Introduction to finance Luděk Benada Department of Finance, office - 402 e-mail: benada@econ.muni.cz Luděk Benada Introduction September 23, 2024 1/22 Content Q Covered areas of the course Q What is Finance Q Economic system Q Financial system Luděk Benada Introduction September 23, 2024 2/22 Content Q Covered areas of the course 9 What is Finance Economic system Financial system Luděk Benada Introduction September 23, 2024 3/22 Structure of the lectures Luděk Benada Introduction September 23, 2024 4/'22 Structure of the lectures General introduction Luděk Benada Introduction September 23, 2024 4/22 Structure of the lectures ■ General introduction ■ Financial markets Luděk Benada Introduction September 23, 2024 4/22 Structure of the lectures General introduction Financial markets Bank and banking system Luděk Benada UP Introduction September 23, 2024 Structure of the lectures General introduction Financial markets Bank and banking system Other financial institutions Luděk Benada UP Introduction September 23, 2024 4/22 Structure of the lectures General introduction Financial markets Bank and banking system Other financial institutions Time value of money Luděk Benada S1 Introduction September 23, 2024 Structure of the lectures ■ General introduction ■ Financial markets ■ Bank and banking system ■ Other financial institutions ■ Time value of money . .. Test Structure of the lectures General introduction Financial markets Bank and banking system Other financial institutions Time value of money . .. Test 01 Personal finance: Luděk Benada Introduction S1 September 23, 2024 ^) c^ £V 4/22 Structure of the lectures General introduction Financial markets Bank and banking system Other financial institutions Time value of money . .. Test 01 Personal finance: ► Annuities I Luděk Benada Introduction S1 September 23, 2024 ^) c^ £V 4/22 Structure of the lectures ■ General introduction ■ Financial markets ■ Bank and banking system ■ Other financial institutions ■ Time value of money . .. Test 01 ■ Personal finance: ► Annuities I ► Annuities II Structure of the lectures ■ General introduction ■ Financial markets ■ Bank and banking system ■ Other financial institutions ■ Time value of money . .. Test 01 ■ Personal finance: ► Annuities I ► Annuities II ■ Corporate finance Structure of the lectures ■ General introduction ■ Financial markets ■ Bank and banking system ■ Other financial institutions ■ Time value of money . .. Test 01 ■ Personal finance: ► Annuities I ► Annuities II ■ Corporate finance ■ Investment Luděk Benada Introduction September 23, 2024 4/22 Structure of the lectures ■ General introduction ■ Financial markets ■ Bank and banking system ■ Other financial institutions ■ Time value of money . .. Test 01 ■ Personal finance: ► Annuities I ► Annuities II ■ Corporate finance ■ Investment ■ International finance & International financial system Introduction September 23, 2024 4/22 Why study finance? ... own financial situation Luděk Benada Introduction September 23, 2024 5/22 Why study finance? ■ .. .own financial situation ■ ... career opportunities Luděk Benada Introduction September 23, 2024 5/22 Why study finance? ■ .. .own financial situation ■ ... career opportunities ■ ... understand world of business Luděk Benada Introduction September 23, 2024 5/22 Why study finance? ■ .. .own financial situation ■ ... career opportunities ■ ... understand world of business ■ ... understand political environment Luděk Benada Introduction September 23, 2024 5/22 Why study finance? ■ .. .own financial situation ■ ... career opportunities ■ ... understand world of business ■ ... understand political environment ■ ... answer different questions .. . Luděk Benada Introduction September 23, 2024 5/22 Content Covered areas of the course O What is Finance Economic system Financial system Luděk Benada Introduction September 23, 2024 6/22 inance Luděk Benada Introduction September 23, 2024 7/22 Finance Finance is the study of concepts, applications, and systems that affects the value (or wealth) of individuals, companies, and countries over the short and long term. The field of finance includes both quantitative and qualitative aspects. Luděk Benada Introduction September 23, 2024 7/22 Beware of simple judgments Luděk Benada Introduction □ S> - = September 23, 2024 8/22 Beware of simple judgments , because ... Luděk Benada Introduction September 23, 2024 8/22 Beware of simple judgments , because ... FINANCE^ MONEY Luděk Benada Introduction September 23, 2024 8/22 Money Luděk Benada Introduction September 23, 2024 9/22 Money Cash Luděk Benada Introduction September 23, 2024 9/22 Money Cash X Luděk Benada Introduction September 23, 2024 9/22 Money Cash X Cashless Luděk Benada Introduction September 23, 2024 9/22 Money Cash X