FFM CH2 - Chapter2 FinancialMarketsand Institutions...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Financial Markets and  Institutions The Capital Allocation Process Financial Markets Financial Institutions Stock Markets and Returns Stock Market Efficiency Chapter 2 2-1
Background image of page 1

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

View Full DocumentRight Arrow Icon
The Capital Allocation Process In a well-functioning economy, capital flows  efficiently from those who supply capital to  those who demand it. Suppliers of capital – individuals and  institutions with “excess funds.”  These  groups are saving money and looking for a  rate of return on their investment. Demanders or users of capital – individuals  and institutions who need to raise funds to  finance their investment opportunities.  These  groups are willing to pay a rate of return on  the capital they borrow. 2-2
Background image of page 2
How is capital created for borrowers? Direct transfers  -  occur when a business sells its stocks or bonds directly to  savers, w/o going through a financial institution - the business gives securities to  savers, savers give the firm $$ Primary market transaction   via an investment banking house  -  an iBank  underwrites  the issue (a company sells its stocks/bonds to the iBank, the iBank  sells these same securities to savers) the risk is that the iBank may not be able to  resell the securities to savers for as much as it paid Financial intermediaries  such as banks, insurance companies and mutual  funds - the intermediary obtains funds from savers in exchange for its securities,  the intermediary uses the money to buy businesses’ securities, savers hold he  intermediary’s securities (so intermediaries literally create new forms of capital) Why are existing stock and bond transfers not mentioned above? 2-3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Figure 2-1 2-4
Background image of page 4
The Importance of Financial Markets Well-functioning financial markets facilitate the  flow of capital from investors to the users of  capital. Markets provide savers with returns on their money 
Background image of page 5

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

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 18

FFM CH2 - Chapter2 FinancialMarketsand Institutions...

This preview shows document pages 1 - 6. Sign up to view the full document.

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