FIN 4113 Lecture Notes - Lecture 3: Penn Square Bank, Deposit Insurance, Basel Iii
Document Summary
Information asymmetries exert a powerful influence on the structure of financial market transactions, contracts and institutions. Unlike transactions at the liquor or grocery store, transactions in the markets for financial claims create a contractual relationship between the buyer and the seller of the fc. Typically the counterparties to a financial market transaction do not share equivalent information concerning important aspects affecting the size timing and likelihood of contractual cash flows. In markets for fcs the relationship between buyer and seller is generally characterized by asymmetric information. One party to the transaction has superior information relative to the counterparty. When asymmetric information is present two types of behavior are likely; Company a sells corporate bond to finance expansion into new market. Borrower indicates that the intended use of the funds is a value enhancing investment opportunity. Willingness of the seller to repay as promised. Bond indenture: the legal contract between borrower (seller) and lender (buyer), specifies bond trustee.