Cashless Functions of money: Luděk Benada Introduction September 23, 2024 Money Cash X Cashless Functions of money: ■ Medium of exchange Luděk Benada Introduction September 23, 2024 9/22 Money Cash X Cashless Functions of money: ■ Medium of exchange ■ Unit of account Luděk Benada Introduction September 23, 2024 9/22 Money Cash X Cashless Functions of money: ■ Medium of exchange ■ Unit of account ■ Store of value Luděk Benada Introduction September 23, 2024 9/22 Content Covered areas of the course Q What is Finance Q Economic system Financial system Luděk Benada Introduction September 23, 2024 10/22 Entities in economic model Luděk Benada Introduction September 23, 2024 11/22 Entities in economic model Households Luděk Benada Introduction September 23, 2024 11/22 Entities in economic model ■ Households ■ Firms Luděk Benada Introduction September 23, 2024 11/22 Entities in economic model ■ Households ■ Firms ■ Government Luděk Benada Introduction September 23, 2024 11/22 Entities in economic model ■ Households ■ Firms ■ Government ■ Foreign sector Luděk Benada Introduction September 23, 2024 11/22 ustration of a simple economic model Luděk Benada Introduction September 23, 2024 12/22 Surplus spending units Luděk Benada Introduction □ S> - = September 23, 2024 13/22 Surplus spending units ■ Have more cash income flow than expenditure Luděk Benada Introduction September 23, 2024 13/22 Surplus spending units Have more cash income flow than expenditure Other terms for SSU - savers, lenders, ... Luděk Benada Introduction September 23, 2024 13/22 Surplus spending units Have more cash income flow than expenditure Other terms for SSU - savers, lenders, ... Offer their money < □ ► r3" Luděk Benada Introduction September 23, 2024 13/22 Surplus spending units ■ Have more cash income flow than expenditure ■ Other terms for SSU - savers, lenders, ... ■ Offer their money (buy assets, deposits etc.) Luděk Benada Introduction September 23, 2024 13/22 Surplus spending units ■ Have more cash income flow than expenditure ■ Other terms for SSU - savers, lenders, ... ■ Offer their money (buy assets, deposits etc.) ■ Usually Introduction □ Surplus spending units ■ Have more cash income flow than expenditure ■ Other terms for SSU - savers, lenders, ... ■ Offer their money (buy assets, deposits etc.) ■ Usually Households Luděk Benada Introduction September 23, 2024 13/22 Surplus spending units ■ Have more cash income flow than expenditure ■ Other terms for SSU - savers, lenders, ... ■ Offer their money (buy assets, deposits etc.) ■ Usually Households and Luděk Benada Introduction September 23, 2024 13/22 Surplus spending units ■ Have more cash income flow than expenditure ■ Other terms for SSU - savers, lenders, ... ■ Offer their money (buy assets, deposits etc.) ■ Usually Households and Foreign sector Luděk Benada Introduction September 23, 2024 13/22 Deficit spending units Luděk Benada Introduction □ Ö> — = September 23, 2024 14/22 Deficit spending units ■ Have more expenditures on consumption and real goods Luděk Benada Introduction September 23, 2024 14/22 Deficit spending units ■ Have more expenditures on consumption and real goods Luděk Benada Introduction September 23, 2024 14/22 Deficit spending units ■ Have more expenditures on consumption and real goods ■ Must participate in the financial sector Luděk Benada Introduction September 23, 2024 14/22 Deficit spending units ■ Have more expenditures on consumption and real goods ■ Must participate in the financial sector ■ Other terms for DSU - Luděk Benada Introduction September 23, 2024 14/22 Deficit spending units ■ Have more expenditures on consumption and real goods ■ Must participate in the financial sector ■ Other terms for DSU - (Borrower, demand-er of loadable funds, seller of securities, etc.) Luděk Benada Introduction September 23, 2024 14/22 Content Covered areas of the course 9 What is Finance Q Economic system Q Financial system Luděk Benada Introduction September 23, 2024 15/22 Definition of a Financial system Luděk Benada Introduction September 23, 2024 16/22 Definition of a Financial system Financial system represents a system that allows the transfer of capital between savers and borrowers. It comprises a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions. Luděk Benada Introduction September 23, 2024 16 / 22 Main functions of the Financial system Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring ■ Risk sharing Luděk Benada Introduction □ S> — = September 23, 2024 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring ■ Risk sharing ■ Clearing & Settlement Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring ■ Risk sharing ■ Clearing & Settlement ■ Aggregation and dis-aggregation of financial resources Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring ■ Risk sharing ■ Clearing & Settlement ■ Aggregation and dis-aggregation of financial resources ■ Shifting of financial resources over time, space and sectors Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring ■ Risk sharing ■ Clearing & Settlement ■ Aggregation and dis-aggregation of financial resources ■ Shifting of financial resources over time, space and sectors ■ Providing information for decision-making processes Luděk Benada Introduction September 23, 2024 17/22 Main functions of the Financial system The most important functions of the financial system include: ■ Money transferring ■ Risk sharing ■ Clearing & Settlement ■ Aggregation and dis-aggregation of financial resources ■ Shifting of financial resources over time, space and sectors ■ Providing information for decision-making processes ■ Helping in managing uncertainty and risk Luděk Benada Introduction September 23, 2024 17/22 Form of the financial system Luděk Benada Introduction September 23, 2024 18/22 Form of the financial system The character of the financial sector depends on the institutional composition and practices. Luděk Benada Introduction September 23, 2024 18/22 Form of the financial system The character of the financial sector depends on the institutional composition and practices. There can be significant differences across countries, such as: Luděk Benada Introduction September 23, 2024 18/22 Form of the financial system The character of the financial sector depends on the institutional composition and practices. There can be significant differences across countries, such as: USA Luděk Benada Introduction September 23, 2024 18/22 Form of the financial system The character of the financial sector depends on the institutional composition and practices. There can be significant differences across countries, such as: USA X Luděk Benada Introduction September 23, 2024 18/22 Form of the financial system The character of the financial sector depends on the institutional composition and practices. There can be significant differences across countries, such as: USA X GERMANY Luděk Benada Introduction September 23, 2024 18/22 Financial claim Luděk Benada Introduction September 23, 2024 19/22 Financial intermediaries Luděk Benada Introduction September 23, 2024 20/22 Financial intermediaries They facilitate the channeling of funds between surplus and deficit agents (banks, insurance companies, etc.). Luděk Benada Introduction September 23, 2024 20/22 Financial intermediaries They facilitate the channeling of funds between surplus and deficit agents (banks, insurance companies, etc.). Main functions of Fl: Luděk Benada Introduction September 23, 2024 20/22 Financial intermediaries They facilitate the channeling of funds between surplus and deficit agents (banks, insurance companies, etc.). Main functions of Fl: ■ Maturity transforming Luděk Benada Introduction September 23, 2024 20/22 Financial intermediaries They facilitate the channeling of funds between surplus and deficit agents (banks, insurance companies, etc.). Main functions of Fl: ■ Maturity transforming ■ Risk transforming Luděk Benada Introduction September 23, 2024 20/22 Financial intermediaries They facilitate the channeling of funds between surplus and deficit agents (banks, insurance companies, etc.). Main functions of Fl: ■ Maturity transforming ■ Risk transforming ■ Convenience denomination Luděk Benada Introduction September 23, 2024 20/22 Adventagies of Fl Luděk Benada Introduction □ Ö> — = September 23, 2024 21/22 Adventagies of Fl Costs benefits Luděk Benada Introduction □ S> - = September 23, 2024 21/22 Adventagies of Fl ■ Costs benefits ► Reconciling conflicting preferences of lenders and borrowers Luděk Benada Introduction September 23, 2024 21/22 Adventagies of Fl ■ Costs benefits ► Reconciling conflicting preferences of lenders and borrowers ► Helping spread out the risk Luděk Benada Introduction September 23, 2024 21/22 Adventagies of Fl ■ Costs benefits ► Reconciling conflicting preferences of lenders and borrowers ► Helping spread out the risk ► Reducing costs of lending and borrowing - Economies of scale Luděk Benada Introduction September 23, 2024 21/22 Adventagies of Fl Costs benefits ► Reconciling conflicting preferences of lenders and borrowers ► Helping spread out the risk ► Reducing costs of lending and borrowing - Economies of scale Market failure protection Luděk Benada Introduction □ S> - = September 23, 2024 Literature: MELICHER, Ronald W. a Edgar NORTON. Introduction to finance : markets, investments, and financial management. Fifteenth edition. Hoboken: Wiley, 2014. xix, 587. ISBN 9781118492673 DAHLQUIST, J., KNIGHT, R. Principles of Finance. OpenStax College, 2022. Luděk Benada Introduction September 23, 2024 22/22