econ423lec2

Econ423lec2 - Recall from last time Sound financial markets and institutions are critical to economic efficiency and economic growth over the long

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THE FINANCIAL SYSTEM: AN OVERVIEW JUNE 19 TH , 2009 Lauren Heller Econ 423 Financial Markets The Plan for Today Domestic and International Market Structure Financial Intermediaries Financial Regulation Introduction to Interest Rates Present Value Recall from last time… Sound financial markets and institutions are critical to economic efficiency and economic growth over the long run. Efficient allocation of capital Benefits to consumers Functions of Financial Markets Channeling funds from people and businesses without investment opportunities (savers) to those who have them (borrowers) Examples of savers (lenders) and borrowers (spenders)? Definitions to Remember A financial instrument or security is a claim on an issuer’s future income or assets. An instrument’s maturity is the number of years until its expiration date. Equities are claims to a share in the net income and assets of a business. Types of Financial Professionals Brokers are agents (working for investors) who match buyers with sellers of securities Dealers buy and sell securities at stated prices.
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Types of Financing Direct Finance Borrowing directly from lenders by selling securities Indirect Finance Borrowing indirectly through the use of financial intermediaries A security is considered to be: An asset for the buyer A liability for the issuer/seller Financial Market Structure Debt Markets Short-term Maturity <10 years Long-term Maturity >10 years Total value of debt instruments in the United States at the end of 2007: $41 trillion Equity Markets Represent an ownership stake in a firm No maturity date, (some) pay dividends perpetually Total value of U.S. equity at the end of 2005: $18 trillion Implications of holding debt vs. equities Financial Market Structure Primary and Secondary Markets Revisited New security issues are sold to initial buyers on the primary market Typically investment banks underwrite (guarantee) primary market offerings. The secondary market is where previously issued securities are bought and sold. Examples: NYSE, Nasdaq Involves both brokers and dealers what are those, again? The Secondary Market: Some Detail If firms don’t receive any direct revenue from the sale of shares on the secondary market, why should they care about it? Secondary markets provide liquidity for firm shares making them easier to buy and sell. Why might this matter to a firm? Secondary markets establish a price for securities. How does a firm’s share price in the secondary market affect the price that a new security will receive in the primary market?
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The Secondary Market: Some Detail Secondary markets can be split into 2 groups: 1. Exchanges , where trades are conducted in central locations. 2.
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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Econ423lec2 - Recall from last time Sound financial markets and institutions are critical to economic efficiency and economic growth over the long

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