FINANCE life-blood (financial economics); french word "finer" means "to end and settle a debt" Higher risk;
quot; means "to end and settle a debt" Higher risk; higher return & Maximize profit and wealth
CHAPTER 1:
SOURCES OF WEALTH:
THE FINANCIAL
Entrepreneurship: profit, capital: interest FUND ROUTES: direct financing & indirect financing INFORMATION ASYMMETRY: occurs when one stakeholder to a transaction holds superior information than the other party
SYSTEM & FINANCIAL
land: rent, labor: salaries&wages
MARKETS
CAPITAL MARKETS : Financial systems, structure of interest rates, pricing of assets
1. lender/borrower
2. financial intermediaries: third party between lender & borrower set of arrangements embracing the lending and borrowing of funds by non-
financial economic units
3. financial instrument: medium of exchange
Allows household, companies and gov't to
FINANCIAL SYSTEM DEFINITION Spend less then their income
ELEMENTS 4. regulatory environment invest their excess funds.
Composed of network inter-related system
5. money creation
6. price discovery
7. financial market
1. price discovery 2. liquidity 3. reduction in transaction cost
FINANCIAL MARKET MAJOR ECONOMIC FUNCTION
interaction between forum where buyer and search cost: incurred to look for financial instruments that can be purchased or sold
classification:
buyer and seller seller can meet information cost: cost related in evaluating investement characteristics of a fin. instrument
TYPES
BASED ON INSTRUMENT TRADED BASED ON MARKET TYPE
short-term primary market secondary market
money market:
instruments that are traded
demanders raise fund through new issuances of instruments (bonds & stocks) securities issued in primary are subsequently traded or sold
treasury bills Lender -> borrower intermediaries: banks buyer (lender) -> seller (borrower)
commercial papers
certificate of deposits Non-negotiable instruments: mortgage loans, savings deposits, life policies economic functions
repurchase agreements
bankers acceptances types of issue method
price discovery
capital market 1. Public offering:
provide info about prices that influence economic decisions
long-term and expected to be liquid market securities are offered for sale or offer for liquidity and reduction in borrowing cost
subscription to general public
Foundation: broker & dealer
2. private placement / limited public offer: allows active trading
classification: equity and debt
support to the primary market
issuer looks for a single investor
(underwriter subscribe to all securities)
setting prices & assessing receptiveness
3. tap issue:
implementation of monetary policy
BASED ON MANNER OF FINANCIAL INTERMEDIARIES
issuer are open to recieve bids
allows regulators (BSP) to trade securities
broker market 4. auction: market structure
buyer and seller are brought together by a broker issuance of treasury bills, bonds and other securities order-driven market structure
dealer market methods
buyer & seller propose their price through their broker
not brought directly dutch auction: begins with high prices to types of order
lower price
english auction: lower to higher bid market orders
BASED ON COUNTRY'S PERSPECTIVES
decreasing price sealed auction / limit orders
first price sealed auction
Domestic market good-until-cancelled orders
Internal/national market Two Parts
foreign market day orders
upon issuance, securities are offered simultaneously qoute-driven market structure
external market characteristics
securities are issued outside the regulatory jurisdiction
primary dealer market, professional, market-made
market who establish price
classification based on where the financial
instruments are traded over-the-counter
exchange /
formalized market / informal
centralized trading locations place where unlisted instrument are allowed to be
traded
