MGT411 Handouts

Lesson 1 · TEXT AND REFERENCE MATERIAL & · The Primary textbook for the course will be

“Money, Banking and Financial Markets” by Stephan G. Cecchetti International Edition, McGraw Hill Publishers, ISBN 0-07-111565-X”

Reference books will be

“The Economics of Money, Banking and Financial Markets”, by Fredrick S. Mishkin 7th Edition Addison Wesley Longman Publishers “Principles of Money, Banking and Financial Markets” by Lawrence S. Ritter, Willaim L. Silber and Gregory F. Udell, Addison Wesley Longman Publishers

Course Contents

Money and the Financial System

Money and the Payments System Financial Instruments, Financial Markets, and Financial Institutions

Interest rate, financial instruments and financial markets

Future Value, Present Value and Interest Rates Understanding Risk Bonds, Pricing and Determination of Interest Rates The Risk and Term Structure of Interest Rates Stocks, Stock Markets and Market Efficiency

Economics of Financial Intermediation Depositary Institutions: Banks and bank Management Financial Industry Structure Regulating the financial system

Central Banks, Monetary Policy and Financial stability

Structure of central banks Balance sheet and Money Supply process Monetary policy Exchange rate policy

Modern Monetary Economics

Money growth and Money Demand Aggregate demand Business Cycle Output and inflation in the short run

Money and Banking in Islam

Monetary and financial policy and structure for an Interest-free economy Islamic Banking in the contemporary world

Money

1. Money

To pay for purchases To store wealth Evolved from gold and silver coins to paper money to today’s electronic funds transfers Traditional Paycheck system vs. ATM Withdrawals and Mailed transactions vs. E-banking

2. Financial Instruments

To transfer wealth from savers to borrowers To transfer risk to those best equipped to bear it. Once investing was an activity reserved for the wealthy Costly individual stock transactions through stockbrokers Information collection was not so easy Now, small investors have the opportunity to purchase shares in “mutual funds.”

3. Financial Markets

To buy and sell financial instruments quickly and cheaply Evolved from coffeehouses to trading places (Stock exchanges) to electronic networks Transactions are much more cheaper now Markets offer a broader array of financial instruments than were available even 50 years ago

4. Financial Institutions

Provide access to financial markets Banks evolved from Vaults and developed into depositsand loans-agency Today’s banks are more like financial supermarkets offering a huge assortment of financial products and services for sale. Access to financial markets Insurance Homeand car-loans Consumer credit Investment advice

5. Central Banks

Monitors financial Institutions Stabilizes the Economy Initiated by Monarchs to finance the wars The govt. treasuries have evolved into the modern central bank Control the availability of money and credit in such a way as to ensure Low inflation, High growth, and The stability of the financial system State Bank of Pakistan

Summary

Money

Lesson 2

1. Time has Value

Time affects the value of financial instruments. Interest payments exist because of time properties of financial instruments

Example

At 6% interest rate, 4 year loan of $10,000 for a car Requires 48 monthly installments of $235 each Total repayment = $235 x 48 = $11,280 $11,280 > $10,000 (Total repayment) (Amount of loan) Reason: you are compensating the lender for the time during which you use the funds

2. Risk Requires Compensation

In a world of uncertainty, individuals will accept risk only if they are compensated in some form. The world is filled with uncertainty; some possibilities are welcome and some are not To deal effectively with risk we must consider the full range of possibilities: Eliminate some risks, Reduce others, Pay someone else to assume particularly onerous risks, and Just live with what’s left Investors must be paid to assume risk, and the higher the risk the higher the required payment Car insurance is an example of paying for someone else to shoulder a risk you don’t want to take. Both parties to the transaction benefit Drivers are sure of compensation in the event of an accident The insurance companies make profit by pooling the insurance premiums and investing them Now we can understand the valuation of a broad set of financial instruments E.g., lenders charge higher rates if there is a chance the borrower will not repay.

3. Information is the basis for decisions

We collect information before making decisions The more important the decision the more information we collect The collection and processing of information is the basis of foundation of the financial system. Some transactions are arranged so that information is NOT needed Stock exchanges are organized to eliminate the need for costly information gathering and thus facilitate the exchange of securities One way or another, information is the key to the financial system

4. Markets set prices and allocate resources

Markets are the core of the economic system; the place, physical or virtual, Where buyers and sellers meet Where firms go to issue stocks and bonds, Where individuals go to purchase assets Financial markets are essential to the economy, Channeling its resources Minimizing the cost of gathering information Making transactions Well-developed financial markets are a necessary precondition for healthy economic growth The role of setting prices and allocation of resources makes the markets vital sources of information Markets provide the basis for the allocation of capital by attaching prices to different stocks or bonds