An overview of the financial system
Function of financial markets:
1. They allow transfers of funds from persons or businesses without investment opportunities to one who
2. They improve economic efficiency
Classifications of financial markets
1. Debt markets: short-term (maturity < 1 year) money market
Long-term (maturity > 10 years) capital market
Intermediate-term (maturity 1-10 years) capital market
2. Equity markets
1) Primary market: New security issues sold to initial buyers (such as investment banks). An investment
bank guarantees a price for a corporation’s securities (under writes the securities) and then sells them
to the public
2) Secondary market: securities previously issued are bought and sold in secondary markets ( i.e.
NYSE) see writes brokers and dealers are crucial to a well functioning secondary market. Brokers
are agents of investors who match buyers with sellers of securities. Dealers link buyers and sellers by
buying and selling securities at stated prices.
A corporation acquires new funds only when its securities are first sold in the primary market
nonetheless; secondary markets serve two important functions:
They increase the liquidity of these instruments thus making them easier to sell in the primary
They determine firm receives in the primary market. The firms that buy securities in the
primary market will pay the issuing corporation no more than the price that they think the
secondary market will set for this security.