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fin 221 ch2 not finished......FML - Chapital Allocatio...

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Chapital Allocatio Process In a well-functioning economy, capital flows efficiently from those with surplus capital to those who need it. 1. Direct transfers of money and securities, as shown in the top section, occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. The business delivers its securities to savers, who, in turn, give the firm the money it needs. This procedure is used mainly by small firms, and relatively little capital is raised by direct transfers. 2. As shown in the middle section, transfers may also go through an investment bank (iBank) such as Citigroup, which underwrites the issue. An underwriter serves as a middleman and facilitates the issuance of securities. The company sells its stocks or bonds to the investment bank, which then sells these same securities to savers. The businesses' securities and the savers' money merely "pass through" the investment bank. However, because the investment bank buys and holds the securities for a period of time, it is taking a risk–it may not be able to resell the securities to savers for as much as it paid. Because new securities are involved and the corporation receives the proceeds of the sale, this transaction is called a
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