Chapter 2 Financial Markets and Institutions

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Presentation transcript:

Chapter 2 Financial Markets and Institutions Fundamentals of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Alan J. Marcus Chapter 2 Financial Markets and Institutions Slides by Matthew Will McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Topics Covered The Importance of Financial Markets and Institutions The Flow of Savings to Corporations Functions of Financial Markets and of Financial Intermediaries Value Maximization and the Cost of Capital 2 2 2 2 3 2

Financial Markets Money Primary Markets OTC Markets Secondary Markets

Financial Markets Financing Decision Source of Funds “Capital” Capital Structure Money Markets Euros 5 5 5 5 6 5

Financial Markets Issue Securities Company Investors Cash Cash Reinvested Company Investors Cash 7 7 7 11 12 7

Financial Institutions Financial Markets Financial markets Stock markets Fixed-income markets Money markets Markets for Commodities Foreign exchange Derivatives Corporation Investment in real assets Reinvestment Investors worldwide Financial Intermediaries Mutual Funds Pension funds Financial Institutions Banks Insurance companies

Financial Institutions Company Obligations Funds Intermediaries Banks Insurance Cos. Brokerage Firms

Financial Institutions Intermediaries Obligations Funds Investors Depositors Policyholders

Financial Markets $ $ Bank of America Explorer Fund Investors Sells shares Issues shares 7 7 7 7 12 11

Financial Markets Company Banks Insurance Cos. Brokerage Firms Funds Banks Insurance Cos. Brokerage Firms Obligations Intermediary Depositors Policyholders Investors Obligations Investor 8 8 8 8 15 16

Financial Markets Company Banks Intermediary Depositors Investor Loan $2.5 mil Banks Intermediary Deposits Cash Depositors Investor 8 8 8 16 15 8

Financial Markets Company Insurance Company Intermediary Policyholders Issue Debt $2.5 mil Insurance Company Intermediary Sell policies Cash Policyholders Investor 8 8 8 16 15 8

Total U.S. Financing % Holdings of Corporate and Foreign Bonds (Qtr 3, 2007)

Total U.S. Financing % Holdings of Corporate Equities (Qtr 3, 2007)

Function of Financial Markets Transporting cash across time Risk transfer and diversification Liquidity Payment mechanism Provide information 18

U.S. Financing Information Provided by Financial Markets Commodity prices Interest rates Company values Credit Rating Interest Rate AAA 5.71% AA 5.78 A 6.38 BBB 7.12 BB 9.84 B 10.82 Source: Bloomberg Composite Corporate Bond Indexes. Interest rates on 30-year corporate bonds, February 2008. 18

Value of Alaska Air Group Data as of January, 2008

Value Maximization

Web Resources www.nyse.com www.nasdaq.com www.rba.co.uk/sources/stocks.htm www.fibv.com www.ici.org www.morningstar.com www.americanbanker.com www.us-banker.com www.sec.gov www.cftc.gov/cftc/cftchome.htm www.federalreserve.gov www.fmcenter.org

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