Chapter 02 - 2. An Overview of the Financial System 2.1...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
2. An Overview of the Financial System 2.1 Function of Financial Markets 2.2 Structure of Financial Markets 2.3 Internationalization of Financial Markets 2.4 Function of Financial Intermediaries 2.5 Financial Intermediaries 2.6 Regulation of the Financial System
Background image of page 1

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

View Full DocumentRight Arrow Icon
2.1 2 Financial markets perform the essential economic function of channeling funds ( Figure 2.1 ) from those who have saved surplus funds (spend less than their income) to those who have a shortage of funds (spend more than their income) Direct finance – borrowers borrow funds directly from lenders in financial markets by selling them securities (financial instruments), which are claims on the borrower’s future income or assets Securities are assets to those who buy them, but liabilities to those who sell them
Background image of page 2
2.1 3 Financial markets are critical for producing an efficient allocation of capital , which contributes to higher production and efficiency for the overall economy When financial markets break down during financial crises, severe economic hardship results which can even lead to dangerous political instability Well-functioning financial markets also directly improve the well-being of consumers by allowing them to time their purchase better (installment plan or mortgage)
Background image of page 3

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

View Full DocumentRight Arrow Icon
2.1 4 Financial markets that are operating efficiently improve the economic welfare of everyone in the society
Background image of page 4
2.2 5 Firms or individuals can obtain funds in a financial market through debt instruments or equities Debt instrument (bond or mortgage) – a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest plus principal payments) until a specified date ( maturity date) when a final payment is made Maturity – the number of years until that instrument’s expiration date Short-term – maturity is less than one year Long-term – maturity is more than ten years
Background image of page 5

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

View Full DocumentRight Arrow Icon
2.2 6 Equities (common stock) – claims to share in the net income and the assets of a business Equities often make periodic payments ( dividends ) to their holders and are considered long-term securities because they have no maturity date Stockholders have the right to vote on issues important to the firm and to elect its directors Main disadvantage of owning a corporation’s equities rather than its debt is that an equity holder is a residual claimant (i.e. the corporation must pay all its debt holders before it pays its equity holders)
Background image of page 6
2.2 7 The advantage of holding equities is that equity holders benefit directly from any increases in the corporation’s profitability or asset value because equities confer ownership rights on the equity holders while debt holders do not share in this benefit because their dollar payments are fixed Primary market – financial market in which new issues of a security (bond or stock) are sold to initial buyers by the corporation or government agency borrowing the funds
Background image of page 7

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

View Full DocumentRight Arrow Icon
2.2
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/05/2010 for the course ECO 349 taught by Professor H during the Fall '09 term at University of Toronto- Toronto.

Page1 / 46

Chapter 02 - 2. An Overview of the Financial System 2.1...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online