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ACTFMKT Chapter 01 Summary Notes

Chapter 1 discusses the functioning of financial markets and institutions, highlighting the flow of money from savers to borrowers and the roles of various financial markets. It categorizes markets into primary, secondary, money, and capital markets, and outlines the risks faced by financial institutions. The chapter also emphasizes the importance of regulation to protect investors and prevent financial crises, referencing the 2008 financial crisis and the TARP bailout.

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37 views2 pages

ACTFMKT Chapter 01 Summary Notes

Chapter 1 discusses the functioning of financial markets and institutions, highlighting the flow of money from savers to borrowers and the roles of various financial markets. It categorizes markets into primary, secondary, money, and capital markets, and outlines the risks faced by financial institutions. The chapter also emphasizes the importance of regulation to protect investors and prevent financial crises, referencing the 2008 financial crisis and the TARP bailout.

Uploaded by

Kirsten Ianna Caymo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Chapter 1 Summary: Financial Markets and Institutions

What This Chapter Is About

This chapter introduces how financial systems work. It explains the flow of money from savers to borrowers,
the role of financial institutions (FIs), types of financial markets, key risks, regulations, and trends such as
globalization and fintech.

Types of Financial Markets

Markets move money between savers and borrowers. They are categorized as:

Primary vs. Secondary Markets

Market Type Description


Primary Where new securities (like stocks, bonds) are first issued
Secondary Where already-issued securities are traded (like stock exchanges

Money vs. Capital Markets

Market Type Description


Money Market Trades short-term debt (<=1 year), like Treasury bills
Capital Market Trades long-term securities like stocks and bonds

Other Market Types

- Foreign Exchange Markets deal with currency trading and risks from currency value changes.
- Derivative Markets deal with financial contracts (options, futures) linked to other assets.

Financial Institutions (FIs)

FIs act as intermediaries between savers and borrowers, reducing risks and increasing efficiency in the
financial system.

Risks Faced by Financial Institutions

Risk Type Meaning


Credit Risk Borrowers fail to repay
Interest Rate Risk Loss from rate changes
Market Risk Drop in investment value
Chapter 1 Summary: Financial Markets and Institutions

Liquidity Risk Trouble selling assets quickly


Operational Risk System or process failures
Currency Risk Value changes in foreign currency
Country Risk Unstable government environment
Insolvency Risk Risk of going bankrupt

Why Regulation Exists

To protect investors, avoid financial system collapse, and enforce fairness. Example: The SEC ensures
transparency in U.S. markets.

2008 Financial Crisis

Mortgage defaults caused large losses for banks. Some failed, like Lehman Brothers. The U.S. government
responded with a $700 billion bailout program called TARP.

Summary Table of Key Terms

Term Meaning
IPO Initial Public Offering; first sale of stock by a company
Liquidity Ease of converting an asset to cash
Derivative A financial product based on another asset
Exchange Rate Value of one currency vs. another
TARP U.S. bailout program during 2008 crisis
SEC Agency that regulates U.S. financial markets

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