4-1 Business Finance (MGT 232) Lecture 3. 4-2 Business Finance Introduction Introduction (Financial Environment)

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Business Finance(MGT 232)

Lecture 3

4-24-2

Business FinanceBusiness FinanceIntroductionIntroduction

Business FinanceBusiness FinanceIntroductionIntroduction

(Financial Environment)(Financial Environment)

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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

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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.

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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)

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• 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.


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• Primary MarketMarket for raising new capital– Initial public offering (IPO)– Second public offering


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• Secondary MarketMarket for already existing and outstanding

securitiesFor Example:o Karachi Stock Exchangeo London Stock Exchangeo New York Stock Exchange


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Stock Exchanges

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

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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

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• Spot MarketMarket where goods and services are exchange

on the spot (the price and date is determined on the spot)

• Futures marketMarket where goods and services are exchange

on some future date with pre-determined price, quantity and date


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• Public Market Market for exchange of goods and services

held publically, require to get into proper formal contracts and is liquid

• Private Market Market for private contracts which are

informal in nature and are not liquid


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• 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


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How is capital transferred between savers and borrowers?

• Direct transfers• Investment banking

house• Financial

intermediaries

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Transferring CapitalTransferring Capital

• Direct Transfer of Funds

saver

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saverfirm

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CashCash



saverfirm

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CashCash

SecuritiesSecurities



saverfirm

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• Indirect Transfer using Investment Banker

saver

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saver

investmentbanker

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FundsFunds



saver

investmentbanker

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FundsFunds



saver

investmentbanker firm

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FundsFunds



FundsFunds

saver


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FundsFunds



FundsFunds


saver


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FundsFunds




FundsFunds


saver


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Investment BankingInvestment Banking

How do investment bankers help firms issue securities?

Advising the firm.Underwriting the issue.Distributing the issue.Enhancing Credibility.

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Transferring CapitalTransferring Capital• Indirect Transfer using a Financial Intermediary

saver

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financialintermediary

saver

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FundsFunds


financialintermediary

saver

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FundsFunds


financialintermediary firm

saver

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FundsFunds


FundsFunds


saver

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FundsFunds


FundsFunds


saver

FirmFirmSecuritiesSecurities

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FundsFunds


IntermediaryIntermediarySecuritiesSecurities

FundsFunds

FirmFirmSecuritiesSecurities


saver

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Types of financial intermediaries

• Commercial banks• Life insurance companies• Mutual funds• Pension Funds• Finance Companies

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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

Documents

4-1 Business Finance (MGT 232) Lecture 3. 4-2 Business Finance Introduction Introduction (Financial Environment)