M02_Titman_2544318_11_FinMgt_C02

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Copyright 2011 Pearson Prentice Hall. All rights reserved.

Firms and the

Financial Market

Chapter 2

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 2-2

Slide Contents

Learning Objectives Principles Used in this Chapter

1.The Basic Structure of the U.S. inancial

!ar"ets#.The inancial !ar"etplace $ inancial%nstitutions

&.The inancial !ar"etplace $ Securities

!ar"ets 'e( Ter)s

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Learning Objectives

1. *escribe the structure and functions offinancial )ar"ets.

#. *istinguish bet+een co))ercial ban"sand other financial institutions in thefinancial )ar"etplace.

&. *escribe the different securities )ar"ets

for bonds and stoc".

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Principles sed in this Chapter

Principle #, There is a -is" -eturn Tradeoff.

$ inancial )ar"ets are organi/ed to offerinvestors a +ide range of invest)entopportunities that have different ris" anddifferent e0pected rates of return that reflectthose ris"s.

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 2-!

Principles sed in this Chapter"cont#$

Principle , !ar"et Prices -eflect%nfor)ation.

$ %t is through the operations of the financial)ar"ets that ne+ infor)ation is efficientl(i)pounded in securit( prices.

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2#% &'( )*S+CS&, C& ,( OF&'( #S#

F+ * C+*LM*,.(&S

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 2-/

&hree Pla0ers in the FinancialMarkets

There are three principal sets of pla(ers thatinteract +ithin the financial )ar"ets,1. Borro+ers

#. Savers 2or so)eti)es called lenders3&. inancial %nstitutions 2or so)eti)es called

inancial %nter)ediaries3

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&hree Pla0ers in the FinancialMarkets "cont#$

1. Borro+ers, %ndividuals and businesses that need)one( to finance their purchases orinvest)ents.

#. Savers 2%nvestors3, Those +ho have )one( toinvest. These are principall( individuals althoughfir)s also save +hen the( have e0cess cash.

&. inancial %nstitutions 2%nter)ediaries3, Thefinancial institutions and )ar"ets help bringborro+ers and savers together.

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2#2 &'( F+ * C+*LM*,.(&PL*C( F+ * C+*L+ S&+& &+O S

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Financial +ntermediaries

SAVERS FinancialIntermediaries

BORROWERS

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Financial +ntermediaries

40a)ple on %nter)ediaries 5ohn6s three sons are gro+n up and are

loo"ing to bu( their first ho)e.$ There is no inter)ediation if 5ohn directl( gives

the) the funds the( need$ There is inter)ediation +here a ban" doles out

the funds and 5ohn is free to place his )onies

in an( ban" he chooses to do so.

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Financial +ntermediaries "cont#$

inancial institutions li"e co))ercialban"s7 finance co)panies7 insuranceco)panies7 invest)ent ban"s7 and

invest)ent co)panies are called inancialintermediaries as the( help bringtogether those +ho have )one( 2savers3and those +ho need )one( 2borro+ers3.

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Mone0 vers5s Capital Market

The mone0 market refers to debtinstru)ents +ith )aturit( of one (ear orless.

$ 40a)ples, Treasur( bills 2T bills37 Co))ercialpaper 2CP3.

The capital market refers to long ter)debt and e8uit( instru)ents.$ 40a)ples, Co))on stoc"7 Preferred stoc"7

Corporate bond7 Treasur( bond7 !unicipalbond.

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 2-%!

Commercial )anks (ver0one6sFinancial Marketplace

Commercial banks collect the savings ofindividuals as +ell as businesses and then lendthose pooled savings to other individuals andbusinesses.

The( )a"e )one( b( charging a rate of interest toborro+ers that e0ceeds the rate the( pa( tosavers.

%n the United States7 ban"s cannot o+n industrialcorporations.

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on-)ank Financial +ntermediaries

These include,$ inancial services corporations7 li"e 94 Capital

*ivision:

$ %nsurance co)panies7 li"e Prudential:$ %nvest)ent ban"s7 li"e 9old)an Sachs:$ %nvest)ent co)panies including )utual funds7

hedge funds and private e8uit( fir)s.

