Functions of a Financial System

In: Business and Management

Submitted By mattcan94
Words 1779
Pages 8

A Modern Financial System—An Overview


Learning Objectives
• Explain the functions of a financial system • The main types of financial institutions • Describe the main classes of financial instruments issued in a financial system • The flow of funds between savers / borrowers • Distinguish between various types of financial markets according to function • Appreciate the importance of globalisation • Understand the effects and consequences of a financial crisis on a financial system and economy


Functions of a Financial System
• Money – Acts as medium of exchange – Solves the divisibility problem, i.e. where medium of exchange does not represent equal value for the p q parties to the transaction – Facilitates saving – Represents a store of wealth


Functions of a Financial System (cont.)
• Role of markets – Facilitate exchange of goods and services by  bringing opposite parties together  establishing rates of exchange, i.e. prices • Financial Markets consist of: • Surplus units – Savers of funds available for lending • Deficit units – Borrowers of funds for capital investment and consumption


Functions of a Financial System (cont.)



Functions of a Financial System (cont.)
• Financial instrument – Issued by a party raising funds, acknowledging a financial commitment and entitling the holder to specified future cash flows • Double coincidence of wants satisfied – A transaction between two parties that meets their mutual needs


Functions of a Financial System (cont.)
• Flow of funds – Movement of funds through the financial system between savers and borrowers giving rise to financial instruments • Financial system – Comprises financial institutions, instruments and markets facilitating transactions for goods and services and financial transactions


Functions of a Financial System…...

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