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Function of Financial Markets
Channels funds from pehts reserved.
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Structure of Financial Markets
Debt Markets
Short-Term (maturity < 1 year)
Long-Term (maturity > 10 year)
Intermediate term (maturity in-between)
Represented $41 trillion at the end of 2007.
Equity Markets
Pay dividends, in theory forever
Represents an ownership claim in the firm
Total value of all . equity was $18 trillion at the end of 2005.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
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Structure of Financial Markets
Primary Market
New security issues sold to initial buyers
Typically involves an investment bank who underwrites the offering
Secondary Market
Securities previously issued are bought and sold
Examples include the NYSE and Nasdaq
Involves both brokers and dealers (do you know the difference?)
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
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Structure of Financial Markets
Even though firms don’t get any money, per se, from the secondary market, it serves two important functions:
Provide liquidity, making it easy to buy and sell the securities of the companies
Establish a price for the securities
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
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Structure of Financial Markets
We can further classify secondary markets as follows:
Exchanges
Trades conducted in central locations (., New York Stock Exchange, CBT)
Over-the-Counter Markets
Dealers at different locations buy and sell
Best example is the market for Treasury securities
NYSE home page
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Classifications of Financial Markets
We can also further classify markets by the maturity of the securities:
Money Market: Short-Term (maturity < 1 year)
Capital Market : Long-Term (maturity > 1 year) plus equities
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
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Internationalization of Financial Marke