Chapter 2 Mishkin Summary 09/27/2013 1. The basic function of financial markets is to channel funds from savers who have an excess of funds
to spenders who have a shortage of funds. Financial markets can do this either through direct finance,
in which borrowers borrow funds directly from lenders by selling them securities, or through indirect
finance, which involves a financial intermediary that stands between the lendersavers and the
borrowerspenders and helps transfer funds from one to the other. This channeling of funds improves
the economic welfare of everyone in the society, because it allows funds to move from people who have
no productive investment opportunities to those who have such opportunities, thereby contributing to
increased efficiency in the economy. In addition, channeling of funds directly benefits consumers by
allowing them to make purchases when they need them most.
2. Financial markets can be classified as debt and equity markets, primary and secondary markets,
exchanges and overthecounter markets, and money and capital markets.
3. An important trend in recent years is the growing internationalization of financial markets. Eurobonds,
which are denominated in a currency other than that of the country in which they are sold, are now the
dominant security in the international bond market and have surpassed U.S. corporate bonds as a
source of new funds. Eurodollars, which are U.S. dollars deposited in foreign banks, are an important
source of funds for Amer