Corporate Finance, Chapter2- The financial market place

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Corporate Finance, Chapter2- The financial market place
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2013-02-20 21:43:30
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Summary of Contemprorary corporate finance International edition by McGuigan, Moyer, Rao & Kretlow, 12th edition
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  1. Financial system
    The vehicle that channels funds from saving units (savers) to investing units.
  2. Saving-investment cycle
    • In any economy as a whole, the actual saving for a given period of time must equal the actual investment.
    • The cycle is completed when net savers or surplus spending units (such as most of households) transfer funds through financial middlemen or financial intermediaries to net investors or deficit spending units (such as government or firms).
  3. Financial middlemen
    • Includes:
    • Brokers: Bring together buyer and seller of securities
    • Dealer: Sell securities to investors out of an inventory they carry 
    • Investment bankers: Assist corporation in selling their securities
    • These securities are primary claim because they are directly sold by the borrowers and bought directly by the saver (investor)
  4. Financial intermediaries:
    • Facilitate fund transfer and compensated for their service by an interest rate spread. 
    • Includes some types which their differences are in the type of deposits they accept (source of funds) and the type of investments they makes (uses of funds):
    • Commercial banks: Accept both demand deposit (checking accounts) and time deposits (saving accounts and certificates of deposit). They are an important source of short-term loans and term loan by 1-10years maturities.
    • Thrift institutions:Includes saving and loan associations, mutual saving banks, and credit unions.
    • Accept both demand and time deposits.
    • Saving and loan associations and mutual saving banks invest in home mortgage, while credit unions are engaged in consumer loans. 
    • Investment companies:Such as mutual funds and real state investment trusts (REITs) pool the funds of many savers and invest in various tpes of assets.
    • Mutual funds invest in specific financial assets such as debt and equity securities of corporations or money market instruments.
    • Pension funds:Pool the contribution of employees (and/or employer) and invest in various types of assets such as corporate securities, or real assets such as real estate.
    • Insurance companies: Receive periodic or lump-sum premium payments from individuals or organizations in exchange for agreeing to make certain futur contractual payments.
    • The premiums received are used to build reserves to pay futur claims. These reserves are invested in various types of assets such as corporate securities.
    • Finance companies: Obtain funds by issuing their own debt securities and brought loans from commercial banks. These funds are used to make loans to individuals and businesses. 
    • They issued secondary claims to ultimate lender.
  5. Financial Assets
    • Money, debt securities and equity securities. 
    • Debt securities and equity securities represent claim against the assets and future earning of the corporation.
  6. Financial Market
    • Vehicles through which financial assets are bought, sold and traded. 
    • Classify as:
    • Money and Capital markets: 
    • * Money market: short term securities having maturities on year or less
    • * Capital Market: Long term securities having maturities greater than one year. 
    • Primary and secondary market: 
    • * Primary financial market: A market which investors can purchase new securities.
    • * Secondary financial market: A market which investors can resell existing securities.
  7. Secondary market
    • Can be classified as either Listed security exchanges or over-the-counter (OTC) market.
    • Listed security exchanges:Operate at designated places of business and have requirements governing the type of securities they can list and trade. 
    • There are two types of members here: floor brokers who execute orders, acting as  agents, on the floorof the exchange for clients and designated market members who play a special role as members of exhange. They are entrusted with maintaining a fair orderly market in the stock  assigned to them.
    • OTC security market:Do not have  centralized places of business but rather exist as networks of security dealers connected by a communication system of telephones and computer terminals the allow the dealers to post the prices at which they are willing to buy and sell various securities.
    • In general

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