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Presentation 1
Presentation 1
Presentation 1
Monetary Policymanagement of money and interest rates. Fiscal Policytaxation and government spending decisions.
Budget Deficit-government expenditure exceeds tax revenues. Budget Surplus-tax revenue exceeds government expenditure.
2) Indirect Finance
Financial markets also improve the well-being of consumers, allowing them to time their purchases better.
Even though firms dont get any money, per se, from the secondary market, it serves two important functions: Provide liquidity, making it easy to buy and sell the securities of the companies Establish a price for the securities
Negotiable Bank Certificates o f Deposit -a debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the original purchase price Commercial Paper -a short-term debt instrument issued by large banks and well-known corporations, such as Microsoft
Repurchase Agreements -are effectively short-term loans (usually with a maturity of less than two weeks) for which Treasury bills serve as collateral, an asset that the lender receives if the borrower does nor pay back the loan.
Federal (Fed) Funds -typically overnight loans between banks of their deposits at the Federal Reserve -designation is somewhat confusing because these loans are not made by the federal government or by the Federal Reserve but rather by banks to other banks
TERMS
Foreign bonds are sold in a foreign country and are denominated in the countrys currency. Eurobond bond dominated in a currency other than that of the country in which it is sold. Eurocurrencies foreign currencies deposited in banks outside the home country
Provides funds Helps finance the federal government Leads way to a more integrated world economy
Transaction cost time and money spent in carrying out financial transactions Risk uncertainty about the returns investors will earn on assets Asymmetric information one party does not know enough about the other party to make accurate decisions.
WHY ARE FINANCIAL INTERMEDIARIES AND INDIRECT FINANCE SO IMPORTANT IN FINANCIAL MARKET?
A. Adverse Selection before the transaction occurs. It occurs when the potential borrowers who are the most likely to produce an undesirable outcome are the ones who most actively seek out a loan and likely to be selected. B. Moral hazard after the transaction occurs. It is the risk that the borrower might engage in activities that are undesirable from the lenders point of view, making it less likely that the loan will be paid back.
WHY ARE FINANCIAL INTERMEDIARIES AND INDIRECT FINANCE SO IMPORTANT IN FINANCIAL MARKET?
INVESTMENT INTERMEDIARIES
Finance companies raise funds by selling commercial paper. Mutual funds acquire funds by selling shares to many individuals Money market mutual funds they sell shares to acquire funds that are then used to buy money market instruments; both liquid and safe.