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Financial System

Lenders & borrowersLearning objectivesIntroductionDefining the financial systemNon-financial lenders and borrowersSummaryFinancial intermediariesLearning objectivesIntroductionFinancial intermediationEconomic functions of financial intermediariesIntroductionFacilitation of flow of fundsEfficient allocation of fundsAssistance in price discoveryMoney creationEnhanced liquidity for lenderPrice risk lessened for the ultimate lenderImproved diversification for lenderEconomies of scalePayments systemRisk alleviationMonetary policy functionFinancial intermediaries: classification and relationshipIntroductionClassification of financial intermediariesFinancial intermediaries: intermediation functionsIntroductionMonetary banking sectorCentral bankPrivate sector banksInsurersRetirement fundsCollective investment schemesAlternative investmentsQuasi-financial intermediariesSummaryFinancial instrumentsLearning objectivesIntroductionFinancial instrument typesShare instrumentsDebt instrumentsDeposit instrumentsInstruments of investment vehiclesDerivative instrumentsSummaryFinancial marketsLearning objectivesIntroductionMoney marketBond marketShare marketIntroductionSharesMarket mechanismIssue (primary market)InvestingTrading (secondary market)Permanent or semi-permanent capital of the issuersForeign exchange marketDerivative marketsOrganizational structure of financial marketsIntroductionPrimary and secondary marketsEconomic functions of secondary marketsIntroductionPrice discoveryLiquidity and borrowing cost reductionSupport of primary marketImplementation of monetary policyMarket form: exchange-traded and OTC marketsIssuing methods IntroductionPublic issuePrivate placementAuctionTap issueTrading driver: order or quoteTrading systemTrading form: single and dual capacityFinancial market participants & short sellingClearing and settlementMoney creationLearning objectivesIntroductionWhat is money?Measures of moneyMonetary banking institutionsMoney and its roleUniqueness of banksThe cash reserve requirementMoney creation does not start with a bank receiving a depositIntroductionNotes and coins depositedGovernment spendsMoney creation starts with a bank loanMoney creation is not dependent on a cash reserve requirementIs "money supply" a misnomer?The money identity and the creation of moneyRole of the central bank in money creationHow does a central bank maintain a bank liquidity shortage?Price discoveryLearning objectivesIntroductionWhat is price discovery?Price discovery and informationThe mechanics of price discoveryRole of central bank in price discoveryComposition of interest rates IntroductionFisher hypothesisComposition of the nominal risk-free rateExpected inflationLiquidity-sacrifice premiumCredit risk premiumMarketabilityRole of interest rates in security valuationIntroductionBondsSharesMarket efficiency