361-CH5Concise - 5-1CHAPTER 5Financial Markets and...

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Unformatted text preview: 5-1CHAPTER 5Financial Markets and InstitutionsUpdated: January 23, 2012The Capital Allocation ProcessFinancial marketsFinancial institutionsStock Markets and ReturnsStock Market Efficiency5-2The Capital Allocation ProcessIn a well-functioning economy, capital (credit) flows efficiently from those who supply capital (credit) to those who demand it.Suppliers of capital (credit) 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 (credit) 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.5-3How is capital transferred between savers (Sc) and borrowers (Dc)?Direct transfers stocks and bonds, securitiesInvestment banking house - UnderwritingFinancial intermediaries banks and mutual fundsSee Figure 5-1, p. 144 Supply and Demand for Credit5-4What 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/capital (Dc) are brought together with those having a surplus of funds (Sc).5-5Types of financial marketsPhysical assets vs. Financial assetsMoney (short) vs. Capital (long)Primary (proceeds go to firm) vs. Secondary Mkt. for outstanding securitiesSpot (cash) vs. FuturesPublic (exchange-traded) vs. Private (banks)Derivatives Futures and optionsForeign Exchange CurrencySee Table 5-1, p. 148 - 1495-6The importance of financial markets to economic growthWell-functioning financial markets facilitate the flow of capital from investors to the users of capital....
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This note was uploaded on 01/23/2012 for the course BUS 361 taught by Professor Staff during the Fall '11 term at University of Michigan.

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361-CH5Concise - 5-1CHAPTER 5Financial Markets and...

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