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Unformatted text preview: 6/2/2010 1 Financial Markets and Institutions Chapter 2 ¬° T he Capital Allocation Process ¬° Financial Markets ¬° Financial Institutions ¬° Stock Markets and Returns ¬° Stock Market Efficiency 2-1 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 ‚Äď individuals and institutions with ‚Äúexcess funds.‚ÄĚ These groups are saving money and looking for a rate of return on their investment. ¬° Demanders or users of capital ‚Äď 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 How is capital transferred between savers and borrowers? ¬° Direct transfers ¬° Investment banking house ¬° Financial intermediaries 2-3 6/2/2010 2 Capital Formation and Transfers ¬° Direct Transfer : (Fig 2-1) Business provides Financial Security directly to Investor/Saver in exchange for Cash ¬° Indirect Transfer using Investment Bankers (IB) : Firm gets money from and transfers securities to IB. Investor/Saver gives money to IB and gets Firm‚Äôs Securities. IB gets paid by both sides. ¬° Indirect Transfers using a Financial Intermediary : Mutual Funds, Hedge Funds 2-4 What is a market? ¬° A market is a venue where goods and services are exchanged. ¬° A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds. 2-5 Types of Financial Markets ¬° Physical assets vs. Financial assets ¬° Spot vs. Futures ¬° Money vs. Capital ¬° Table 2 1 is important summary of major market ¬° Table 2-1 is important summary of major market instruments, participants and characteristics ¬° Primary vs. Secondary ¬° Public vs. Private 2-6 6/2/2010...
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- Spring '08
- Financial Markets, Capital Allocation Process, secondary market transaction