Financial System Functions

Course : Managerial Finance Lecture : Marc Credit Hours : 3 Credits Semester Sessions : 3 Semester, 2021/2022 Session Prepared By : Kenzo LECTURE NOTES Financial System Functions The financial system in a modern economy has at least seven main functions as follows: Savings function. Financial market systems and institutions institutions provide instruments for savings. Bond, Shares and other debt instruments are bought and sold on the market money and capital markets that promise an income and with low risk for the saving community that flows through financial markets and is then used for investment so that goods and services can be obtained produced. Wealth storage function. Financial instruments which are bought and sold in the money market and capital market provides the best way to save wealth (i.e. holding the value of assets owned) until these funds are needed to be spent. Liquidity function. Wealth stored in forms financial instruments can be easily cashed out through financial market mechanisms. Bonds or shares and other financial instruments promising profits with relatively small risk. Money market and capital market provides a way to convert instruments the instrument becomes cash. Financial institutions Deposits provide various alternative instruments savings that have a high level of liquidity. Credit function. Apart from providing liquidity and facilitate the flow of savings into investment order to store wealth, financial markets provide credit to finance consumption and investment needs in economics. Payment function. The financial system provides paymen mechanism for goods and services transactions. Available payment instruments include checks, giro billet, credit card, etc. Risk function. Financial markets offer business units and consumer protection against life, health and risk income or loss. This can be done by selling various insurance policies. Policy function. Financial markets have become instruments principal that can be used by the government for implement policies to stabilize the economy and influencing inflation through monetary policy. Types of financial markets in the financial system The financial market consists of the money market and capital market has a vital function in the economic system, namely distributing savings to parties such as individuals, companies, or other institutions that have more expenditure much of the income he received. The money market is a type of market in finance is basically a market for long-term funds short where institutions, companies or individuals who have temporary excess funds (surplus units) meet the needs of moderate parties experiencing a temporary shortage of funds (unit deficit). Thus the money market allows units the economy manages its liquidity position. In contrast, capital markets are designed markets to finance long-term investments by business units, government agencies, and households. Financial instruments used in the capital market has a certain maturity exceeds 1 year and the value varies from a relatively small value up to large values. Financial markets have several definition. In a narrow sense, financial markets are defined as a market where financial assets are issued and traded. In a broader sense, the market Finance is a market which consists of various things various techniques and instruments for the purpose of borrowing, giving ease of investing, consuming, saving, and provide freedom to buy and sell goods and services. Financial markets can be grouped into several categories category: in several categories: 1. Debt market. Basically the debt market is a market that buying and selling debt instruments, for example bonds (bonds), debenture, commercial paper, treasury bills, and etc. 2. Equity market is a market that buys and sells claims ownership, for example shares. 3. The capital market is a trading market long-term securities, namely more than 12 months. The instruments traded in this market can be: debt instruments (debt instruments) or shares (equity). 4. Furthermore, in financial markets there are also markets where companies issue instruments finances that are being sold or offered for the first time, for example: shares or bonds. That market is called the primary market (primary market) or often also called initial public offering (IPO). 5. While the market is trading the instrument finances that were previously sold on the primary market are called secondary market (secondary market). 6. Markets where transactions are carried out directly settlement of payments and handover of financial assets called the cash market. Settlement of payments in cash The market can basically be done a few days later transaction, for example t+0, t+1, or t+2. It means payment and delivery of the financial assets being transacted can be carried out on the same day (t+0), one day (t+1), or two days (t+2) after the transaction. 7. Derivatives market is a transaction that The settlement is carried out in terms of time or several time later. This market is usually based on a type of instrument as the underlying transaction or can be also based on interest rates, currencies, or indices.