Chapter 2 Fim

Overview of the Financial System
(chapter 2)
Function of Financial Markets
Channeling Funds: Financial markets helps
in regulating funds in an economy in such a
manner that economic resources are
transferred from lenders (surplus) to
borrowers (deficient)
Function of Financial Markets
Securities : They are assts for borrowers
and liabilities for sellers. It is a way of
direct finance
Structure of Financial Markets
Debt and Equity Markets:
1. One of the method is to issue a debt
instrument, such as a bond or a
mortgage. A fixed payment is made along
with principal amount until a specified
maturity date.
2. In equity market firm issue shares to
generate funds for its investment.
residual claimant: It means that
cooperation should pay all its debt holders
before its equity holders . This is a
disadvantage of owning a cooperation’s
equity
Primary and Secondary
Markets
In the primary market, companies sell
new stocks and bonds to the public for the
first time, such as with an initial public
offering (IPO)
The secondary market is basically the
stock market and refers to the New York
Stock Exchange, the NASDAQ, and other
exchanges worldwide.
Investment banks helps corporations
obtain debt financing by finding investors
for corporate bonds. It plays an important
role in primary markets
Examples of secondary
markets
Foreign exchange markets
 Futures markets
 Options markets.
Securities brokers and dealers are crucial to
a well-functioning secondary market
Secondary markets can be organized in
two ways.
Exchanges
 Over-the-Counter Markets
https://www.youtube.com/watch?
v=pFkEoCcchtI
Money and Capital Markets
Capital markets are used for long-term
assets, which are those with maturities of
greater than one year.
Capital markets include the equity (stock)
market and debt (bond) market.
The money market is a financial market in
which only short-term debt instruments
(generally those with original maturity of
less than one year) are traded
The instruments used in the money
markets include deposits, collateral loans,
acceptances, and bills of exchange.
Money and Capital Markets
Liquidity is the main purpose
for accessing money
markets.
Money markets are
considered low risk; risk-averse
investors are willing to access
them with the anticipation that
liquidity is readily available.
International Bond Market,
Eurobonds, and Eurocurrencies
The Eurobond is a special type of bond issued in
a currency that is different from that of the
country or market in which the bond is issued.
Due to this external currency characteristic, these
types of bonds are also known as external bonds.
A foreign bond is a bond issued in a domestic
market by a foreign entity in the domestic
market's currency as a means of raising capital.
For foreign firms doing a large amount of
business in the domestic market, issuing foreign
bonds, such as bulldog bonds, Matilda bonds, and
samurai bonds, is a common practice.
International Bond Market,
Eurobonds, and Eurocurrencies
A variant of the Eurobond is
Eurocurrencies, which are foreign
currencies deposited in banks outside the
home country. The most important of the
Eurocurrencies are Eurodollars, which
are U.S. dollars deposited in foreign
banks outside the United States or in
foreign branches of U.S. banks.
Function of Financial
Intermediaries: Indirect Finance
A financial intermediary is an entity that
acts as the middleman between two parties
in a financial transaction, such as a
commercial bank, investment banks,
mutual funds and pension funds.
Financial intermediaries offer a number of
benefits such as
1. Safety
2. liquidity
3. Economies of scale involved in
commercial banking, investment banking
and asset management.
Asymmetric Information: Adverse
Selection and Moral Hazard
This inequality in information in fianancial
markets is called asymmetric
information.
This inequality is called asymmetric
information.
Moral hazard is the problem created
by asymmetric information after the
transaction occurs.
https://www.tutor2u.net/economics/
reference/information-economics-moral-
hazard-and-adverse-selection

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Overview of the Financial System

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