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CHAPTER 1

AN OVERVIEW OF FINANCIAL MARKETS AND INSTITUTIONS

CHAPTER OVERVIEW AND LEARNING OBJECTIVES

➢ This chapter introduces the concept of the financial system and explains its economic role— to channel savings into productive investment by bringing savers and borrowers together. A reliable system of financial institutions and markets helps sustain economic prosperity.

➢ This chapter identifies the participants in financial activity, classifies their relationships, and defines basic terms for use throughout the course.

➢ This study guide helps you organize your thinking about these new concepts and terms. Try to link each topic to your own life, the news of the day, and the “big picture”. Are you a depositor at a bank or credit union? Do you have insurance or student loans? Have you noticed headlines about interest rates or the stock market? The financial system affects almost everyone, almost all the time.

➢ Answer the questions or problems, compare your answers with the solutions, then re-read and reinforce the material. Make full use of each opportunity to use the Wall Street Journal and the various online resources to which you will be directed.

CAREER PLANNING NOTE

Finance traditionally comprises 3 main career areas. Managerial finance involves financial roles within a business or government. Examples of entry-level jobs in this area include “financial analyst” or “budget analyst”. The Investment area involves products and services for the investing public, with opportunities for analysts, brokers, and traders. Financial institutions offer a large array of entry-level finance jobs. Banks, insurance companies, and regulators all recruit college graduates for well-defined career paths.

Every topic in the book represents a potential career path. Find out more about opportunities—and working conditions—associated with various financial institutions and markets. Many of your professors have worked outside the “ivory tower”; ask about their experiences. Your academic advisor can point you toward resources—on and off campus—to help you learn more. And the worldwide web, of course, is not far from your fingertips. For the 21st-century college student, it’s never too early to start looking!

READING THE WALL STREET JOURNAL….

…is one of the best professional habits you can cultivate. As a student, you may qualify for a discounted subscription. Ask your instructor, or contact the Journal directly:

1.800.568.7625 http://info.wsj.com/college/jumppage/

Chapter by chapter, this Study Guide will help you get the most from Journal, as both a companion to your studies and a tool in your professional life.

TOPIC OUTLINE AND KEY TERMS

I. The financial system facilitates the flow and allocation of funds throughout the economy.

A. Basic components of the financial system: markets and institutions.

1. Financial markets are markets for financial instruments, also called financial claims or securities.

2. Financial institutions (also called financial intermediaries) facilitate flows of funds from savers to borrowers.

B. Economic units with financial needs: Households, businesses, and governments.

1. Households supply labor, demand products, and save for the future. 2. Businesses demand labor, supply products, and invest in productive assets. 3. Governments collect taxes and provide “public goods” (e.g. education, defense).

C. Budget positions creating financial needs for a given period: Surplus or deficit.

1. Surplus spending units ( SSUs) are economic units in a surplus budget position. a. Income for the period exceeds planned expenditures, resulting in savings. b. Ultimately, most SSUs are households, who need to