ch 26 the financial system
TRANSCRIPT
Chapter 26
Saving, Investment, and the
Financial System
I. O. UI Owe YouPromises
Name Amount
DateSignature
Promissory Note
Trading paper for paper
I.O. U.
10 SARDr. Gale
Financial System
Institutions that match people who save
money with people who need money
Financial Instruments
I.O.UsSimple to Complex
RelationshipContract
Financial System
Two categories
Financial Markets
Financial Intermediaries
Financial Markets
Bond Market
Stock Market
Financial Markets
Bonds - Borrow - Debt
Stocks - Sell OwnershipsEquity
Bond Markets
What is a Bond?
Certificate of Indebtedness
Riyadh Pizza Company
Saudi Style Supreme
Riyadh Pizza Company
Borrowor
Sell ownership shares
Riyadh Pizza Company
Bond
100Riyals
Dr. GaleCEO
10% 2023
Pays 10 Riyals each yearPays 100 riyals at maturity
2014Coupon
2015Coupon
2016Coupon
2017Coupon
2018Coupon
2019Coupon
2020Coupon
2021Coupon
2022Coupon
2023Coupon
Bond
Term - Length of time
Credit Risk - chance of default
Tax - How is the interest or profit taxed
Stock
Ownership ShareCompany sells once
Then resold to other buyersLimited Liability
No promises of profitEquity position
Riyadh Pizza Company
Need to raise 1,000 SAR
Create 1,000 shares and sell for 1 SAR each
Each share is worth 1/1,000 of the company
Riyadh Pizza Company
Stock Certificate
One Share
Dr. GaleCEO
Current Share Owner: Prince Alwaleed
Stock Markets
“Circulation”169 Companies
http://en.wikipedia.org/wiki/Tadawulwww.tadawul.com
Stock Valuation
Share PriceDividend
Price-Earnings Ratio
Share Price
Every time a share sells it sets the current price
Share prices go up and down
Dividend
Company Earnings or Profits
Declare dividendKeep - Retained Earnings
Dividend
Earnings: 500Dividend: 300Retained Earnings: ?
Price - Earnings Ratio
P/E Ratio
Current Share Pricedivided by
Earnings last year
P/E Ratio
Current Share Price: 75
Earnings last year: 5
P/E Ratio: ?
P/E RatioPrice
Last SaleEarnings
Last 12 monthsP/E
Ratio
Equation Earnings x P/E Ratio Price ÷ P/E Ratio Price ÷ Earnings
Apple 460 44
Google 792 24.8
STC 12.4
10.45
31.93
62
Financial Intermediaries
Banks
Mutual Funds
Banks
SaversBorrowe
rs
Bank Pays5%
Bank Charges7%
Make moneyon spread
7% - 5% = 2%
We are rich today because
people yesterday were willing to save and not consume
Mutual Funds
Allows small investors to pool and diversify
their savings
460 792 40
smallsavers
323
smallsavers
323
smallsavers
323
smallsavers
323
Mutual FundTotal:1292
Index Fund
Buy one share of all the companies in the
market
Tadawul All Share Index (TASI)
Exchange IndexesDow Jones Industrial Average
(DJIA)30 biggest U.S. Companies
S&P 500500 biggest U.S. companies
Tadawul All Share Index (TASI)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0 100 200 300 400 500 600 700 800 900 1000
InterestProfitRate
%
Loanable Funds
Supply
Demand
Market for Loanable Funds
Intellectual
Financial Physical
Human
Culture
Entrepreneur
trust knowledge skills personality health relationships
natural resources time buildings equipmentthings than make things
money and risksavers and borrowers time is money
(1+r)n
insurance limited liability corporations
ideas technologymethods