FINANCIAL ENVIRONMENT
Definition:
“A financial environment is a part of an economy with the major
players being firms, investors, and markets. Essentially, this sector
can represent a large part of well-developed economy as individuals
who retain private property have the ability to grow their capital.”
From Wikipedia, the free encyclopedia. The global financial system is
the worldwide framework of global agreements, institutions, and
both formal and informal economic actors together facilitate
international flows of financial capital for purposes of investment
and trade financing.
FINANCIAL SERVICES:
The financial sector is a category of the economy made up of firms that Provide
financial services to commercial and retail customers. This sector includes banks,
investment funds, insurance companies and real estate. Financial services
perform best in low-interest-rate environments.
Financial system
The purpose of a financial system is to bring two groups of people together
borrowers and lenders.
Financial institutions
In order to facilitate the transfer of funds and securities in this ‘bringing together’
process, various financial institutions have evolved. Nonetheless, there may be
occasions where transfers occur directly between borrowers and lenders i.e. a
business sells its stock or bonds directly to investors who in turn give the business
the necessary funds. This is obviously not very efficient.
1. Commercial banks
2. Savings and loans banks e. g Cayman national building society, Jamaica
national building society
3. Mutual savings banks
4. Credit union
5. Pension funds
6. Insurance companies
7. Mutual funds
8. Financial services corporation
Financial markets
There are the various outlets in which securities are traded. Financial markets can
be categorized in different ways but the two (2) most popular categories are:
1. By their maturities dates- money markets (M) vs capital markets (C)
2. By the originality of the issue – primary markets (p) vs secondary markets
(s)
Money (m)- securities which have maturity < 1 year e. g. treasury bill commercial
paper and other short term debt instruments.
Capital ( c ) –securities which have maturity date > 1 year e.g. bonds, stocks etc.
Primary (p) –any 1st time issues e.g. where a company goes public and issues
shares for the first time.
(IPO – Initial public offering) ( see investment banking house above)
Secondary (s)- where these share are now traded by brokers and investors ( e.g
stock market –see below)
Stock markets these facilitate the trading of stocks and bonds among investors.
There are two types of stock markets:
1. Physical location exchanges
2. Electronic ( non-physical) markets
He cost of money/interest rates (expressed in percentages)
Funds are raised in two ways, by the owners pumping in money (equity capital)
or by borrowing money (debt capital). The cost of obtaining money can there
be broken down into types, the cost of equity capital and the cost of debt capital.
The cost of equity is known as the required rate of return and is equal to the sum
of the dividend gains and the capital gains e that the investor/owner is expected
to
Receive. The cost of debt capital is what is called the nominal interest rate.
Fator affecting the cost of money (i.e. supply and demand)
1. Production opportunities – the availability of returns from investing in
productive assets ( the existing of viable business)
2. Time preference for consumption- when do investors require their returns?
succeed?
3. Inflation – the value of future money i.e will the replacement decline in real
time
Note – increases in all the above will generally lead to increased interest rates
Interest rate levels
Market forces are the primary determinant for interest rate levels i.e.
borrowers who can afford to pay higher interest rates will always obtain
capital over those who can’t afford it. However, preferred treatment is often
given to certain types of borrowers e.g those in a particular productive sector,
say agriculture.
Other factors that affect interest rate levels:
1. Government policies
2. International factors
Business activity levels
