m


 





c
c 
‡ Intermediaries, instruments, and regulations.
‡ Financial markets: bond and stock markets
‡ Financial intermediaries: banks, insurance
companies, pension funds
‡ Moving funds from those who have a surplus of
funds to those who have a shortage of funds.

c
c 
p 
 





‡ Financial markets channel funds: surplus of
funds to shortage of funds.

‡ Direct finance: borrowers borrow funds directly

from lenders in financial markets by selling
them securities (financial instruments) which
are claims on the borrower¶s future income or
assets.

c
c 
‡ áecurities are assets for the person who buy
them but liabilities (IOU, debts) that (sell, issue)
them.

c
c 
p 
 






‡ ith no lending or borrowing opportunities, an

individual who saved KD1000 will remain the
same
‡ But giving the KD(1000) to another person with
productive use of it (earning KD200/year)
sharing the KD200 (100/100).

c
c
‡ Using financial markets for:
increasing/improving production, personal uses
(house), therefore:

‡ Financial markets allow funds to move from

people who lack productive investment
opportunities to people who have such
opportunities.

c
c

   






‡ u

  : can obtain funds
in financial markets in two ways:

c
 


  : bond, mortgage:
a contractual agreement by the borrower to pay
the holder of the instrument fixed amount at
regular intervals (interest and principle
payment) until specific date (maturity date).

c
c 
‡ Maturity: the time that a debt instrument
expires.
‡ If maturity is less than a year: áhort-Term debt
instrument
‡ if the maturity is ten years or longer: Long-Term
debt instrument
‡ in between: Intermediate-Term.

c
c 
   






‡ [ 




such as common stock, which are claims to share
in the net income and assets of a business.

‡ Equities usually make periodic payments

(dividends) to their holders and are considered
long-term securities because they have 
maturity date.

c
c
‡ cn equity holder is a residual claimant
claimant:
the corporation must pay all its debt holders
before it pays its equity holders
(disadvantage of owing a firm¶s equity).

‡ The cdvantage: the holder can benefit directly

from any increase in profits or asset value.

c
c 
V





‡ V
   a financial market in which new
issues of a security (bond or stock) are sold to initial
buyers.
‡ á     a financial market in which
securities that have been previously issued are resold.

‡ [  an agent of investors who match buyers with

sellers of securities.
‡ u  link buyers and sellers by buying and selling
securities at stated prices.

c
c 
‡ c corporation acquires new funds only when its
securities are first sold in the primary market.
‡ áecondary markets serve 2 functions:
‡ Easier to sell financial instruments to raise
cash; they make financial instrument more
liquid
‡ Determine the price of the security (pay for the
issuing corporation no more than what you think
it will be sold at the secondary market).

c
c 
‡        
(to organize secondary markets)
‡ Exchanges; a central location where buyers
and sellers of securities meet.
‡ Over the counter market (OTC): dealers in
different locations with inventory of securities
stand ready to buy and sell securities ³over the
counter´ to anyone accept their price.

c
c 
‡  
  depends on the
maturity of the securities traded in each market;

‡    :
only short-term debt instrument are traded.

‡ m
  :
the market in which longer term debt and equity
instrument are traded.

c
c 
?






‡    
  áhort-term to
maturitya least price fluctuations, least risky
investments.

‡ Uá Treasury bills, Negotiable bank certificates

of deposits, Commercial paper, Banker¶s
acceptances, Repurchase agreements, Federal
funds.

c
c 
‡ m
  
  
‡ átocks, Mortgages, Corporate bonds, Uá
government securities, Uá government agency
securities, átate and Local government bonds,
Consumer and Bank commercial loans.

c
c 

‡ Ñ  



  


- Transaction Costs: economies of scale
- csymmetric information:
cdverse áelection and Moral Hazard.

c
c 
ÿ 


  


c u 
 

 

- Commercial Banks.
- áavings and Loan cssociation
- Mutual áavings Banks
- Credit Unions.

c
c 
ÿ 


  


[ m  á


 

- Life insurance companies
- Fire and Casualty insurance companies.
- Pension funds and government retirement
funds.

c
c 
ÿ 


  


m 
  
  


- Finance companies
- Mutual funds
- Money market mutual funds.

c
c 
]


 





c. Increasing information available to investors.

B. Improving control of monetary policy

c
c 
]


 





C. Ensuring the soundness of financial

intermediaries:
- Restrictions on entry,
- Disclosure,
- Restrictions on assets and activities,
- Deposit insurance,
- Limits on competition,
- Restrictions on interest rates

c
c