Introduction to the Financial World

1. Introduction to the Financial World Corporate Finance 2

2. The financial world • Explain the role of the financial manager • Detail the value of financial intermediaries • Show an appreciation of the function of the major financial institutions and markets

3. Primitive and modern economies Exhibit 1.14 Flows within a simple economy – production level Exhibit 1.15 Flows within a simple economy – production level plus money

4. Flows within a modern economy Exhibit 1.16 Flows within a modern economy

5. The role of the financial manager Exhibit 1.17 The flow of cash between capital markets and the firm’s operations

6. The financial manager plays a pivotal role in the following: • Interaction with the financial markets • Investment • Treasury management • Risk management • Strategy

7. The flow of funds and financial intermediation Exhibit 1.20 The flow of funds and financial intermediation

8. The flow of funds and financial intermediation • Primary investors • Ultimate borrowers • Conflict of preferences

9. Savings into investment in an economy without financial intermediaries

10. The introduction of financial intermediaries • Brokers • Asset transformers • Risk transformation • Maturity (liquidity) transformation • Volume transformation • Intermediaries’ economies of scale • (a) Efficiencies in gathering information • (b) Risk spreading • (c) Transaction costs • Financial markets

11. Savings into investment in an economy with financial intermediaries and financial markets

12. Growth in the financial services sector • Reasons for growth of financial services in the UK • 1 High income elasticity • 2 International comparative advantage Exhibit 1.24 Main features of change in financial services

13. The financial system: the banking sector • Retail banks • Wholesale banks • Raising external finance for companies • Broking and dealing • Fund management (asset management) • Assistance in corporate restructuring • Assisting risk management using derivatives • International banks • Foreign banking • Eurocurrency banking • Building societies • Finance houses

14. The financial system: long-term savings institutions • Pension funds • The long time horizon of the pension business means that large sums are built up and available for investment – currently over £800bn • Insurance funds • General insurance • Life assurance • Term assurance, whole-of-life policies, • Endowment policies, annuities • Life assurance companies have over £900bn under management

15. The financial system: the risk spreaders • Unit trusts • Investment trusts • Open-ended investment companies (OEICs)

16. The financial system: the markets • The money markets • The bond markets • The foreign exchange markets (Forex or FX) • The share markets • The derivative markets

17. Lecture review 1 • Financial institutions and markets • Financial managers • Financial institutions • Asset transformation • Intermediaries and economies of scale • Secondary markets • Financial services sector

18. Lecture review 2 • The financial system • The banking sector • Long-term savings institutions • The risk spreaders • The markets