Chapter 1
Financial markets
Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage.
Security
Is a claim on the issuer’s future income or assets.
Bond
Is a debt security that promises to make payments periodically for a specified period of time.
Interest rate
Is the cost of borrowing or the price paid for the rental of funds.
Common stock (stock)
Represents a share of ownership in a corporation.
●To raise funds to finance their activities.
●A higher price for a firm’s shares means that it can raise a larger amount of funds, which can be used to buy production facilities and equipment.
The foreign exchange market
For funds to be transferred from one country to another, they have to be converted from the currency in the country of origin(say, dollars) into the currency of the country they are going to (say, euros). The foreign exchange market is where this conversion takes place.
The foreign exchange rate
The price of one country’s currency in terms of another’s.
Financial intermediaries
Institutions that borrow funds from people who have saved and in turn make loans to others.地锚机
Banks
Are financial institutions that accept deposits and make loans.
●Commercial banks
●Saving and loan associations
●Mutual saving banks
●Credit unions
Other financial institutions
●Insurance companies墙壁之间
●Finance companies
●Pension funds
●Mutual funds
●Investment banks
核桃包装
Types of financial intermediaries网眼
面料 ●Depository institutions存款机构 Commercial banks
Savings and loan associations and mutual savings banks
Credit unions信用社
●Contractual savings institutions契约型储蓄机构 Life insurance companies人寿保险
Fire and casualty insurance companies意外伤害险
Pension funds and government retirement funds养老和政府退休资金 ●Investment intermediaries投资中介
Finance companies
Mutual funds
Money market mutual funds
Investment banks
A budget deficit is the excess of government expenditures over tax revenues for a particular time period, typically a year, while a budget surplus arises when tax revenues exceed government expenditures.
Chapter 2
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Financial markets perform the essential economic function of channeling funds from households, firms, and governments that have saved surplus funds by spending less than their income to those that have a shortage of funds because they wish to spend more than their income.
Direct finance
Borrowers borrow funds directly from lenders in financial markets by selling them securities, which are claims on the borrower’s future income or assets.
●Advantages
Borrower can communicate with investor
Finance cost is lower as no middleman
●Disadvantages
Professional skill & knowledge (surplus units)
High risk (surplus units)
Threshold is high (deficit units)
Securities
Are assets for the person who buys them but liabilities for the individual or firm that sells t
hem.
The process of indirect finance using financial intermediaries, called financial intermediation, is the primary route for moving funds from lenders to borrowers.
Indirect finance
The process of indirect finance using financial intermediaries, called financial intermediation, is the primary route for moving funds from lenders to borrowers.
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●Advantages
Transaction costs
The time and money spent in carrying out financial transactions, are a major problem for people who have excess funds to lend.
Financial intermediaries can substantially reduce transaction costs because they have developed expertise in lowering them; and because their large size allows them to take a
dvantage of economies of scale.
Risk sharing
Risk sharing
They create and sell assets with risk characteristics that people are comfortable with, and the intermediaries then use the funds they acquire by selling these assets to purchase other assets that may have far more risk.
Low transaction costs allow financial intermediaries to share risk at low cost, enabling them to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold. This process sometimes referred to as asset transformation, because in a sense, risky assets are turned into safer assets for investors.
Diversification entails investing in a collection(portfolio) of assets whose returns do not always move together, with the result that overall risk is lower than for individual assets.
●Disadvantages
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