Financial Markets and Institutions (2-downloads)

1. Visit 

http://www.forecasts.org/data/index.htm

.

Click on “Stock Index Data” at the very top of the

page. Now choose “U.S. Stock Indices-Monthly.”

Review the indices for the DJIA, the S&P 500, and the

NASDAQ composite. Which index appears most

volatile? In which index would you have rather

invested in 1985 if the investment had been allowed

to compound until now?

2. The Internet is a great source of information on stock

prices and stock price movements. Go to 

http://

finance.yahoo.com

and click on the DOW ticker in

the Market Summary section to view current data on

the Dow Jones Industrial Average. Click on the chart

to manipulate the different variables. Change the time

range, and observe the stock trend over various inter-

vals. Have stock prices been going down over the last

day, week, three months, and year?

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Why Do Financial 

Institutions Exist?

Preview

A healthy and vibrant economy requires a financial system that moves funds from

people who save to people who have productive investment opportunities. But

how does the financial system make sure that your hard-earned savings get

channeled to those with productive investment opportunities?

This chapter answers that question by providing a theory for understanding

why financial institutions exist to promote economic efficiency. The theoretical

analysis focuses on a few simple but powerful economic concepts that enable

us to explain features of our financial markets, such as why financial contracts

are written as they are, and why financial intermediaries are more important

than securities markets for getting funds to borrowers.

PA R T   T H R E E F U N D A M E N TA L S   O F  

F I N A N C I A L   I N S T I T U T I O N S

7

C H A P T E R

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Basic Facts About Financial Structure Throughout 

the World

The financial system is complex in both structure and function throughout the world.

It includes many different types of institutions: banks, insurance companies, mutual

funds, stock and bond markets, and so on—all of which are regulated by government.

The financial system channels trillions of dollars per year from savers to people with

productive investment opportunities. If we take a close look at financial structure

all over the world, we find eight basic facts, some of which are quite surprising, that

we need to explain to understand how the financial system works.

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Chapter 7 Why Do Financial Institutions Exist?

135

The bar chart in Figure 7.1 shows how American businesses financed their activ-

ities using external funds (those obtained from outside the business itself) in the

period 1970–2000 and compares U.S. data to those of Germany, Japan, and Canada.

The Bank Loans category is made up primarily of loans from depository institutions;

Nonbank Loans is composed primarily of loans by other financial intermediaries;

the Bonds category includes marketable debt securities such as corporate bonds

and commercial paper; and Stock consists of new issues of new equity (stock mar-

ket shares).

Now let us explore the eight facts.