Business Finance MGT 232 Lecture 3 4 -1

Business Finance (MGT 232) Lecture 3 4 -1

Business Finance Introduction (Financial Environment) 4 -2

Overview of the Last Lecture • • • Role of Management Agency Theory Social Responsibility Organization of the Financial Management Business Environment – Four types of Businesses • Financial Environment – Financial Markets and Institutions 4 -3

What is a market? • A market is a venue where goods and services are exchanged. • A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds. • The purpose of financial markets is to efficiently allocate savings to ultimate users. 4 -4

Types of financial markets • Physical assets market: A market for exchange of Physical assets (e. g: Cell phones, wheat, cloths etc) • Financial assets A market specifically for the financial assets ad their exchange and tranfer (e. g bonds, stocks, swaps, certificate of deposits etc) 4 -5

Types of financial markets • Money Market A market for short-term and highly liquid asset (MM Instruments: Treasury bills, commercial paper, deposits, certificates of deposit, bills of exchange, repurchase agreements etc) • Capital Market A market in which individuals and institutions trade financial securities. this type of market is composed of both the primary and secondary markets. 4 -6

Types of financial markets • Primary Market for raising new capital – Initial public offering (IPO) – Second public offering 4 -7

Types of financial markets • Secondary Market for already existing and outstanding securities For Example: o Karachi Stock Exchange o London Stock Exchange o New York Stock Exchange 4 -8

Stock Exchanges • A very important secondary market • There are two basic types of Stock exchanges – The Physical Location Exchanges – Electronic dealer-based markets 4 -9

Physical location stock exchanges vs. Electronic dealer-based markets • Auction market vs. Dealer market (Exchanges vs. OTC) • NYSE vs. Nasdaq • (National Association of Security Dealer based Automated Quotation) • Differences are narrowing now-a-days 4 -10

Types of financial markets • Spot Market where goods and services are exchange on the spot (the price and date is determined on the spot) • Futures market Market where goods and services are exchange on some future date with pre-determined price, quantity and date 4 -11

Types of financial markets • Public Market for exchange of goods and services held publically, require to get into proper formal contracts and is liquid • Private Market for private contracts which are informal in nature and are not liquid 4 -12

Types of financial markets • Mortgage Market: Market for mortgage loans including the House financing, Business loans etc which require to mortgage something in return of getting a loan • Consumer Credit: Consumer loans including the student loan, short term loans, car financing, credit card loans etc 4 -13

How is capital transferred between savers and borrowers? • Direct transfers • Investment banking house • Financial intermediaries 4 -14

Transferring Capital • Direct Transfer of Funds saver 4 -15

Transferring Capital • Direct Transfer of Funds saver firm 4 -16

Transferring Capital • Direct Transfer of Funds Cash saver firm 4 -17

Transferring Capital • Direct Transfer of Funds Cash firm saver Securities 4 -18

Transferring Capital • Indirect Transfer using Investment Banker saver 4 -19

Transferring Capital • Indirect Transfer using Investment Banker saver investment banker 4 -20

Transferring Capital • Indirect Transfer using Investment Banker Funds saver investment banker 4 -21

Transferring Capital • Indirect Transfer using Investment Banker Funds saver investment banker firm 4 -22

Transferring Capital • Indirect Transfer using Investment Banker Funds saver investment banker firm 4 -23

Transferring Capital • Indirect Transfer using Investment Banker Funds saver investment banker firm Securities 4 -24

Transferring Capital • Indirect Transfer using Investment Banker Funds saver investment banker Securities firm Securities 4 -25

Investment Banking How do investment bankers help firms issue securities? Advising the firm. Underwriting the issue. Distributing the issue. Enhancing Credibility. 4 -26

Transferring Capital • Indirect Transfer using a Financial Intermediary saver 4 -27

Transferring Capital • Indirect Transfer using a Financial Intermediary saver financial intermediary 4 -28

Transferring Capital • Indirect Transfer using a Financial Intermediary Funds saver financial intermediary 4 -29

Transferring Capital • Indirect Transfer using a Financial Intermediary Funds saver financial intermediary firm 4 -30

Transferring Capital • Indirect Transfer using a Financial Intermediary Funds saver Funds financial intermediary firm 4 -31

Transferring Capital • Indirect Transfer using a Financial Intermediary Funds saver Funds financial intermediary Firm Securities firm 4 -32

Transferring Capital • Indirect Transfer using a Financial Intermediary Funds saver Funds financial intermediary Intermediary Securities Firm Securities firm 4 -33

Types of financial intermediaries • • • Commercial banks Life insurance companies Mutual funds Pension Funds Finance Companies 4 -34

Summary • Financial Market • Types of Financial Markets – Physical Vs Financial asset – Money Vs Capital – Primary Vs. Secondary – Spot Vs. Future – Public Vs. Private – Mortgage Vs Consumer Credit • Types of Capital transfer • Types of Financial Intermediaries 4 -35