GROUP 1
FINANCIAL
MANAGEMENT
ENVIRONMENT
Topic B
Today's
Topic Highlights Outline
(1) The Economic Environment for Business
(2) The Nature and Role of Financial Markets and
Institutions
(3) The Nature and Role of Money Markets
THE ECONOMIC
ENVIRONMENT FOR BUSINESS
Economics is a social study
that studies the
production, distribution
and consumption of goods
and services.
(1) Microeconomics
(2) Macroeconomics
Economics
(1) Macroeconomics
looks at the economy as a whole, addressing broad aggregates
like national income and output, unemployment, inflation, and
the effects of monetary and fiscal policy.
Objectives
Economic growth
Low level of inflation
Low level of unemployment
Sustainable Balance of Payments
Proper distribution of income and wealth
Macroeconomic
Policy Setting
POLICY OBJECTIVES POLICY TARGETS POLICY INSTRUMENTS
the broad goals that economic specific and quantifiable tools used by policymakers to
policies aim to achieve outcomes that policymakers achieve the targets and
aim to achieve to meet the objectives.
broader objectives. These
targets provide clear (1) Monetary Policy
benchmarks for assessing the (2) Fiscal Policy
success of economic policies. (3) Exchange Rate Policy
Main Macroeconomics Policy Targets
Economic Sustainable Balance Proper distribution of
Growth of Payments income and wealth
Low levels of Low level of
unemployment inflation
Economic Policy Tools
Monetary Policy Fiscal Policy Exchange Rate Policy
Influence monetary variables like money government’s use of taxation and spending Involves managing the country's currency
supply and interest rates. to meet macroeconomic targets. value relative to other currencies to influence
trade and investment.
Contractionary Policy: Contractionary Policy:
Decreases money supply. Increase tax
Increase interest rates. Decrease government
Expansionary Policy: (Aims to combat inflation.) expenditure.
Expansionary Policy:
Increases money supply.
Decrease Tax
Decrease interest rates.
Increase government
(Aims to accelerate economic
expenditures
growth or combat unemployment
during a recession.)
GOVERNMENT ECONOMIC POLICY AND
IMPLICATIONS ON BUSINESSES
Contractionary Monetary Increased Government Spending
Policy (Raising Interest and Tax Incentives
Rates)
When the economy is growing too fast or inflation When the government increases its spending on development
is too high, the government may try to slow things projects and offers tax incentives to certain sectors, the
down by reducing the money supply and raising combined effects can significantly stimulate the economy and
interest rates. create numerous opportunities for businesses.
Higher borrowing cost Higher overall demand
Costs more to pay existing debt Cost savings and increased investment
Drop in company shares Job creation
Reduced investment in new projects
GOVERNMENT ECONOMIC POLICY AND
IMPLICATIONS ON BUSINESSES
Free Float of Currency – Domestic Currency
Weakens without Intervention
When a government allows its currency to float freely, the value of the currency is determined
by the market forces of supply and demand without any intervention. This can lead to a
weakening of the domestic currency, which has several implications for businesses
Imported Raw Materials Become More Expensive
Foreign Goods Become More Expensive
Exported Domestic Goods Become More Competitive
Nature and Role of
Financial Markets and
Institutions
A financial market is a market
where financial securities are
traded. They enable the exchange of
stocks, bonds, commercial papers,
short-term bills, etc.
a. Capital Market
b. Money Market
WHAT IS A
FINANCIAL MARKET?
Capital markets are places to make
medium- to long-term investments
or raise money using financial
CAPITAL securities, such as
securities for debt and stocks.
MARKET
It is divided into categorias mainly:
Equity Securities
Debt Securities
THE CAPITAL MARKETS SERVE
TWO MAIN FUNCTIONS:
Primary markets. This is when organizations raise new finance via the
issuance of new equities or debt securities to financial institutions or private
investors
Secondary markets. Investors are allowed to trade in existing listed
securities, to sell their existing securities or buy new ones to manage their
portfolios. The low transaction costs and enhanced liquidity facilitates the
proper pricing of securities at fair value. The secondary markets in turn serve
as a source of pricing information for the primary market, and assist the
efficient allocation of new funds at the right price.
