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The Principles of finance and banking Free essay! Download now

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The Principles of finance and banking

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10.11.2011.- Summary – The Principles of finance and banking

Last week I taught you banking, trying to get you some definitions and explanations in English about :
=financial and banking services;
= how the banking system is organized;
= activities performed by commercial banks and so on.
Financial systems perform the essential economic function of
channeling funds from units who have saved surplus funds to units
who have a shortage of funds.
The units who have saved can lend funds: they are known as
lender-savers.
The units with a shortage of funds must borrow funds to
finance their spending: they are the borrower-spenders.
In direct finance, borrower-spenders borrow funds directly from lenders in the financial markets by selling them securities.
In indirect finance, a financial intermediary stands between the lender-savers and the borrower-spenders: the intermediary helps to transfer funds from one to the other.

Financial markets and intermediaries are alternatives that perform more or less the same function but in different ways and with different degrees of success.
The process of indirect finance, known as financial intermediation, is the most important way of transferring funds from lenders to borrowers.
The introduction of money in the economy enables savers and spenders to separate the act of sale from the act of purchase.
The main functions of financial systems are to:
= provide the mechanisms by which funds can be transferred
from units in surplus to units in shortage of funds, which is to
facilitate lending and borrowing
= enable wealth holders to adjust the composition of their
portfolios provide payment mechanisms.
The structure of financial systems:
A.= financial markets,
B.= securities
C.= financial intermediaries.


Ad. A Financial markets are markets in which funds are moved from people who have an excess of available funds to people who have investment opportunities.
Ad. B Securities (also called financial instruments) are financial
claims on the issuer’s future income or assets.
Governments and corporations raise funds to finance their activities by issuing :
=debt instruments (bonds) - Bonds are securities that promise to make periodic payments of a sum of money for a specified period of time.
= equity instruments (shares, known in the USA as stocks).
Stocks are securities ...

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