Finance School of management Managing Risk Transfers of risks through financial system Ⅰ surance policies o The flow of funds bundled with the flow of risks Finance $100,000 to start a business $70,000 from an investor in equity capital in return for a 75%o share of the profits $30,000 from a bank, at an interest rate of 6% per year The flow of funds unbundled with the flow of risks guaranteed loan uesTc 16
16 Finance School of Management Managing Risk ❖ Transfers of risks through financial system – Insurance policies ❖ The flow of funds bundled with the flow of risks – Finance $100,000 to start a business – $70,000 from an investor, in equity capital in return for a 75% share of the profits – $30,000 from a bank, at an interest rate of 6% per year ❖ The flow of funds unbundled with the flow of risks – A guaranteed loan
Finance School of management Quick Check Give an example of a transfer of risk that takes place through the financial system uesTc
17 Finance School of Management Quick Check ❖ Give an example of a transfer of risk that takes place through the financial system
Finance School of management Clearing and Settling payments A financial system provides an efficient payments system to facilitate the exchange of goods, services and assets Traveling abroad The development of checks, credit cards, and electronic funds transfer uesTc 18
18 Finance School of Management Clearing and Settling Payments ❖ A financial system provides an efficient payments system to facilitate the exchange of goods, services, and assets. – Traveling abroad – The development of checks, credit cards, and electronic funds transfer
Finance School of management Pooling Resources and Subdividing Shares a variety of mechanisms to pool or aggregate the wealth of households into large masses of capital Opportunities for individual households to participate in investments that require large lump sums of money by pooling their funds and then subdividing shares in the investment You, having only $10,000, want to invest in a race horse that costs $100,000 Investing in U.S. Treasure bills with the minimum denomination of $10,000 and money-market funds uesTc 19
19 Finance School of Management Pooling Resources and Subdividing Shares ❖ A variety of mechanisms to pool or aggregate the wealth of households into large masses of capital ❖ Opportunities for individual households to participate in investments that require large lump sums of money by pooling their funds and then subdividing shares in the investment – You, having only $10,000, want to invest in a race horse that costs $100,000. – Investing in U.S.Treasure bills with the minimum denomination of $10,000 and money-market funds
Finance School of management Providing Information Price information that helps coordinate decentralized decision-making in various sectors of the economy You are 30 years old, just got married, and want to buy a house for $100,000 Your local bank will make you a mortgage loan for $80,000 at an interest rate of 8%o per year but you need to pay 20%0 Your 45-year-old sister has a savings account with $20,000 in it for her retirement, earning 6%o per year If your sister is willing to lend you her retirement savings for your down payment, how do you decide what a fair rate of interest rate? uesTc
20 Finance School of Management Providing Information ❖ Price information that helps coordinate decentralized decision-making in various sectors of the economy – You are 30 years old, just got married, and want to buy a house for $100,000. – Your local bank will make you a mortgage loan for $80,000 at an interest rate of 8% per year, but you need to pay 20% down. – Your 45-year-old sister has a savings account with $20,000 in it for her retirement, earning 6% per year. – If your sister is willing to lend you her retirement savings for your down payment, how do you decide what a “fair” rate of interest rate?