Professional Documents
Culture Documents
3 Financial Institutions:
4 Financial Intermediaries:
6 Securities:
8 Insurance Companies:
Financial System:
Some economic units generate more income than they spend and have funds left
over. These are called Surplus Economic Units. Other economies units generate
less income than they spend and need to acquire additional funds in order to
sustain their operations. These are called Deficit Economic Units. The purpose of
financial system is to bring the two groups, surplus economic units and deficit
economic units, together for their mutual benefits.
Financial Markets:
Financial Institutions:
• Commercial Banks
• Savings & Loan Associations
• Central Bank
• Credit Unions
• Insurance Companies
• Mutual Funds
• Pension Funds
Financial Intermediaries:
• Investment Bankers
• Brokers
• Dealers
Securities:
Insurance Companies:
• Life Insurance Companies
• Property and Casualty Insurance Companies
• Pension Funds
• Annuities
Financial Markets:
Financial asset markets, on the other hand deal with stocks, bonds, notes,
mortgages and other financial instruments.
Spot Markets:
Spot markets and future markets the terms that refer to whether the assets are
being bought or sold on the spot delivery or for delivery at some future date.
Such as six months or a year in future.
Money Markets:
Are the markets for short term, highly liquid debt securities. The New York and
London money markets have long been the world’s largest markets.
Mortgage Markets:
Deals with loan and residential, commercial and industrial real estate and on
farmland.
When a security is created and sold for the first time in the financial marketplace,
the transaction takes place in the primary market. It is also known as Initial Public
Offering (IPO)
Once a security has been issued, it may be traded from one investor to another.
Short term securities are traded in money market. Network of dealers operate in
this market.
Security Exchanges:
Commercial Banks:
Commercial banks are financial institutions that exit primarily to lend money to
business. Banks also lend to individuals, government and other entities, but the
bulk of their profit typically come from business loans. Commercial banks make
money by charging a higher interest rate on the money they lend than the rate
they pay on money lent to them in the form of deposits. The difference between
the rate charged to borrowers and the rate paid to depositors is known as the
interest rate spread.
Banking is different from many other types of business in that it must have a
charter before it can open its doors. A bank charter is much more different to
obtain Ethan a city license need to open another business. It is an authorization
from the government granting permission to operate.
The banks do most of their business by receiving funds from depositors and
lending the funds to those who need them.
Issuance of Bonds:
Commercial banks occasionally issue long term bonds to raise funds, borrow
from the federal reserve, or borrow deposits kept by other financial institutions in
the federal reserve banks in what is known as the federal fund market.
Commercial Banks Reserves:
Commercial banks are not allowed to lend all the funds they get from depositors.
Central bank requires all commercial banks to keep a minimum amount of
reserves on hand.
The required level of reserves a bank must hold is determined by applying a
certain percentage to the average weekly deposits held by the bank. The exact
percentage of deposits a bank must hold in reserve, called the require reserve
ratio.
Central Bank:
Primary Functions
One of the primary responsibilities of the State Bank is the regulation of currency
in accordance with the requirements of business and the general public. For this
purpose the Bank has been granted the sole right of issuing notes in the country
under Section 24 of the State Bank of Pakistan Act, 1956. The overall affairs with
respect to the issuing of notes are conducted through two notionally separate
departments of SBP.
T-Bill Auctions
SBP 3-day repots rate influences the yield of T-bills sold through auctions the cut
off yield is determined by the Auction Committee, keeping in view monetary
targets, Current economic and financial conditions and expected market
response. The Six month T-bill is considered the most important benchmark by
the money market.
Another principal task of the Bank is to safeguard the soundness of the financial
system. To perform this crucial role effectively and efficiently, State Bank of
Pakistan has been given vast powers under the State Bank of Pakistan Act,
1956,
Bankers' Bank:
The Bank also functions as the bankers’ bank. Banks are classified as scheduled
and non-scheduled. The Bank maintains an updated list of all scheduled banks at
its various offices. These banks are entitled to certain facilities from the State
Bank and in return they have some obligations to it.
One of the important characteristics of a central bank is its being the lender of the
last resort. The State Bank provides loan and re-discount facilities to scheduled
banks in times of dire need when they find no other source of funds.
Banker to Government:
The State Bank conducts the banking business of Federal and Provincial
Government and some government agencies.
2 Secondary Functions:
Being responsible for maintaining the external value of the currency, the State
Bank of Pakistan assumed the charge of management and administration of the
exchange system of the country in line with the Foreign Exchange Regulation
Act,
The Bank submits its review of the economy to the Parliament through its annual
and quarterly reports.
Micro Finance:
In order to expand the banking services at grass root level and to enable the
financial sector to play its role in poverty alleviation, the State Bank of Pakistan is
also promoting micro banking in the country.
Like commercial banks, savings and loan associations are in business to take in
deposits and lend money, primarily in the form of mortgage loans. Mortgage
loans are loans that are secured by real property such as real estate. If borrower
defaults on a mortgage loan, the lender can take legal possession on the
property. The property can then be sold and the lender keeps the proceeds from
the sale up to the amount owed.
S&Ls make a profit by charging a higher interest rate on the money they lend
than the rate paid on deposits they take in.
Credit Unions:
Mutual Funds:
Are corporations that accept money from savers and then use these stocks,
bonds, long term bonds, or short term debt instruments issued by businesses or
government units. These organizations pool funds and thus reduce risk by
diversification. They also achieve economy of scale in analyzing securities,
managing portfolios, and buying and selling securities.
Pension Funds:
Financial Intermediaries:
Investment Bankers
Institutions called investment banking firms exist to help business and state and
local governments sell their securities to the public.
Underwriting:
Brokers:
Dealers:
Dealers make their living buying securities and reselling them to others. Dealers
make money by buying securities for one price, called bid price and selling them
for a higher price, called the ask (offer) price. The difference or spread between
the bid price and the ask price represents the dealer’s fee.
Securities:
Document that represent the right to receive funds in the future.
Treasury bills are considered the benchmark of safety because the have
essentially no risk
They are simply pieces of paper that certify that you have deposited a certain
amount of money in the bank, to be paid back on a certain amount of money
in the bank.
• Commercial Papers:
A type of short term promissory note issued by large corporations with strong
credit rating.
• Eurodollars:
Euro dollar are deposited and borrowed by large institutions with good credit
rating.
• Banker’s Acceptance:
• Treasury Notes:
When the federal government wants to borrow the money for period of more
than one year, it issues treasury notes.
• Municipal Bonds:
The bonds issued by state and local governments are known as municipal
bonds.
• Corporate Bonds:
Corporate bonds are similar as treasury notes but issued by the corporations.
These are some times known a small loan companies, make small loans to
consumers for car purchases, medical expenses, vacations, and the
like.interst rate charged on these types of loans a little bit higher.
Insurance Companies:
Life insurance companies sell policies that pay the beneficiary of the insured
hen the insured person dies.
Pension Funds:
Annuities:
Sometime the sponsor of pension funds will use the funds accumulated
during the retire person’s working year to purchase an annuity from an
insurance company.insurane companies also sell annuities to investors.