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CHAPTER
Chapter Objectives
Financial markets provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units) Financial markets provide payments system Financial markets provide means to manage risk
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PRIMARY
SECONDARY
Money
Capital
Organized
OTC
Wired Network of Dealers No Central, Physical Location All Securities Traded off the Exchanges
Copyright 2002 Thomson Publishing. All rights reserved.
Securities Listed
New York Stock Exchange
Derivative Securities
Financial contracts whose value is derived from the values of underlying assets Used for hedging (risk reduction) and speculation (risk seeking)
Copyright 2002 Thomson Publishing. All rights reserved.
receives dividends if declared Capital gain/loss when sold No maturity dateneed market to sell
Valuation of Securities
Present value of cash flows discounted at the market required rate of return Value determined by market demand/supply Value changes with new information
Economic Conditions
Industry Conditions
Exhibit 1.3
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Security prices reflect available information New information is quickly included in security prices Investors balance liquidity, risk, and return needs
Copyright 2002 Thomson Publishing. All rights reserved.
To Promote Efficiency
High
Efficient
Low
market crashes
Prevent Prevent