Financial Markets And Institutions

Question 1

Reinvestment

Answer 1

Reinvestment is additional savings by original shareholders

If a company reinvests cash that cash could have been given to shareholders , by not taking the cash the shareholders are reinvesting their cash

Question 2

Flow of savings to Corp

Answer 2

Two possible paths:

1) firms can sell new shares
2) reinvest cash back into the firms operations

Question 3

The stock market

Answer 3

Financial market - market where securities are issued and traded

Security - traded financial asset

NYSE- NY exchange market
NASDAQ

IPO- the very first issue of a share (Initial public offering)

Buyers of IPOs are helping the firm finance investments in assets, and the investors become part owners of the firm

Primary market- market for sale of new securities by corporations

Secondary market- market in which previously issued securities are traded among investors

Fixed income market - market for debt securities

Capital market - market for short term financial assets

Money market- market for short term financial assets

Question 4

Financial intermediary

Answer 4

An organisation that raises money from investors and provides financing for individuals,corporations,or other organisations

Stop on the road between savings and real investment

Mutual funds- an investment company that pools the savings of many investors and invests in a portfolio of securities - offer low cost diversification and professional management

For investors is more efficient to buy a mutual fund than to assemble a diversified portfolio of stocks and bonds

Question 5

Financial intermediaries 2

Answer 5

Hedge funds- private investment fund that pursued complex, high risk investment strategies

Pension funds- fund set up by an employer to provide for employees’ retirement

Question 6

Financial institutions

Answer 6

A bank,insurance company, or similar financial intermediary

Commercial banks - major sources of loans for corporations
The bank provides debt financing for the company and, at the same time, provides a place for depositors to park their money safely and withdraw it as needed.

Investment banks -do not generally take deposits or make loans, instead they advise and assist companies in obtaining finance
Also advise on takeovers,mergers and acquisitions
Offer investment advice and manage investment portfolios for individual and institutional investors

Insurance companies - more important than banks for Long Term financing

Massive investors in corporate stocks and bonds and often make long term loans to corporations
Money to make loans come from selling policies

Question 7

Functions of financial markets and intermediaries

Answer 7

Transporting cash across time - can hold cash in a savings account for use another time, pensions etc

Risk transfer and diversification - financial markets and intermediaries allow investors businesses to reduce and reallocate risk e.g. buy homeowners insurance reduce risk of fire etc

Liquidity (ability to sell an asset on short notice at close to market value )- ability to turn an investment back into cash when needed

The payment mechanism - checking accounts, credit cards and electronic transfers allow individuals and firms to send and receive payments quickly and safely over long distances

Informations provides by financial markets -

• Commodity prices
• interest rates
• company values
• cost of capital