Ch1.Introduction and Overview of Financial Markets
Ch1.Introduction and Overview of Financial Markets
Ch1.Introduction and Overview of Financial Markets
AND OVERVIEW
OF FINANCIAL
MARKETS
Financial Markets
The arenas through which funds flow
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Financial Markets can be distinguished in two
major dimensions:
PRIMARY MARKETS
Markets in which corporations raise funds
through new issues of securities
SECONDARY MARKETS
A market that trades financial instruments once
they are issued.
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Primary Market Transfer of Funds Timeline
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Secondary Market Transfer of Funds Timeline
Investors
Investors
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Money Markets vs Capital Markets
MONEY MARKETS CAPITAL MARKETS
▸Market that trades debt ▸Market that trades debt
securities or instruments and equity instruments
with maturities of one with maturities of more
year or less. than one year.
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Money Market Instruments
• Treasury Bills
• Federal Funds
• Repurchase Agreements
• Commercial Paper
• Negotiable Certificate of Deposit
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Derivative Security Markets
markets in which derivative security trades
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Financial Institutions
Institutions that perform the essential function of
channelling funds from those with surplus funds to those
with shortages of funds.
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Types of Financial Institutions
• Commercial Banks
• Thrifts
• Insurance Companies
• Securities Firms and Investment Banks
• Finance Companies
• Investment Funds
• Pension Funds
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Flow of funds without financial institutions
Price Risk
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Flow of funds with financial institutions
Manage to
diversify Asset
funds Transformer
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Services Performed by
Financial Institutions
Services benefiting the supplier of
Funds:
•Monitoring Cost
•Liquidity and Price Risk
•Transaction Cost Services
•Maturity Intermediation
•Denomination Intermediation
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Services Performed by
Financial Institutions
Services benefiting the overall economy:
•Money supply transmission
•Credit Allocation
•Intergenerational wealth transfers
•Payment Services
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Risks Incurred by Financial
Institutions
•Credit Risk
•Foreign Exchange Risk
•Interest Rate Risk
•Price Risk
•Technology Risk
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Regulation of
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Financial
Institutions