Beruflich Dokumente
Kultur Dokumente
Flow of Funds
Largest lender Households Largest borrower Governments and Businesses Indirect Finance Saver to Bank (or other intermediate) to Borrower. Ex. Car Loan Direct Finance Saver to Borrower Ex. Buying bonds from GE
Flow of Funds
Direct Finance Borrower sells securities.
Securities become liabilities for seller Assets for buyer. Asset because someone owes you money. Liability because you have to pay someone money.
Secondary Market NYSE, NASDAQ Brokers agents of investors Dealers buy and sell securities at given prices
Corporate Bonds Long term bonds issued by companies with strong credit ratings
U.S. Govt Agency Securities Ex. Ginnie Mae, Federal Farm Credit Bank
Backed by government
State and Local Govt Bonds Municipal bonds, have tax advantages Consumer & Bank Commercial Loans Car loans, home loans, etc. mostly by banks
Foreign Bonds: sold in a foreign country and denominated in that countrys currency Eurobond: bond denominated in a currency other than that of the country in which it is sold Eurocurrencies: foreign currencies deposited in banks outside the home country World Stock Markets
Debt contracts are complicated legal documents that place substantial restrictive covenants on borrowers
o What you can and cant do with the money.
Transaction Costs
Acquiring resources can be expensive There are benefits to volume Financial intermediaries have evolved to reduce transaction costs
Economies of scale Expertise
Transaction Costs
Economies of scale
Transaction costs decrease as costs spread across more transactions grow (size or number)
Ex. Mutual Funds buy large number of shares
Transaction Costs
Expertise
Same idea as specialization in that they can focus on improving services while lowering costs
Ex. Online services and advice vs. postal mail
Asymmetric Information
Adverse selection occurs before the transaction
The buyer will decide not to buy at all because all that is left in the market is poor quality items
It leads to a market not functioning properly
Financial intermediation
Banks specialize in assessing risk
Debt Contracts
Return is fixed
Financial Intermediation
Banks provide the above
However, very expensive for small firms ($100 mil or less) to comply $824,000
http://www.nytimes.com/2007/06/13/opinion/13carlat.html