21 the capital market is a financial relationship

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market and is used for short-term bank time deposits denominated in dollars or other major currencies. 21. The capital market is a financial relationship created by a number of institutions and arrangements that allows the suppliers and demanders of long-term funds (with maturities greater than one year) to make transactions. The key securities traded in the capital markets are bonds plus common and preferred stock.
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Chapter 1 The Role and Environment of Managerial Finance 9 22. The broker market consists of national and regional securities exchanges. These organizations provide a location, such as the New York Stock Exchange, to bring together the buyers and sellers of debt and equity. They create a continuous market for securities, allocate scarce capital, determine and publicize security prices, and aid in new financing. Broker markets account for 60% of total dollar volume. By contrast, dealer markets are electronic markets for the buyers and sellers of securities not listed on the major exchanges. In a broker market, physical trading locations are replaced by security dealers who offer to buy or sell securities at stated bid/ask prices. Dealers buy securities from clients, sell them to other dealers, who in turn sell them to their clients. A majority of shares traded in the dealer market are listed on Nasdaq, the National Association of Securities Dealers Automated Quotation System. 23. In addition to the U.S. capital markets, corporations can raise debt and equity funds in capital markets located in other countries. The Eurobond market is the oldest and largest international debt market. Corporate and government bonds issued in this market are denominated in dollars or other major currencies and sold to investors outside the country in whose currency the bonds are denominated. Foreign bond markets also provide corporations with the opportunity to tap other capital sources. Corporations or governments issue bonds denominated in the local currency and sold only in that home market. The international equity market allows corporations to sell blocks of stock to investors in several countries, providing a diversified investor base and additional opportunities to raise larger amounts of capital. 24. An efficient market will allocate funds to their most productive uses due to competition among wealth-maximizing investors. Investors determine the price of assets through their participation in the financial markets. Changes in supply and demand continually impact prices in an efficient market. 25. The ordinary income of a corporation is income earned through the sale of a firm’s goods or services. Taxes on corporate ordinary income have two components: a fixed amount on the base figure for its income bracket level, plus a progressive percentage, ranging from 15% to 39%, applied to the excess over the base bracket figure. A capital gain occurs when a capital asset is sold for more than its initial purchase price. Capital gains are added to ordinary income and taxed at the regular corporate rates.
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