003 - Financial Markets Financial Markets Institutions...

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Unformatted text preview: Financial Markets, Financial Markets, Institutions Institutions 5  , , and Instruments and Instruments ECO 473 – Money & Banking – Dr. D. Foster ECO 473 – Money & Banking – Dr. D. Foster Match savers and investors ◦ Savers want to ↑ wealth ◦ Investors want to create wealth Successful strategy - diversification ◦ Savers seek out mutual funds ◦ Savers seek out financial intermediaries ◦ Investors seek OPM ◦ banks ◦ credit unions ◦ S&Ls ◦ thrifts ◦ savings banks pension funds Insurance companies mutual funds mortgage brokers investment bankers finance companies Why - Intermediation e & , e& , e& Who . . . Financial Markets - Why & Who Financial Markets - Why & Who A financial intermediary Banks raise funds by accepting deposits. Banks use the funds to make loans. Banks as a solution to “asymmetric  info.” ◦ How does this occur for “direct” finance? S&L, Thrifts, Credit Unions also. Not “Investment” banks. When one party to a transaction knows more than the other party. Adverse selection Adverse selection - parties to a transaction have different information sets. ◦ Borrowers as inherently  risky. Moral hazard Moral hazard    ˆb+- after the transaction, behavioral changes adversely affect one party. ◦ How is the $ used? ◦ Bernard Mad off. Involved on Wall Street since 1960. Prominent philanthropist. Client losses = $65 bill. “Ponzi” scheme: ◦ Began in 1991. ◦ “Model” unreplicated. ◦ Targeted charities. ◦ Client suicides . New - Primary Markets ◦ stocks (IPO), bonds, mortgages, other. Used - Secondary Markets ◦ exchange of ownership. Where: NYSE, NASDAQ, OTC . . . Financial Markets - New & Used Financial Markets - New & Used Short - Money Markets ◦ A financial instrument that matures w/in one year. ◦ Used to facilitate liquidity demands.  Need funds soon.  Have excess cash. 3 mo. & 6 mo. T-Bills Commercial paper Bank CDs Fed’l funds Repurchase agreements Bankers’ acceptances Euro$ funds Financial Markets - Short & Long Financial Markets - Short & Long Money Market Instruments Outstanding, April 2005 Money Market Instruments Outstanding, April 2005...
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003 - Financial Markets Financial Markets Institutions...

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