Financial Markets and Institutions

Financial Markets and Institutions - Financial Markets and...

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Financial Markets and Institutions Test 1 Review Chpts. 1-3 CHAPTER 1 The greater and more efficient the flow of funds, the greater the economic output and welfare of the economy. Financial Institutions - facilitate the flow of funds from savers to borrowers. They do this by selling financial claims to generate funds and then use the money to buy financial claims of businesses, consumers, and government units, thereby funding them. Financial institutions are such firms as commercial banks, credit unions, life insurance companies, and finance companies and are often referred to as financial intermediaries . The Financial system is concerned with funneling money- and with it purchasing power from SSU’s to DSU’s. DSU’s include business firms and governments. SSU’s include households. SSU’s lend money DSU’s borrow money. IOU’s are financial claims, they are claims against someone else’s money at a future date. o To DSU it’s a liability o To SSU it’s an asset, interest earned is the reward for postponing consumption. o The ease to which a financial claim can be resold is its marketability. The Job of Bringing DSU’s and SSU’s together can be done either by Direct or Indirect Financing ( Financial Intermediation ). Direct Financing- DSU’s exchange financial claims ( Direct Financial Claims ) for money from SSU’s directly. o Direct financial market is a wholesale market. o The Size of the transactions are $1 million or more. Types of Direct Financing o Investment Banking Services Investment Banks - help companies sell new debt or equity in financial markets.
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Money Center Banks - large commercial banks located in major financial centers that transact in money markets directly. . Services of Investment Banking Services Bring New Securities to Market o Origination - all work necessary to bring a security issue for sale. o Underwriting - investment banker helps a firm sell its new security issue in the direct financial market. Most Common Type is Firm Commitment Investment banker assumes the risk of buying a new issue of securities from the issuing corporation at a guaranteed price. o Distribution- occurs immediately after buying the securities from the issuer and is the marketing and sales of securities to institutional and individual investors. Trading and Brokerage Services o Brokers- help bring buyers and seller together, matchmakers, they receive commission for sales, brokers never own the securities they trade (buy or sell). o Dealers- make markets for securities by carrying an inventory of securities from which they stand ready to either buy or sell at quoted prices. Make profits by trading (buying and selling) o Problem with direct financing is aside for the very wealthy, individuals typically do not directly participate in direct markets because of the transaction size and that DSU’s must find SSU’s that want direct claims with precisely the characteristics they
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Financial Markets and Institutions - Financial Markets and...

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