Intro to Financial Markets and Financial Intermediaries
Intro to Financial Markets and Financial Intermediaries ECO 315
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This 2 page Class Notes was uploaded by Shannon Panagopoulos on Tuesday January 5, 2016. The Class Notes belongs to ECO 315 at DePaul University taught by Ingunn Lonning in Winter 2016. Since its upload, it has received 9 views. For similar materials see Intro to Money and Banking in Economcs at DePaul University.
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Date Created: 01/05/16
3 Main Topics: 1. Interest rate= the rental price of borrowing funds (bond market) 2. Financial Intermediaries (bank management, regulation of financial intermediaries) 3. Federal Reserve and Monetary Policy (how Fed is link between economy and financial mkts.) (why and how the Feed changes interest rates) Financial Market Basics Role of financial markets -Financial Markets: channel funds from savers to lenders (i.e. Wall Street) *Savers & lenders Financial Market Borrowers & Investors Without financial markets, no borrowing or lending financial markets channels funds to their best use allows consumers to even out their consumptions over time Direct vs. Indirect Finance Direct Finance= Funds go directly from saver to borrower (ex: stocks & bonds) Indirect Finance= Use of financial intermediaries; Saver gives funds to intermediary who lends to borrower (ex: bank uses savers money to make loans to borrowers) Why financial intermediaries? Financial intermediaries are important because: 1. They have smaller transaction costs because of the large number of borrowers; they have bigger economies of scale 2. Diversification and Risk Sharing Diversification: intermediary diversified over many projects Risk sharing: You won’t lose money; bank will cover it 3. Asymmetric Information: one part to a trade knows a lot more than the other (borrower knows more about her/himself and the project) Financial security= financial instrument= a claim on a borrower’s future income, sold by the borrower to the lender Types of Financial Markets: A. 1. Primary Market the first time a security is sold; through an investment bank 2. Secondary Market= When a security is resold; through exchange (OTC) B. 1. Money Market= Short term, less than one year to maturity 2. Capital Market= Medium and longterm securities; 110 years is mediumterm, longer than 10 years to maturity is longterm
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