chap2 - CHAPTER 2 Financial Markets& I nstitutions 1...

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Unformatted text preview: CHAPTER 2 Financial Markets & I nstitutions 1 Topics 2 The Capital Allocation Process Financial markets Financial institutions Stock Markets and Returns Stock Market Efficiency The Capital Allocation Process 3 I n 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. How is capital transfer red between savers and bor rowers? Direct transfers I nvestment banking house Financial int er mediar ies 4 Direct Transfer from saver-to- borrower 5 Savers Borrowers Savers Borrowers Funds Claims I ndirect Transfer through I nvestment Banking House 6 Savers Borrowers I nvestment Banks • Underwrite I ssue • Best Efforts Funds Primary Claims Funds Primary Claims Primary Claim s Primar y Claims I ndirect Transfer through Financial I ntermediary(FI ) 7 Savers Borrowers Financial I nter- mediary: Banks & Thrifts Mutual Fund Co.’s Pension Funds I nsurance Co.’s Finance Co.’s Funds Funds Primary Claims Secondary Claims Primary & /or What is a market?What is a market?...
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This note was uploaded on 02/14/2011 for the course FIN 221 taught by Professor Dyer during the Spring '09 term at University of Illinois, Urbana Champaign.

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chap2 - CHAPTER 2 Financial Markets& I nstitutions 1...

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