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Financial Markets and Institutions: Chapter 1

Chapter 1 Role of Financial Markets and Institutions: describe the types of financial markets that facilitate the flow of funds, describe the types of securities traded within financial markets, describe the role of financial institutions within financial markets,. | 1 1 Part 1 Overview of the Financial Environment 2 3 1 Role of Financial Markets and Institutions ■ describe the types of financial markets that facilitate the flow of funds ■ describe the types of securities traded within financial markets ■ describe the role of financial institutions within financial markets ■ explain how financial institutions were exposed to the credit crisis 3 Chapter Objectives 3 Financial Market A market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in financial markets when one party purchases financial assets previously held by another party. 4 Role of Financial Markets Financial markets transfer funds from those who have excess funds to those who need funds. Surplus units: participants who receive more money than they spend, such as investors. Deficit units: participants who spend more money than they receive, such as borrowers. Securities: represent a claim on the issuers Debt securities - debt (also called credit, or borrowed funds) incurred by the issuer. Equity securities - (also called stocks) represent equity or ownership in the firm. 5 Role of Financial Markets Accommodating Corporate Finance Needs: The financial markets serves as the mechanism whereby corporations (acting as deficit units) can obtain funds from investors (acting as surplus units). Accommodating Investment Needs: Financial institutions serve as intermediaries to connect the investment management activity with the corporate finance activity. 6 Exhibit 1.1 Comparison of Roles Among Financial Institutions 7 Primary versus Secondary Markets Primary markets - facilitate the issuance of new securities Secondary markets facilitate - the trading of existing securities, which allows for a change in the ownership of the securities Liquidity is the degree to which securities can easily be liquidated (sold) without a loss of value. If a security is illiquid, investors may not be able to find a willing buyer for | 1 1 Part 1 Overview of the Financial Environment 2 3 1 Role of Financial Markets and Institutions ■ describe the types of financial markets that facilitate the flow of funds ■ describe the types of securities traded within financial markets ■ describe the role of financial institutions within financial markets ■ explain how financial institutions were exposed to the credit crisis 3 Chapter Objectives 3 Financial Market A market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in financial markets when one party purchases financial assets previously held by another party. 4 Role of Financial Markets Financial markets transfer funds from those who have excess funds to those who need funds. Surplus units: participants who receive more money than they spend, such as investors. Deficit units: participants who spend more money than they receive, such as borrowers. Securities: represent a claim on the issuers Debt securities - .