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Chapter 1

BU383 Chapter Notes - Chapter 1: Efficient-Market Hypothesis, Information Asymmetry, Canadian Securities Administrators

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Chpt 1: Introduction to Finance
Financial System:
- They not only encompass a multitude of securities, including shares,
bonds, and other securities, but also span national boarders
- Two types of markets:
1) Money Market: This market is for securities that mature in less than 1
2) Capital Market: For securities that mature in more than 1 year
- Within these markets are primary and secondary market
1) Primary Market: The market for the first issuance of a security
2) Secondary Market: Trades securities after their issuance
a. Further divided into two groups
1) Action: Markets that trade in one physical or virtual location
2) Dealer Markets: Characterized by multiple dealers who
each hold an inventory of the security and who are each
willing to buy or sell
Money Markets:
- Money is not traded in the money markets
- In a money market, the securities
oShort term
oHighly liquid (easy to sell)
oMature in less than 1 year from their issue date
- Individuals participate in the money when they buy units in money market
mutual funds (MMMFs)
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oBecause money market securities have large face values, which
precludes most individual investors from buying them
- Sellers of money market securities find that the money market provides a
low-cost source of temporary funds
- Banks borrow in the money market to meet short-term reserve
requirement shortages
- The govn’t funds a large portion of the national debt by issuing Treasury
bills (T-bills)
Capital Markets:
- The principal securities traded in the capital market are bonds and shares
oShare represent an ownership interest in the issuing company
Companies issue both shares and bonds
oBonds represent a debt owed by the issuer to the holder
Govn’ts only issue bonds
- The securities traded on the capital markets fund long-term investments
by companies and govn’ts in projects like factories and highways
- Share represent an ownership interest in the issuing company
Primary and Secondary Markets:
- A primary market transaction is one in which there is an initial sale of a
security by a firm or government and the issuer receives the funds raised
by the sale
- The primary market is intermediated by investment banks
- The banks (alone or in groups) buy the new securities from the spread b/w
the buy and sell prices
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