Financial Markets and Institutions
Financial Markets and Institutions
Mid-Semester Exam Revision
The Flow of Fund- the financial system allows the flow of funds from surplus spending units (SSU’s) to deficit spending units (DSU’s). Providers of funds (SSU) receive a financial instrument (which stipulates the terms of the deal – i.e. amount lent, stream of future income, maturity date, etc.) issued either by the receiver of the funds (DSU) or by a financial intermediary.
Direct Finance- SSU’s lend money to DSU’s and SSU’s hold a financial claim directly issued by the DSU’s. In direct financing, this exchange takes place directly between SSU’s and DSU’s (likely with the help of a third party like an underwriter and broker) BUT in the ABSENCE of a financial intermediary.
Indirect Finance:
Two different financial instruments are involved in the channelling process…
-The financial institution issues a liability for collecting funds from the ultimate provider of funds.
- The financial institution issues (or buys) an asset when providing funds to the ultimate recipient of funds.
Financial Intermediaries/Institutions: whilst all financial intermediaries are financial institutions, not all financial institutions are financial intermediaries. For example, a brokerage firm or an investment bank are financial institutions but NOT financial intermediaries.
Divergent Needs of Surplus and Deficit Units: FEATURES | SURPLUS UNITS | DEFECIT UNITS | Return on funds | High as possible | Low as possible | Length of contract | Flexible and short | Inflexible and long | Risk exposure | Mainly risk averse | Risk taker | Amount of funds | Usually small | Usually large |
Benefits of Financial Intermediation: * Aggregation/Denomination divisibility * LESS RISK AND LESS COST!!!
LESS RISK AND LESS COST!!!
Economies of scale – buy big amount of shares in less transactions to save $ (commission). * Credit risk diversification
* Maturity transformation/ liquidity (companies using my short term money to
Mid-Semester Exam Revision
The Flow of Fund- the financial system allows the flow of funds from surplus spending units (SSU’s) to deficit spending units (DSU’s). Providers of funds (SSU) receive a financial instrument (which stipulates the terms of the deal – i.e. amount lent, stream of future income, maturity date, etc.) issued either by the receiver of the funds (DSU) or by a financial intermediary.
Direct Finance- SSU’s lend money to DSU’s and SSU’s hold a financial claim directly issued by the DSU’s. In direct financing, this exchange takes place directly between SSU’s and DSU’s (likely with the help of a third party like an underwriter and broker) BUT in the ABSENCE of a financial intermediary.
Indirect Finance:
Two different financial instruments are involved in the channelling process…
-The financial institution issues a liability for collecting funds from the ultimate provider of funds.
- The financial institution issues (or buys) an asset when providing funds to the ultimate recipient of funds.
Financial Intermediaries/Institutions: whilst all financial intermediaries are financial institutions, not all financial institutions are financial intermediaries. For example, a brokerage firm or an investment bank are financial institutions but NOT financial intermediaries.
Divergent Needs of Surplus and Deficit Units: FEATURES | SURPLUS UNITS | DEFECIT UNITS | Return on funds | High as possible | Low as possible | Length of contract | Flexible and short | Inflexible and long | Risk exposure | Mainly risk averse | Risk taker | Amount of funds | Usually small | Usually large |
Benefits of Financial Intermediation: * Aggregation/Denomination divisibility * LESS RISK AND LESS COST!!!
LESS RISK AND LESS COST!!!
Economies of scale – buy big amount of shares in less transactions to save $ (commission). * Credit risk diversification
* Maturity transformation/ liquidity (companies using my short term money to