Scribd Logo
Upload

Welcome to Scribd!

  • 84 views

    Function of Financial Markets

    Uploaded by

    Yepuru Chaithanya
    The document discusses the functions of financial markets and intermediaries. It provides classifications of different financial markets, including debt and equity markets. It also discusses how financial intermediaries help reduce transaction costs and information asymmetries. Financial intermediaries pool funds to lower risk and facilitate indirect finance between savers and borrowers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Function of Financial Markets

    Uploaded by

    Yepuru Chaithanya
    84 views11 pages
    The document discusses the functions of financial markets and intermediaries. It provides classifications of different financial markets, including debt and equity markets. It also discusses how financial intermediaries help reduce transaction costs and information asymmetries. Financial intermediaries pool funds to lower risk and facilitate indirect finance between savers and borrowers.

    Original Description:

    finance management

    Original Title

    Chapter 2

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses the functions of financial markets and intermediaries. It provides classifications of different financial markets, including debt and equity markets. It also discusses how financial intermediaries help reduce transaction costs and information asymmetries. Financial intermediaries pool funds to lower risk and facilitate indirect finance between savers and borrowers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    84 views11 pages

    Function of Financial Markets

    Uploaded by

    Yepuru Chaithanya
    The document discusses the functions of financial markets and intermediaries. It provides classifications of different financial markets, including debt and equity markets. It also discusses how financial intermediaries help reduce transaction costs and information asymmetries. Financial intermediaries pool funds to lower risk and facilitate indirect finance between savers and borrowers.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 11

    Function of Financial Markets

    1. Allows transfers of funds from person or business without investment opportunities to one who has them 2. Improves economic efficiency

    2-1

    Financial Markets:
    Direct finance: through securities (IOUs) Indirect: intermediaries Saving transaction costs (search) Maturity, Stocks, Dividends (residual claim), Debt, IPOs (underwriting), Brokers, Dealers

    2-2

    Classifications of Financial Markets


    1. Debt Markets Short-term (maturity < 1 year) Money Market Long-term (maturity > 1 year) Capital Market 2. Equity Markets Common stocks 1. Primary Market New security issues sold to initial buyers 2. Secondary Market Securities previously issued are bought and sold 1. Exchanges Trades conducted in central locations (e.g., New York Stock Exchange, Chicago Commodity) 2. Over-the-Counter Markets Dealers at different locations buy and sell
    2-3

    Internationalization of Financial Markets


    International Bond Market 1. Foreign bonds of a foreign entity denominated in home
    currency (German producer issues in US in $)

    2. Eurobonds denominated in foreign currency (in in the US)


    Now larger than U.S. corporate bond market

    World Stock Markets (U.S. stock markets are no longer the largest) Eurocurrencies deposited outside the home country
    Eurodollars (Russia, Middle-East)

    2-4

    Function of Financial Intermediaries


    Financial Intermediaries 1. Engage in process of indirect finance 2. More important source of finance than securities markets 3. Needed because of transactions costs and asymmetric information Transactions Costs 1. Financial intermediaries make profits by reducing transactions costs (search costs) 2. Reduce transactions costs by developing expertise and taking advantage of economies of scale (liquidity services)

    2-5

    Function of Financial Intermediaries


    Risk Sharing 1. Create and sell assets with low risk characteristics and then use the funds to buy assets with more risk (also called asset transformation, by pooling of funds). 2. Also lower risk by helping people to diversify portfolios

    2-6

    Asymmetric Information: Adverse Selection,and Moral Hazard


    Adverse Selection 1. Before transaction occurs 2. Potential borrowers most likely to produce adverse outcomes are ones most likely to seek loans and be selected (gamblers have high return & risk => need to borrow often) Moral Hazard 1. After transaction occurs 2. Hazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that wont pay loan back Financial intermediaries reduce adverse selection and moral hazard problems (by developing monitoring expertise), enabling them to make profits
    2-7

    Financial Intermediaries

    2-8

    Regulatory Agencies

    2-9

    Regulatory Agencies

    2-10

    Regulation of Financial Markets


    Is it good or bad? Would it work without it? Two Main Reasons for Regulation are: 1. Increase information to investors (decrease asym. info)
    A. Decreases adverse selection and moral hazard problems B. SEC forces corporations to disclose information

    2. Ensuring the soundness of financial intermediaries


    A. Prevents financial panics B. Chartering, reporting requirements, restrictions on assets and activities (banks - no stocks, insider trading, etc.), deposit insurance, and anti-competitive measures

    2-11

    You might also like