1. Chapter 26
Saving, Investment,
and the
Financial System

2. I. O. U
I Owe You
Promises
Name
Amount
Date
Signature

3. Promissory Note
I.O. U.
10 SAR
Dr. Gale
Trading paper for paper

4. Financial System
Institutions that match
people who save
money with people
who need money

5. Financial Instruments
I.O.Us
Simple to Complex
Relationship
Contract

6. Financial System
Two categories
Financial Markets
Financial Intermediaries

7. Financial Markets
Bond Market
Stock Market

8. Financial Markets
Bonds - Borrow - Debt
Stocks - Sell Ownerships
Equity

9. Bond Markets
What is a Bond?
Certificate of
Indebtedness

11. Riyadh Pizza Company
Saudi Style Supreme

12. Riyadh Pizza Company
Borrow
or
Sell ownership shares

13. 10% Bond 2023
100 Dr. Gale
Riyals CEO
Riyadh Pizza Company
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon Coupon
Pays 10 Riyals each year
Pays 100 riyals at maturity

14. Bond
Term - Length of time
Credit Risk - chance of default
Tax - How is the interest or
profit taxed

15. Stock
Ownership Share
Company sells once
Then resold to other buyers
Limited Liability
No promises of profit
Equity position

16. Riyadh Pizza Company
Need to raise 1,000 SAR
Create 1,000 shares and sell
for 1 SAR each
Each share is worth 1/1,000
of the company

17. Stock Certificate
Riyadh Pizza Company
One Dr. Gale
CEO
Share
Current Share Owner: Prince Alwaleed

19. Stock Markets
Tu Dare Wa Lu
“Circulation”
160 Companies
www.tadawul.com
http://en.wikipedia.org/wiki/Tadawul

20. Stock Valuation
Share Price
Dividend
Price-Earnings Ratio

21. Share Price
Every time a share sells
it sets the current price
Share prices go up and
down

22. Dividend
Company Earnings or
Profits
Declare dividend
Keep - Retained Earnings

23. Dividend
Earnings: 500
Dividend: 300
Retained Earnings: ?

24. Price - Earnings Ratio
P/E Ratio
Current Share Price
Earnings last year

25. P/E Ratio
Current Share Price: 75
Earnings last year: 5
P/E Ratio: ?

26. P/E Ratio
Price Earnings P/E
Last Sale Last 12 months Ratio
Earnings x P/E
Equation Price ÷ P/E Ratio Price ÷ Earnings
Ratio
Apple 460 44 10.45
Google 792 31.93 24.8
STC 40 4 10

27. Financial Intermediaries
Banks
Mutual Funds

29. Banks
Savers Borrowers
Investors
Bank Pays Make money Bank Charges
5% on spread 7%
7% - 5% = 2%

30. We are rich today
because
people yesterday
were willing to save
and not consume

31. Mutual Funds
Shares of a portfolio of
stocks
Diversify risk
Small investors

32. Index Fund
Buy one share of all the
companies in the
market
Tadawul All Share Index
(TASI)

33. Exchange Indexes
Dow Jones Industrial Average
(DJIA)
30 biggest U.S. Companies
S&P 500
500 biggest U.S. companies
Tadawul All Share Index
(TASI)

34. Market for Loanable Funds
10%
9%
Supply
8%
Interest
7%
Profit
Rate 6%
% 5%
4%
3%
Demand
2%
1%
0%
0 100 200 300 400 500 600 700 800 900 1000
Loanable Funds