Advantages /disadvantages of holding debt or equity instrument:

Advantages of holding debt

1. First claimant: debt holders are the first claimant on the earning and total
asset of the corporation

Disadvantages of holding debt:

1. No voting rights: Debt holder has got no voting rights in the management
decisions
2. No claim on extra earnings: Debt holder has got no claim on extra earning
of the corporation

Advantages of holding equity

1. Voting right
2. Claim on extra increased earning

Disadvantage of holding equity

1. Residual claimant: they will have claim on the earnings at the last after
paying all to the debt and preferred holder.

Example: suppose the economy is in a recession and the companys will like to
default, during this scenario which instrument you will likely to choose debt
issued by the company or equity issued by the company?

Primary Market: Primary market is a financial market where newly issued share
are offered to the public for the first time.

Secondary Market: Secondary market is a financial market where the previously

issued securities are bought and sold.

Exchange market: Exchange market is a secondary market where all the listed
securities are trades
OTC Over the counter: OTC is a secondary market where the delisted securities
are traded.

Internationalization of Financial Market:

1. Eurocurrency Market (short term)

2. Euro Bond Market, Foreign Bond Market, International Stock Market. (Long
Term)

Eurocurrency Market: The international equivalent of domestic money market is

known as Eurocurrency market. This is the market where corporation or
government can borrow fund if they wishes to avail international money market.
Generally they borrow fund at labor and with additional risk premium depending
on the instrument they are borrowing.

Euro Bond: bond denominated in a currency other than that of the country in
which it is sold.

Example: USA based MNC issued a bond in UK denominated in dollar

Foreign Bond: sold in a foreign country and denominated in that country’s

currency

Example: USA based MNC issued a bond in uk and collect pound

Function of Financial Intermediary:

1. Lowering TC: Financial Intermediary helps to lower transaction cost. In direct

finance generally the transaction cost is higher and sometimes the contract may
not be feasible because of higher transaction cost but when there is financial
intermediary it reduces transaction cost by economies of scale benefit as per unit
contract cost becomes significantly lower.
Financial intermediary also gives liquidity services which is not possible in direct
finance.

2. Risk Sharing: Financial intermediary helps to reduce risk by sharing the risk. It is
possible through

1. Asset transformation and

2. Diversification

Asset Transformation means converting low risky asset to high risky asset, that
means converting simple deposit into high risky project investment and this is
only possible when there exists financial intermediary.

It also share risk by investing public’s money not only in risky or one single
investment rather investing in different assets.

3. Resolving Asymmetric Information and moral hazard problem: Financial

intermediary or indirect finance helps to resolve asymmetric information problem
which is before the transaction. Asymmetric information problem means lack of
information that means having no idea about the borrower. Financial
intermediary generally holds the idea about the borrower which is generally not
possible in direct finance to know about every borrower.

Financial intermediary also helps to resolve moral hazard problem. As they are
aware about the borrower and generally not gives loan eny unethical borrower so
they can resolve moral hazard problem which is generally after the transaction.