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Financial Services Corporations

Financial services corporation are in thelending or financing business7 but the( are notco))ercial ban"s.

One +ell "no+n financial service corporation is 94capital7 the finance unit of the 9eneral 4lectricCorporation.

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Financial Services Corporations"cont#$

94 capital provides co))ercial loans7 financingprogra)s7 co))ercial insurance7 e8uip)entleasing7 and other services in over &; countriesaround the +orld.

94 capital also provides credit services to )orethan 1&< )illion custo)ers that range fro)retailers7 auto dealers7 consu)ers offeringproducts and services fro) credit cards to debtconsolidation to ho)e e8uit( loans.

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+ns5rance Companies

+ns5rance companies sell insurance to individualsand businesses to protect their invest)ents.

The( collect pre)iu) and hold the pre)iu) inreserves until there is an insured loss and then pa(out clai)s to the holders of the insurance contracts.Later7 these reserves are deplo(ed in various t(pesof invest)ents including loans to individuals7businesses and the govern)ent.

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+nvestment )anks

+nvestment banks are speciali/edfinancial inter)ediaries that,$ help co)panies and govern)ents raise )one(

$ provide advisor( services to client fir)s on)ajor transactions such as )ergers

ir)s that provide invest)ent ban"ingservices include Ban" of =)erica7 9old)anSachs7 !organ Stanle( and 5P !organChase.

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+nvestment Companies

+nvestment companies are financialinstitutions that pool the savings ofindividual savers and invest the )one( in

the securities issued b( other co)paniespurel( for invest)ent purposes.

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M5t5al F5nds and (9change &radedF5nds "(&Fs$

M5t5al 5nds are professionall( )anagedaccording to a stated invest)ent objective.

%ndividuals can invest in )utual funds b(

bu(ing shares in the )utual fund at thenet asset value 2>=?3. >=? is calculateddail( based on the total value of the funddivided b( the nu)ber of )utual fundshares outstanding.

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M5t5al F5nds and (9change &radedF5nds "(&Fs$ "cont#$

!utual funds can either be load or no loadfunds. The ter) load refers to the salesco))ission that (ou pa( +hen ac8uiring

o+nership shares in the fund. Theseco))issions t(picall( range bet+een .e+ Eor" Stoc" 40change 2>ES43 islocated at 11 Hall Street in !anhattan7 >E.The total value of stoc"s listed on the

>ES4 fell fro) 1I trillion in #

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Stock Markets "cont#$

The over-the-co5nter markets includeall securit( )ar"et e0cept the organi/ede0changes.

>=S*=J 2>ational =ssociation of Securities*ealers =uto)ated Juotations3 is an overthe counter )ar"et and describes itself asa Kscreen based7 floorless )ar"et . %n#

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Copyright 2011 Pearson Prentice Hall. All rights reserved. 2-!8

,eading Stock Price @5otes

igure # & illustrates ho+ to read stoc"price 8uotes fro) +++.google.co)Mfinance.

Si)ilar infor)ation is available athttp,MMfinance.(ahoo.co)
http://www.google.com/financehttp://finance.yahoo.com/http://finance.yahoo.com/http://www.google.com/finance

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Other Financial +nstr5ments

Table # # provides a list of differentfinancial instru)ents used b( fir)s to raise)one( beginning +ith the shortest

)aturit( instru)ents that are traded in the)one( )ar"et and )oving through to thelongest )aturit( instru)ents that aretraded in the capital )ar"et.

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.e0 &erms

=ccredited investor Bond Capital )ar"et Co))ercial ban" Co))on stoc" Coupon rate

Credit default s+aps

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.e0 &erms "cont#$

*ebt securities 48uit( securities 40change traded funds 24T s3 ace or par value inancial inter)ediaries Dedge fund

%nvest)ent ban"

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.e0 &erms "cont#$

%nvest)ent co)panies Leveraged bu(out fund Load funds !aturit( !one( )ar"et !utual fund

>et asset value

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.e0 &erms "cont#$

>otes >o load fund Organi/ed securit( e0changes

Over the counter )ar"ets Preferred stoc" Pri)ar( )ar"et Secondar( )ar"et Securit( ?enture Capital fir)

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