cases of liquidation or bankruptcy.
At the maturity date, the relationship between the bond-holder
and the bond-issuer will end.
Bonds are issued by corporations or governments.
Debt and Equity Markets
Equity Markets
Equity Markets are the financial markets concerned with
financing through issuing equities such as common stocks
(shares).
Common stocks (shares): are claims to share in the net
income and assets of a business. (For example, if a company
issued one million shares and you own one share; you are
entitled to one-millionth of the firm's net income and one-
millionth of the firm's assets).
Equities (or stocks) give periodic payments to their holders.
These payments are called dividends. These dividends are a
specific percentage of the corporation’s net income (or profits),
which means that it is not fixed.
Debt and Equity Markets
Equity Markets
Equities involve no maturity, as they do not have a
maturity date. The relationship between the
shareholder and the issuing company will never end
until the former sells his shares or the company is
liquidated or bankrupt. However, equities are
considered long term securities.
Equities involve risks, because firms might achieve
profits or losses.
Equities holders are the last claimants to the issuing
company in cases of liquidation or bankruptcy.
Equities are issued by corporations only.
What three questions does financial
management seek to answer?
Sole proprietorship
Partnership
Corporation
Sole Proprietorship
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
Partnership
Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
Goals of the Corporation
Sales
Current level
Short-term growth rate in sales
Long-term sustainable growth rate in
sales
Operating expenses
Capital expenses
Factors that Affect the Level and
Risk of Cash Flows
Decisions made by financial
managers:
Investment decisions (product
lines, production processes,
geographic market, use of
technology, marketing strategy)
Financing decisions (choice of debt
policy and dividend policy)
The external environment
Financial Management
Issues of the New Millenium