Money Markets is where companies
and government meet their short-
term borrowing needs. Money
markets have much shorter period
MONEY of time between its issuance and
maturity compared to bonds.
MARKET Usually, it only lasts three or months
or less but not exceeding a year.
Examples of Money Market
Instrument are:
Time deposits
Treasury bills
Money market funds
An organization that serves as a middle-
man for two parties to enable a financial
transaction is referred to as a financial
intermediary. Financial intermediaries
encompass a range of entities, including
mutual funds, commercial banks,
investment banks, and pension funds.
Financial
Intermediaries
Convenience
Professional Risk-
WHAT ARE THE Profiling
BENIFITS OF Pooling of risk
GOING THROUGH Maturity of
A FINANCIAL transformation
INTERMEDIARY? Regulatory protection
Aggregation
Functions of a Stock Market and
Corporate Bond Market
A stock market is a marketplace for the issuance and trading of company shares and
derivatives. In the same way, a corporate bond market is a marketplace for the
issuance and trading of corporate debt securities and derivatives.
Both the stock market and corporate bond market have certain identical functions:
Source of Finance for
companies
Source of Investment for
investors
Reduced risk to buyers and
sellers
Risk and Return Trade-off
TYPE OF RISK:
1. DEFAULT RISK - The risk that a borrower will not meet its obligations in a
timely manner.
2. LIQUIDITY RISK - The risk of receiving less than fair value for an
investment if liquidated in a quick manner.
3. MATURITY RISK - The risk that prices of securities may change owing to
uncertainty in the duration of the investment, such as interest rate
movements, which are more evident in longerdated securities.
4. INFLATION RISK - The risk that upon receiving back the invested
amount, the purchasing power of the invested amount has already been
eroded.
Nature and Features of Different Securities in
Relation to the Risk/Return Trade-off
MONEY MARKET SECURITIES
1. TREASURY BILLS - Treasury bills are discount securities issued at
below face value by the Treasury department.
2. Certificate of Deposit (CD) - CDs are time/fixed deposits with a bank
or financial institution bearing a predetermined interest rate and
maturity date.
CAPITAL MARKET SECURITIES
1. Government Bonds - These are interest-bearing securities with coupon paid
on a periodical basis, for example, semi-annually.
2. Debentures - Debentures are loan agreements. It is common for debentures
to be unsecured since in the event of a default the debenture holders
become general creditors with rights over the unencumbered assets
THE NATURE AND ROLE OF
MONEY MARKET
A SECTION OF THE FINANCIAL MARKET
WHERE NEGOTIABLE INSTRUMENTS WITH
HIGH LIQUIDITY AND SHORT-TERM
MATURITIES ARE TRADED.
MONEY
MARKET
MONEY MARKET IS A SYSTEM
it facilitates the trade of negotiable instruments
it is unregulated and informal
MONEY MARKET IS USED BY VARIOUS PARTICIPANTS
for short-term financing needs
for safe investment opportunities
MONEY
MARKET
WHAT ARE THE EXAMPLES OF
COMMON MONEY
CHARACTERISTICS OF MARKET
MONEY MARKET INSTRUMENTS
INSTRUMENTS? TREASURY BILLS
SHORT TERM COMMERCIAL
HIGHLY LIQUID PAPER
LOW-RISK CERTIFICATE OF
DEPOSITS
PRIMARY MONEY SECONDARY MONEY
MARKETS MARKETS
Issuance of new money market Trading of existing money
instruments market instruments
For the purpose of raising funds to To provide liquidity for investors
meet short term financial needs who want to trade before
maturity
HOW MONEY MARKETS SERVE THE ECONOMY
ROLE OF MONEY MARKET
A SYSTEM FACILITATES
THAT GIVES LIQUIDITY
A PLATFORM
WAY FOR THE MANAGEMENT EFFICIENT
FOR SAFE AND
TRADE OF AND SHORT ALLOCATION
PROFITABLE
FINANCIAL TERM OF FUNDS
INVESTMENTS
INSTRUMENTS FUNDING
End
Reported by Group 1