Chapter2AnOverviewoftheFinancialSystem©2013PearsonEducation,Inc.Allrightsreserved.2-2FunctionofFinancialMarkets•Performtheessentialfunctionofchannelingfundsfromeconomicplayersthathavesavedsurplusfundstothosethathaveashortageoffunds•Directfinance:borrowersborrowfundsdirectlyfromlendersinfinancialmarketsbysellingthemsecurities©2013PearsonEducation,Inc.Allrightsreserved.2-3FunctionofFinancialMarkets(cont’d)•Promoteseconomicefficiencybyproducinganefficientallocationofcapital,whichincreasesproduction•Directlyimprovethewell-beingofconsumersbyallowingthemtotimepurchasesbetter©2013PearsonEducation,Inc.Allrightsreserved.2-4Figure1FlowsofFundsThroughtheFinancialSystem©2013PearsonEducation,Inc.Allrightsreserved.2-5StructureofFinancialMarkets•DebtandEquityMarkets–Debtinstruments(maturity)–Equities(dividends)•PrimaryandSecondaryMarkets–InvestmentBanksunderwritesecuritiesinprimarymarkets–Brokersanddealersworkinsecondarymarkets©2013PearsonEducation,Inc.Allrightsreserved.2-6StructureofFinancialMarkets(cont’d)•ExchangesandOver-the-Counter(OTC)Markets–Exchanges:NYSE,ChicagoBoardofTrade–OTCMarkets:Foreignexchange,Federalfunds•MoneyandCapitalMarkets–Moneymarketsdealinshort-termdebtinstruments–Capitalmarketsdealinlonger-termdebtandequityinstruments©2013PearsonEducation,Inc.Allrightsreserved.2-7Table1PrincipalMoneyMarketInstruments©2013PearsonEducation,Inc.Allrightsreserved.2-8Table2PrincipalCapitalMarketInstruments©2013PearsonEducation,Inc.Allrightsreserved.2-9InternationalizationofFinancialMarkets•ForeignBonds:soldinaforeigncountryanddenominatedinthatcountry’scurrency•Eurobond:bonddenominatedinacurrencyotherthanthatofthecountryinwhichitissold•Eurocurrencies:foreigncurrenciesdepositedinbanksoutsidethehomecountry–Eurodollars:U.S.dollarsdepositedinforeignbanksoutsidetheU.S.orinforeignbranchesofU.S.banks•WorldStockMarkets–Alsohelpfinancethefederalgovernment©2013PearsonEducation,Inc.Allrightsreserved.2-10FunctionofFinancialIntermediaries:IndirectFinance...
