Business Finance

(MGT 232)

Lecture 3

4-1
Business
Business Finance
Finance
Introduction
Introduction
(Financial Environment)

4-2
 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

4-3
 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.

4-4
 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)
4-5
 Types of financial markets
• 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.

4-6
 Types of financial markets
• Primary Market
Market for raising new capital
– Initial public offering (IPO)
– Second public offering

4-7
 Types of financial markets
• Secondary Market
Market for already existing and outstanding
securities
For Example:
o Karachi Stock Exchange
o London Stock Exchange
o New York Stock Exchange

4-8
 Stock Exchanges
• A very important secondary market
• There are two basic types of Stock exchanges
– The Physical Location Exchanges
– Electronic dealer-based markets

4-9
 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

4-10
 Types of financial markets
• Spot Market
Market where goods and services are exchange
on the spot (the price and date is determined
on the spot)
• Futures market
Market where goods and services are exchange
on some future date with pre-determined
price, quantity and date

4-11
 Types of financial markets
• 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
4-12
 Types of financial markets
• 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

4-13
How is capital transferred between savers
and borrowers?
• Direct transfers
• Investment banking
house
• Financial
intermediaries

4-14
 Transferring Capital
• Direct Transfer of Funds

saver

4-15
 Transferring Capital
• Direct Transfer of Funds

firm
saver

4-16
 Transferring Capital
• Direct Transfer of Funds
Cash

firm
saver

4-17
 Transferring Capital
• Direct Transfer of Funds
Cash

firm
saver

Securities 4-18
 Transferring Capital
• Indirect Transfer using Investment Banker

saver

4-19
 Transferring Capital
• Indirect Transfer using Investment Banker

saver

investment
banker

4-20
 Transferring Capital
• Indirect Transfer using Investment Banker

Funds

saver

investment
banker

4-21
 Transferring Capital
• Indirect Transfer using Investment Banker

Funds

saver

investment
banker firm

4-22
 Transferring Capital
• Indirect Transfer using Investment Banker

Funds Funds

saver

investment
banker firm

4-23
 Transferring Capital
• Indirect Transfer using Investment Banker

Funds Funds

saver

investment
banker firm

Securities 4-24
 Transferring Capital
• Indirect Transfer using Investment Banker

Funds Funds

saver

investment
banker firm

Securities Securities 4-25

 Investment Banking
How do investment bankers help
firms issue securities?

Advising the firm.

Underwriting the issue.
Distributing the issue.
Enhancing Credibility.

4-26
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

saver

4-27
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

saver financial
intermediary

4-28
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

Funds

saver financial
intermediary

4-29
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

Funds

saver financial
intermediary firm

4-30
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

Funds Funds

saver financial
intermediary firm

4-31
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

Funds Funds

saver financial
intermediary firm
Firm
Securities 4-32
 Transferring Capital
• Indirect Transfer using a Financial Intermediary

Funds Funds

saver financial
intermediary firm
Intermediary Firm
Securities Securities 4-33
 Types of financial intermediaries
• Commercial banks
• Life insurance companies
• Mutual funds
• Pension Funds
• Finance Companies

4-34
 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

4-35