FNBU 3221 Lecture Notes - Lecture 8: Efficient-Market Hypothesis, Financial Intermediary
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CHAPTER 7: FINANCIAL MARKETS & INSTITUTIONS
Functions of Financial Markets and Institutions
Payment mechanism (facilitate payments for transactions)
Savings vehicle
Credit supplier (take in savings from net savers and give out loans/instruments to net creditors)
Liquidity source ("make the market" - facilitate the buying/selling that creates a market for
financial instruments)
Risk reducer
Policy vehicle
Moving Funds from Lenders to Borrowers
Direct Transfer: An exchange straight between a lender and borrower
Indirect Transfer: An exchange through a financial intermediary
Semidirect Transfer: An exchange mediated by an investment banker
oIntermediary chooses how to handle the lender's funds to dole them out to borrowers
oFinancial intermediaries make money through the net interest margin
Money should always be earning the holder SOMETHING (even tiny bits of interest!)
Money vs. Capital Markets
Money Markets: Markets for debt securities of one-year maturity or less
oUsed for liquidity management
Capital Markets: Markets for debt and equity securities with maturity greater than one year
oUsed for intermediate and long-term financing
Primary Financial Markets
The market for the first time that an instrument is sold
oExample: IPO in which the company initially distributes shares
Facilitated by investment bankers
oBanker provides analysis, advice, underwriting (guarantee of the proceeds of the sale)
Secondary financial markets cover the resale of financial instruments
Flotation Cost
The cost of issuing new securities, varies with difficulty of the sale
Two parts:
oUnderwriting spread (underwriter's fee, risk fee, selling fees)
oAdministrative costs (registration fees, legal fees, auditors' fees, taxes)
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