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Chapter 1

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Dr.Richard Deeves

Chapter 1: The Financial Landscape 1. Why do we need financial markets? 2. Capital markets and securities 3. Where do corporations fit in? 4. Regulation (Ch. 5 sect 5.4) 5. Where do individuals fit in? 6. Three key assumptions of modern academic finance 1. Why do we need financial markets? • Financial markets are very important since their drivers of the economy • Fall of 2008, financial markets were in crisis which led to a dramatic recession. Financial markets and movements of funds • Main function of financial markets is: o Efficient transfer of funds from those with excess to those with insufficient. • Players are businesses, financial institutions, households, and various levels of governments. o Governments tend to be very big borrowers of money • Main reason for fund transfers: o Businesses have investment opportunities but a shortage of capital Basis of funds transfer: • What if you have an investment idea? • You have estimated inflows and outflows. • Say there is a negative flow today and a positive flow next year. • Should you go ahead with the investment? • If there is no risk, It depends on: o The interest rate. • If there is risk, it depends on cost of capital o Which includes a risk premium. -> Higher the higher the risk. Funds transfer example: • You have opportunity to invest $10 000 • You will have $11 000 at the end of year • Interest rate is 8% • Is this a good investment? • RETURN = 11 000/10 000 – 1 = 10% • INTEREST = 8% • Therefore th
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