FİNANSAL PİYASALAR VE KURUMLAR - Deneme Sınavı - 10

Financial instruments are needed besides
money in the financial system due to the following
reasons:
1. the quantity of funds is not always matched
among lenders and borrowers in the case
of using just money. Financial instruments
offer various alternatives to investors in this
manner.
2. The maturity is not always matched among
lenders and borrowers in the case of using
just money. Using financial instruments
fulfills the demand for and supply of shortterm and long-term investment/funding
needs.
3. Splitability is a problem in the case of using
just money. The minimum amount of funds
in order to take place in the financial system
as a lender (investor) is very important for
inclusion of small amounts of funds in
the system. Financial instruments provide
means to represent small amounts of funds, and enhance the splitability. Splitability
is especially important for individual and
small investors. Otherwise, borrowers
would not use an important quantity of
funds, and at the same time lenders would
not use their small savings for gaining some
return

Madura (2015) explains some of the factors that commonly affect the demand for and supply of loanable funds as follows:

Based on maturity of financial instruments that are traded: Financial markets where transactions are made with financial instruments with a maturity of up to one year are called money markets. On the other hand, financial markets where transactions are made with financial instruments with a maturity of one year and longer are called capital markets.

Capital gain or loss stems from the
difference between the buying and selling
prices of financial assets. When the market
prices appreciate, investors have capital gain
as they liquidate their investment. When
the market prices appreciate, investors have
capital loss as they liquidate their investment.

Finding Future Value by Using CompoundInterest (Compounding)

FV= PV * (1+i)ⁿ

FV= future value
PV= present value
i= interest rate of the period
n= number of periods

Liquidity is the ease and quickness of an asset
to be bought and sold at an acceptable value, or
price that is not below the actual value, or price.
Liquidity is a required factor for assets because it
gives investors some degree of flexibility to change
their minds quickly and at a low cost.

Lenders (investors) in the financial system
compare securities according to some characteristics
that affect risk, return, and therefore the market
price of securities.

Equity instruments represent a claim on
future cash flows of the issuer of the security in
the form of dividends. The most common equity
instrument is a private company share of stock.
Holders of shares become a “shareholder” to a
company, which is a very long-lasting relationship
with no maturity date in theory (if we assume
that shareholders will not sell the share(s) of the
company).

Main non-depository institutions are portfolio
management companies, insurance companies,
unemployment insurance funds, and pension
investment funds.

Individual pension funds.

Portfolio management companies.

Payment systems.

Loanable funds theory explains the movements in the general level of market interest rate in a particular country. Loanable funds here, refers to all kinds of borrowings of households, firms, and the government.

Based on the organization status: If a financial market has its specific land, building, managers, and written rules and regulations, then it is an organized financial market. However, if a financial market does not have its specific land, building,
managers, and written rules and regulations, then it is an unorganized, or, an over-thecounter financial market. Because terms and conditions are not standard in over-the-counter financial markets, individuals in general feel less safe compared to organized markets.

Based on maturity of financial instruments that are traded: Financial markets where transactions are made with financial instruments with a maturity of up to one year are called money markets. On the other hand, financial markets where transactions are made with financial instruments with a maturity of one year and longer are called capital markets.

Liquidity: In broad terms, liquidity refers to convenience of assets. Liquidity of an asset tells how easy and how quick an asset can be converted to cash without a significant loss from its value.

Splitability: Splitability is a term describing how much minimum amount of money is needed in order to buy a security. Securities high in splitability are more liquid than securities low in splitability.

Main depository institutions are deposit banks. In Turkey, the dominant financial institution in the financial system is banks.

Equity instruments represent a claim on future cash flows of the issuer of the security in the form of dividends. The most common equity instrument is a private company share of stock.

Borrowers are the bond issuers such as governments, municipalities, financial and real sector companies.