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CHAPTER2 - UNIVERSITY OF SANTO TOMAS Espana Manila College...

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UNIVERSITY OF SANTO TOMAS Espana, Manila College of Commerce and Business Administration Basic Finance Understanding financial markets Instructor: Carlsberg S. Andres, CPA I. The mix of corporate securities sold in the capital market. A. When corporations raise cash in the capital market, what type of financing vehicle is most favored? The answer to this question is corporate bonds. The corporate debt markets clearly dominate the corporate equity markets when new (external) funds are being raised. II. Why financial markets exist A. Financial markets consist of institutions and procedures that facilitate transactions in all types of financial claims. B. Some economic units spend more during a given period of time than they earn. Some economic units spend less than they earn. Accordingly, a mechanism is needed to facilitate the transfer of savings from those economic units that have a savings surplus to those that have a savings deficit. Financial markets provide such a mechanism. C. The function of financial markets then is to allocate savings in an economy to the ultimate demander (user) of the savings. D. If there were no financial markets, the wealth of an economy would be lessened. Savings could not be transferred to economic units, such as business firms, which are most in need of those funds. III. Financing business: The movement of funds through the economy. A. In the financing process , financial institutions play a major role in bridging the gap between savers and borrowers in the economy. B. In a normal year, the household sector is the largest net supplier of funds to the financial markets. We call the household sector then a savings-surplus sector. C. In contrast, the nonfinancial business sector is a savings-deficit sector. In recent years, the federal government has become a "quasi-permanent" savings deficit sector. D. All in all, within the domestic economy, the nonfinancial business sector is dependent on the household sector to finance its investment needs. E. The financial market system includes a complex network of intermediaries that assist in the transfer of savings among economic units. F. The movement of savings through the economy occurs in three distinct ways: 1. The direct transfer of funds. 2. Indirect transfer using the investment banker. 3. Indirect transfer using the financial intermediary. IV. Components of the financial market system. A. Public offerings can be distinguished from private placements . 1. The public (financial) market is an impersonal market in which both individual and institutional investors have the opportunity to acquire securities.
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