Financial Markets

Financial Markets
Introduction

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Financial Markets & Flow of Funds
Financial Markets M k t Lenders
Households Firms Governments Foreigners

Borrowers
Households Firms Governments Foreigners

Financial Institutions
Note that lenders are suppliers of funds (surplus units) while borrowers are demanders/users of funds (deficit units)
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Flow of Funds
Financial institutions perform the essential function of channeling funds from surplus units to deficit units.
Agents (e.g. brokers). Carry out the instructions of lenders and have no rights to the benefits that flow from the acquisition of the instruments by the l d lenders. Asset transformers (e.g. banks, investment/finance companies). Involved as principals in the exchange of funds either as the borrower or the lender.
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Flow of Funds: Direct Transfer
Financial Claims (Equity and debt instruments)

Users of Funds
Cash

Suppliers of Funds

Example: A firm sells shares directly to investors without going through a financial institution

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Flow of Funds: Indirect Transfer
Users of Funds FI (Brokers) Suppliers of Funds

Financial Claims (Equity and debt securities)

FI (Asset transformers)

Financial Claims (Deposits and insurance policies)

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Well Functioning Financial Markets
Facilitate the flow of funds from surplus economic units to deficit economic units.
Surplus units expect improved wealth through saving and associated acquisition of financial assets. Deficit units thus need to provide surplus units with a positive rate of return. Future consumption and productivity increased through efficient channeling of resources

Provide liquidity for the exchange of financial q y g claims.
Leads to the development of financial intermediaries Process of portfolio structuring and restructuring facilitated through the creation and exchange of suitable types of financial instruments (assets)
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Money versus Capital Markets
Money Markets k
Markets that