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Functions of Financial System Payment system Pooling of funds Transfer of resources: temporal & Spatial Mechanism for managing uncertainty and controlling risks (especially using derivatives). Generates information Disseminates information removing informational asymmetry (Credit info. sharing) Agency problem Moral Hazard: get insured be negligent Adverse selection: insure only those at the highest risk Financial system promotes efficient distribution of funds through financial market by facilitating Price discovery (order, buy/bid quote, sell/ask quote, price discovery, bid-ask spread) Liquidity Reduction of cost of transaction
Issuer Market
Equity Share Preference Shares Debentures Bonds Term Loan Long Short Other Hybrid instruments Rights Warrants Bonus shares