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1、Chapter 1Financial marketsMarkets in which funds are transferred from people who have an excess of available funds to people who have a shortage.SecurityIs a claim on the issuers future income or assets.BondIs a debt security that promises to make payments periodically for a specified period of time
2、.Interest rateIs 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 firms shares means that it can raise a larger amount of funds, which can be used to
3、buy production facilities and equipment.The foreign exchange marketFor 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
4、is where this conversion takes place.The foreign exchange rateThe price of one countrys currency in terms of anothers.Financial intermediariesInstitutions that borrow funds from people who have saved and in turn make loans to others.BanksAre financial institutions that accept deposits and make loans
5、. Commercial banks Saving and loan associations Mutual saving banks Credit unionsOther financial institutions Insurance companies Finance companies Pension funds Mutual funds Investment banksTypes of financial intermediaries Depository institutions 存款机构Commercial banksSavings and loan associations a
6、nd mutual savings banksCredit 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 companiesMutual fundsMoney market mutual fundsInvestm
7、ent banksA 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 2Financial markets perform the essential economic function of channeling funds f
8、rom 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 financeBorrowers borrow funds directly from lenders in financial markets by selling them securities,
9、 which are claims on the borrowers 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)SecuritiesAre assets for the per
10、son who buys them but liabilities for the individual or firm that sells them.The process of indirect finance using financial intermediaries, called financial intermediation, is the primary route for moving funds from lenders to borrowers. Indirect financeThe process of indirect finance using financi
11、al intermediaries, called financial intermediation, is the primary route for moving funds from lenders to borrowers. Advantages Transaction costsThe time and money spent in carrying out financial transactions, are a major problem for people who have excess funds to lend.Financial intermediaries can
12、substantially reduce transaction costs because they have developed expertise in lowering them; and because their large size allows them to take advantage of economies of scale. Risk sharingRisk sharingThey create and sell assets with risk characteristics that people are comfortable with, and the int
13、ermediaries 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
14、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, w
15、ith the result that overall risk is lower than for individual assets. Disadvantages Asymmetric information: adverse selection and moral hazardAsymmetric informationIn financial markets, one party often does not know enough about the other party to make accurate decisions.Adverse selection is the pro
16、blem created by asymmetric information before the transaction occurs.Moral hazard is the problem created by asymmetric information after the transaction occurs.Structure of financial markets Debt and equity markets 债务市场和债权市场 Returns to buyersDebt: The borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made.Equi
