Untitled Quiz

Study Notes

Firms needing money from external sources can get it through a financial institution, financial markets, or private placements.
Financial institutions act as intermediaries, channeling savings from individuals, businesses, and governments into loans or investments.
Individuals generally supply funds, while businesses and governments usually demand funds.

Commercial banks offer safe places to invest funds, and provide loans to individuals and businesses.
Investment banks assist firms in raising capital, provide advice on transactions like mergers, engage in trading, and act as market makers.

Financial markets offer a platform for suppliers and demanders of funds to interact directly.
The money market deals with short-term marketable securities, while the capital market focuses on long-term securities.
Private placements involve selling new securities directly to investors or a group.
Most firms opt for public offerings of securities, selling bonds or stocks to the general public.
The primary market is where new securities are initially issued, with the issuer directly involved.
Secondary markets trade pre-owned securities, not new issues.

Suppliers of funds provide funds to financial institutions and markets through deposits, shares, and securities.
Financial institutions receive funds from suppliers and loan them to demanders.
Private placements receive funds from suppliers and sell securities to demanders.
Financial markets receive funds from suppliers through securities and sell securities to demanders.
Demanders of funds receive funds from financial institutions, private placements, and financial markets.

The money market facilitates short-term lending between suppliers and demanders.
Most transactions involve marketable securities: short-term debt instruments.
U.S. Treasury bills, commercial paper, and negotiable certificates of deposit are examples of marketable securities issued by governments, businesses, and financial institutions, respectively.
These securities are generally considered low-risk investments.

The capital market connects long-term fund suppliers and demanders.
Key securities within this market include bonds (long-term debt) and common and preferred stock (equity).
Bonds are long-term debts used to raise large sums of money from a variety of lenders.
Common stock represents ownership interest or equity in a corporation.
Preferred stock is a unique type of ownership with characteristics from both bonds and common stock.

Broker markets bring buyers and sellers together on a centralized trading floor to trade securities.
NYSE Euronext and the American Stock Exchange are examples of broker markets.
Dealer markets involve market makers who execute orders for buyers and sellers without direct interaction.
There are no centralized trading floors in dealer markets; instead, they operate using a network of market makers.
Nasdaq is a prime example of a dealer market.
Market makers profit from the spread: the difference between bid price and ask price.

The Eurobond market involves corporations and governments issuing bonds denominated in dollars to investors outside the US.
The foreign bond market deals with bonds issued by a foreign borrower and sold to investors in a different country.
The international equity market enables investors to buy shares in foreign companies.