Chapter #1

By;
Dr. Kamrul Hasan

Financial Markets are the markets in

which funds are transferred from people
who have an excess of available funds to
people who have a shortage
Financial Markets are important in
channeling funds from people who do not
have a productive use for them to those
who do

DEBT MARKET
STOCK MARKET
FORIEGN EXCHANGE MARKET
DERIVATIVE MARKET

Debt Markets, also often referred to generally as

the Bond Markets. are especially important to
economic activity because they enable
corporations/ governments to borrow to finance
their activities
Bond Markets are the markets where interest
rates are determined
A bond is a debt security that promises to make
payments for a specified period of time
A security ( also called a financial instrument ) is
a claim on the issuer's future income or assets

The interest rate is the cost of borrowing or the

price paid for the rental of funds which is usually
expressed as a percentage
Interest Rates are important on a number of
levels
On a personal level, high interest rates could
deter you from buying a house or a car because
the cost of financing it would be high
Conversely, high interest rates could encourage
you to save because you can earn more interest
income by putting aside some of your earnings as
savings

The Stock Markets are the markets in which

claims on the assets and earnings of corporations
( share of stock ) are traded
A common stock ( typically just called a stock) is
a security that represents a share of ownership
in a corporation
It is a claim on the earnings and assets of the
corporation
Issuing stock and selling it to the public is a way
for corporations to raise funds to finance their
activities

For funds to be transferred from one country to

another, they have to be converted from the
currency in the country of origin ( say $ ) into
the currency of the country they are going to
( say Takas)
The foreign exchange market is where this
conversion takes place.
It is where the foreign exchange rate, the price
of one country's currency in terms of another, is
determined

Financial markets, such as bond and stock

markets, are crucial in our economy.

These markets channel funds from savers

to investors, thereby promoting economic
efficiency.

Market activity affects personal wealth,

the behavior of business firms, and
economy as a whole.

Well functioning financial markets, such as

the bond market, stock market, and foreign
exchange market, are key factors in
producing high economic growth.

Financial Institutions are the institutions that

make financial markets work.
Financial Institutions are the
intermediaries, that take funds from the
people who save and lend it to people who
have productive investment opportunities.

If you wanted to make a loan to Square

Pharmaceuticals or Bata Shoes or any other
company , for example, you would not go
directly to the Chairman of the company and
offer a loan. Instead you would lend it to
such companies indirectly through financial
intermediaries institutions such as
commercial banks, insurance companies,
leasing companies etc

Central Bank, the government agency

responsible for conducting the monetary
policy on a country, which in Bangladesh is
the Bangladesh Bank.
Commercial Banks, are the financial
institutions, that accept deposits and make
loans
Other financial institutions include Leasing
Companies, Insurance Companies, etc

We will also spend considerable time discussing

financial institutions. These institutions play a
crucial role in improving the efficiency of the
economy. We will look at:
1.

Central Banks and the Conduct of

Monetary Policy

2.

Structure of the Financial System

Helps get funds from savers to investors

3.

Banks and Other Financial Institutions

Includes the role of insurance companies,
mutual funds, pension funds, etc.

4.

Financial Innovation
Focusing on the improvements in technology
and its impact on how financial products are
delivered

5.

Managing Risk in Financial Institutions

Focusing on risk management in the
financial institution.