Financial Markets Institution, Lecture Notes - Financial Management, Study notes for Financial Management. University of Michigan (MI)

Financial Management

Description: The Capital Allocation Process, Financial markets, Financial institutions , Stock Markets and Returns, Stock Market Efficiency
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5-1
CHAPTER 5
Financial Markets and Institutions
Updated: September 20, 2011
The Capital Allocation Process
Financial markets
Financial institutions
Stock Markets and Returns
Stock Market Efficiency
5-2
The Capital Allocation Process
In a well-functioning economy, capital (credit) flows
efficiently from those who supply capital (credit) to
those who demand it.
Suppliers of capital (credit) individuals and institutions
with “excess funds.” These groups are saving money
and looking for a rate of return on their investment.
Demanders or users of capital (credit) individuals and
institutions who need to raise funds to finance their
investment opportunities. These groups are willing to
pay a rate of return on the capital they borrow.
5-3
How is capital transferred between
savers (Sc) and borrowers (Dc)?
Direct transfers stocks
and bonds, securities
Investment banking
house - Underwriting
Financial intermediaries
banks and mutual funds
See Figure 5-1, p. 144
Supply and Demand for
Credit
5-4
What is a market?
A market is a venue where goods and
services are exchanged.
A financial market is a place where
individuals and organizations wanting to
borrow funds/capital (Dc) are brought
together with those having a surplus of
funds (Sc).
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