FNCE4070 Class Notes - FNCE4070 Class Notes Ch 1 Asymmetric...

Info icon This preview shows pages 1–3. Sign up to view the full content.

FNCE4070 Class Notes Ch. 1 Asymmetric information o One party doesn’t know enough about the other party to make accurate decisions Adverse selection – problem of asymmetric information before transaction occurs Moral hazard – problem created by asymmetric information after the transaction o People that come to borrow money are slightly less likely to pay it back – need the money more. Want to lend to those that don’t want the money o Moral hazard ex) had money to pay back, but ended up spending on something else once you got the money Ex) once you get health insurance you begin to ski – previously answered no to any extreme sports question – but getting health insurance changes behavior Principle Agent Problem o One person or entity (agent) is able to make decisions on behalf or that impact someone else (principle) o Dilemma exists because sometimes agent is motivated to act in self-interest instead of interest of principle Financial markets o Channel funds from persons or businesses without investment opportunities (lenders/savers) to those who have them (borrowers/spenders) Housing Market Lender/saver – we invest money, banks lend Borrower/spender – people purchasing property o Improve economic efficiency by channeling funds o Financial market participants Lender/saver Households Business firms Governments Foreigners* Borrower/spender Households Business firms Governments Foreigners* o Individuals tend to be closer to lender/savers as they get older Never absolutely one category
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Direct Finance o Lenders and borrowers are directly connected Rare Banks act as intermediary – money comes from depositor, not direct o Direct purchasing of t-bills Indirect finance o Financial intermediary Channels funds from lender/savers to borrower/spenders Banks act as intermediary Deposits act as lending Bank lends that money to other people o Ex) Mutual Funds Vanguard short-term treasury fund 80% assets in treasury bills, notes, bonds 1-4 year bonds you pay a small premium for them to do it for you o Ex) prosper.com Connect people who want to invest with people who want to borrow Take out the hassle of creating a contract, setting rates, etc. Essentially buying note from website Brokers o Agents of investors who match buyers with sellers Gets paid matching fee, but not actually taking any capital risk If borrow stops paying, lender loses money – not prosper Dealer o Link buyers and sellers by buying and selling securities at stated prices Bank lends money borrowed from depositors Deciding what price to lend at If loan defaults, depositors don’t care because bank is at risk (unless bank goes under, but not likely with deposit insurance) Function of financial intermediary o Economies of scale Transaction cost – time and money spend carrying out transaction
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern