The Financial Markets: C 3 T F E: M, I, I B

8/17/2016
CHAPTER 3
THE FINANCIAL
ENVIRONMENT:
MARKETS,
INSTITUTIONS,AND
INVESTMENT
BANKING
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distributedwithacertainproductorserviceorotherwiseonapasswordprotectedwebsiteforclassroomuse.
TheFinancialMarkets
Financialmarketsrepresentasystemthat
includesindividualsandinstitutions,
instruments,andproceduresthatbring
together________and_______,nomatterthe
location.
Theprimaryroleoffinancialmarketsisto
facilitatethe__________fromindividualsand
businessesthathavesurplusfundsto
individuals,businesses,andgovernmentsthat
needfundsinexcessoftheirincomes.
Diagram of the Capital Formation Process

1. Direct Transfers
Businesss Securities (Stocks or Bonds)
Business
(Borrower)
Savers
(Investors)
Funds
2. Indirect Transfers through an Investment Banker
Business
(Borrower)
Securities
(Stocks/Bonds)
Funds less
issuing costs
Investment Banker
Helps corporations issue
securities (stocks or bonds)
Receives fees from the issue
Firms Stocks
or Bonds
Savers
(Investors)
Funds
3. Indirect Transfers through a Financial Intermediary
Business
(Borrower)
(Debt owed to
intermediary)
Borrowers
Liability
Funds
Financial Intermediary
Uses funds to buy/create loans
and other financial instruments
Pays a return/interest to attract
funds from savers
Intermediarys
Liability
(Account at
intermediary)
Savers
(Investors)
Funds
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MarketEfficiency
EconomicEfficiency Fundsareallocatedto
theiroptimaluseatthe___________.
InformationalEfficiencyinvestmentprices
areadjustedquicklytoreflectcurrent
information.
Weakform
Semistrongform
Strongform
ImplicationsofMarketEfficiency
Youhearinthenewsthatamedicalresearch
companyreceivedFDAapprovalforoneofits
products.Ifthemarketissemistrongefficient,can
youexpecttotakeadvantageofthisinformationby
purchasingthestock?
______________________________________
________________________________________
TypesofFinancialMarkets
Moneymarketsversuscapitalmarkets
Debtmarketsversusequitymarkets
Primarymarketsversussecondarymarkets
Derivativesmarkets
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Whatarederivatives?Howcantheybeusedto
reduceorincreaserisk?
Aderivativesecuritysvalueisderivedfromthepriceof
anothersecurity(e.g.,optionsandfutures).
Canbeusedto______________risk.Forexample,an
importer,whoseprofitfallswhenthedollar(Euro)losesvalue,
couldpurchasecurrencyfuturesthatdowellwhenthedollar
(Euro)weakens.
Also,speculatorscanusederivativesto___onthedirectionof
futurestockprices,interestrates,exchangerates,and
commodityprices.Inmanycases,thesetransactionsproduce
highreturnsifyouguessright,butlargelossesifyouguess
wrong.Here,derivativescanincreaserisk.
7
GeneralStockMarketActivities
The__________markettradinginthe
outstanding,previouslyissuedsharesof
investmentinstruments.
The__________marketadditionalshares
soldbyestablished,publiclyowned
companies.
IPOmarketnewofferingsbyprivatelyheld
firmsthataregoingpublicwiththeir
shares.
StockMarkets
_______stockexchanges
NYSE,AMEX,andregionalexchanges
Exchangemembers
Floorbrokers
Designatedmarketmakers(specialists)
Supplementalliquidityproviders(SLPs)
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StockMarkets(cont.)
OvertheCounterMarketsandtheNASDAQ
Networkofbrokersanddealers
_________market
OrganizedInvestmentNetwork
ElectronicCommunicationsNetworks(ECNs)
10
Wherecanyoufindastockquote,andwhat
doesonelooklike?
Stockquotescanbefoundinavarietyofprintsources(WallStreetJournal
orthelocalnewspaper)andonlinesources(Yahoo!Finance,CNNMoney,or
MSNMoneyCentral).
Bondquotesarehardertofind,butcanbefoundontheBond
Center/BondScreenerpageatYahooFinance
11
RegulationofU.S.Securities
Markets
SecuritiesandExchangeCommission(SEC)
Jurisdictionovermost________offeringsofnew
securitiestothegeneralpublic
Regulationof__________securitiesexchanges
Powertoprohibit__________ofsecurities
prices
Controloverstocktradesbycorporateinsiders
12
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TypesofFinancialIntermediaries
Commercialbanks
Creditunions
Savingsandloanassociations(thrifts)
Mutualfunds
Wholelifeinsurancecompanies
Pensionfunds
13
TheRoleofFinancial
Intermediaries
Facilitatethetransferoffundsfromthose
whohavefunds_________tothosewho
needfunds_________
Manufactureavarietyoffinancialproducts
thattaketheformofeither_____or_____
instruments
14
BenefitsofFinancial
Intermediaries
Reducedcosts
Risk/____________
Fundsdivisibility/_______
Financialflexibility
Relatedservices
15
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InternationalFinancialMarkets
U.S.stockmarketsrepresent________ofthe
totalvalueworldwide
U.S.marketsdominatethestockmarketsin
othercountries
U.S.investorscanparticipateininternational
marketsbyusingAmericanDepositoryReceipts
(ADRs),whichare________thatholdstocksor
foreignsecuritiescertificatesissuedin______
denominations
16
FinancialOrganizationsinOtherParts
oftheWorld
U.S.financialinstitutionsare________
regulated.
Historically,U.S.financialinstitutionshave
faced_______limitationsonbranching,
servicesoffered,andrelationshipswithnon
financialbusinesses.
17
ENDOFLECTURE

The Financial Markets: C 3 T F E: M, I, I B

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8/17/2016

Diagram of the Capital Formation Process

Businesss Securities (Stocks or Bonds)

2. Indirect Transfers through an Investment Banker

3. Indirect Transfers through a Financial Intermediary

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