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1、Part Financial Markets,Chapter 1 Functions of Financial MarketsChapter 2 Money MarketsChapter 3 Capital MarketsChapter 4 Foreign Exchange Markets,Chapter 1Functions of Financial Markets,1.1 SignificanceThe word “finance” signifies capital in monetary form, that is, in the form of funds lent or borro
2、wed, normally for capital purposes, through financial markets or financial institutions. When finance goes international, it is then an international finance.What is a financial market? It is a place where financial transactions take place. Financial markets facilitate the lending of funds from save
3、rs to those who wish to undertake investments. Those that wish to borrow to finance investment projects sell financial instruments to savers.,When an investor purchases the securities issued by ultimate borrowers (those who use the funds to invest in real assets), capital market operations for equit
4、ies, bonds would fall largely into this category. When an investor chooses to invest in the obligations of financial intermediaries, which in turn lend the funds to those who invest in real assets, they are operations in money market for term deposits and loans, interbank transactions of such nature
5、. The primary distinction between the two channels is that, in the first case, i.e. direct financing, the investor is faced directly with the credit risk of the issuer, while in the second case, i.e. financing through financial intermediation, a financial institution, such as a bank, interjects itse
6、lf between users and providers of funds. Any analysis of the sector of money market dominated by financial intermediaries must be very much concerned with these financial institutions themselves (their policies, financial conditions and official regulatory environment) in addition to those factors g
7、overning the suppliers and users of funds.International financial transactions include purchases and sales of foreign currency, securities, gold bullion, and lending and borrowing.,Foreign exchange marker deals with the exchanges of different means of payment. These exchanges are necessary for inter
8、national capital flows. As the relative values among different currencies (the exchange rates) will fluctuate according to economic and political circumstances of the currencies of the relative countries, international investors or financiers face exchange risks. To this end, foreign exchange market
9、s provide services, such as forward transactions and foreign currency futures to eliminate such risks.1.2 Functions Apart from borrowing from banks, a firm or an individual can obtain funds in a financial market in two ways. The most common method is to issue a debt instrument, such as a bond or a m
10、ortgage, which is a contractual agreement by the borrower to pay the holder of the instrument fixed amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made. The maturity of a debt instrument is short-term if its maturity
11、 is less than a year and long-term if its maturity is ten years or long. Debt instruments with a maturity between one and ten years are said to be intermediate-term.,The second method of raising funds is by issuing equities, such as common stock, which are claim to share in the net income (income af
12、ter expenses and taxes) and the assets of a business. Equities usually earn periodic payment (dividends) and are considered long-term securities because they have no maturity date.A primary market is a financial market in which new issues of a security, such as a bond or a stock, are sold to initial
13、 buyers by the corporation or government agency borrowing the funds. A secondary market is a financial market in which securities that have been previously issued (and are thus secondhand) can be resold. The primary market for securities is not well known to the public because the selling of securit
14、ies to initial buyers take place behind doors. An important financial instrument that assists in the initial sale of securities in the primary market is the investment bank. It does this by underwriting securities, that is, it guarantees a price for a corporations securities and then sells them to t
15、he public.,When an individual buys a security in the secondary market, the person who sold the security receives money in exchange for the security, but the corporation that issued the security acquires no new funds. A corporation acquires new funds only when its security are first sold in the prima
16、ry market. Nonetheless, the secondary market serves two important functions. First, financial instruments are more liquid. The increased liquidity of the instruments makes them more desirable and thus easier for the issuing firm to sell in the primary market. Second, they determine the price of the
17、security that the issuing firm sells in the primary market. The firms that buy securities in the primary market will pay the issuing corporation no more than the price that they think the secondary market will set for this security. The higher the securitys price in the secondary market, the higher
18、the price that the issuing firm will receive for a security in the primary market and hence the greater the amount of capital it can raise. Conditions in the secondary market are therefore the most relevant to corporations issuing securities. It is for this reason that studies dealing with financial market focus the behavior of secondary markets rather than primary markets.,
