Chapter5 - 1 CHAPTER 5 Financial Markets Institutions...

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CHAPTER 5 Financial Markets & Institutions 1
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Topics 2 The Capital Allocation Process Financial markets Financial institutions Stock Markets and Returns Stock Market Efficiency
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The Capital Allocation Process 3 In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. Suppliers of capital – individuals and institutions with “excess funds”. These groups are saving money and looking for a rate of return on their investment. Demanders or users of capital – individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow.
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How is capital transferred between savers and borrowers? Direct transfers Investment banking house Financial intermediaries 4
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Direct Transfer from saver-to- borrower 5 Savers Borrowers Savers Borrowers Funds Claims
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Indirect Transfer through Investment Banking House 6 Savers Borrowers   Investment Banks Underwrite Issue Best Efforts Funds Primary Claims Funds Primary Claims Primary Claims Primary Claims
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Indirect Transfer through Financial Intermediary(FI) 7 Savers Borrowers Financial Inter- mediary: Banks & Thrifts Mutual Fund Co.’s Pension Funds Insurance Co.’s Finance Co.’s Funds Funds Primary Claims Secondary Claims Primary &/or
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What is a market?
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