JIMA A. DE LEON, B.S.I.M., M.B.A School of Graduate Studies
Central Philippine University
Jaro, Iloilo City
Chapter Two and Three of Mishkin’s The Economics of Money, Banking and Financial Market
Faculty, College of Business and Accountancy Graduate Programs
Central Philippine University
In partial fulfilment
Of the Course Requirements
In Philippine Financial System
JOYNEN A. BALDEVARONA
July 24, 2015
Chapter 2: An Overview of the Financial System
This chapter gives an overview of the financial markets and institutions as well as explain the concept and role of financial intermediaries in the economy.
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3. Exchanges and Over-the-Counter Markets
Secondary markets can be organized either through exchanges, where buyers and sellers of securities meet in one central location to trade or through over-the-counter (OTC) market, in which dealers at different locations who have an inventory of securities are ready to buy and sell.
4. Money and Capital markets
The money market is the market for shorter-term securities, generally those with one year or less remaining to maturity and capital market is the market for longer-term securities, generally those with more than one year to maturity
Mishkin also noted that financial market instruments traded are classified into two. Those which are traded in the money market: U.S Treasury Bills, Negotiable Bank Certificates of Deposit, Commercial Paper, Repurchase Agreements and Federal Funds and those traded in the capital market: stocks, mortgages, corporate bonds, US Government Securities, US Government Agency Securities, State and Local Government Bonds and Consumer and Bank Commercial Loans.
It was also mentioned in this chapter that internationalization of financial markets has become an importrant trend where various types of financial assets issued by one country may be purchased by nationals of another country. The traditional instruments in the international bond market are as follows:
* Eurocurrencies are currencies deposited in banks outside the country of issue. For example, eurodollars, a major form of eurocurrency, are U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks. That is, eurodollars are dollar-denominated bank deposits held in banks outside the U.S.
* International bond is a bond available for sale outside the country of its issuer.Example of which is a bond issued by a U.S. firm that is available for sale both in the U.S. and abroad.
* Foreign bond is an international bond issued by a country that is denominated in a foreign currency and that is for sale exclusively in the country of that foreign currency. Example is a bond issued by a U.S. firm that is denominated in Japanese yen and that is for sale exclusively in Japan.
* Eurobond is an international bond denominated in a currency other than that of the country in which it is sold. An example would be a bond issued by a U.S. borrower, denominated in U.S. dollars, and sold outside the U.S.
It is also in this chapter, where Mishkin explained the function of financial intermediaries. According to him, financial intermediaries are institutions that acquire funds by issuing liabilities and use those funds to acquire assets by purchasing securities or making loans. Financial intermediaries are essential because they reduce transaction costs, allows risk sharing and solve problem caused by adverse selection and moral hazards. They are categorized into three types: banks (commercial, S&Ls and Mutual Savings Banks, credit union), contractual savings institutions (insurance...