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

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Chapter 2 - An Overview of the Financial System Function of Financial Markets •Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds •Direct finance: borrowers borrow funds directly from lenders in financial markets by selling them securities. •Promotes economic efficiency by producing an efficient allocation of capital, which increases production •Directly improve the well-being of consumers by allowing them to time purchases better Structure of Financial Markets •Debt and Equity Markets –Debt instruments (maturity) –Equities (dividends) •Primary and Secondary Markets –Investment Banks underwrite securities in primary markets –Brokers and dealers work in secondary markets •Exchanges and Over-the-Counter (OTC) Markets –Exchanges: NYSE, Chicago Board of Trade –OTC Markets: Foreign exchange, Federal funds.
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