2- 1 Chapter Approach  Chapter 2  Financial Markets  Road to success with this chapter material Read Chapter 2 first Print the chapter handout Take notes Recognize that “jargon” is a shorthand way of summarizing complicated concepts so don’t give up too soon  Click here to view the Chapter 2 lecture (see and hear)

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

2- 3 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- 4 Financial Markets Primary Markets Secondary Markets OTC Markets Money

2- 5 Financial Markets  Financing Decision  Source of Funds “Capital”  Capital Structure  Money Markets  Euros

2- 6 Financial Markets Company Issue Securities Cash Investors Cash Reinvested

2- 7 Corporation Investment in real assets Investors worldwide Financial markets Stock markets Fixed-income markets Money markets Markets for Commodities Foreign exchange Derivatives Financial Intermediaries Mutual Funds Pension funds Financial Institutions Banks Insurance companies Reinvestment Financial Markets

2- 8 Financial Institutions Company Intermediaries Banks Insurance Cos. Brokerage Firms Obligations Funds

2- 9 Financial Institutions Intermediaries Investors Depositors Policyholders Investors Obligations Funds

2- 10 Financial Markets Bank of America Explorer Fund Investors $$ Sells shares Issues shares

2- 11 Financial Markets Funds Banks Insurance Cos. Brokerage Firms Obligations Depositors Policyholders Investors Obligations Company Intermediary Investor

2- 12 Financial Markets Banks Depositors $2.5 mil Cash Loan Deposits Company Intermediary Investor

2- 13 Financial Markets Insurance Company Policyholders $2.5 mil Cash Issue Debt Sell policies Company Intermediary Investor

2- 14 Total U.S. Financing % Holdings of Corporate and Foreign Bonds (Qtr 3, 2007)

2- 15 Total U.S. Financing % Holdings of Corporate Equities (Qtr 3, 2007)

2- 16 Function of Financial Markets  Transporting cash across time  Risk transfer and diversification  Liquidity  Payment mechanism  Provide information

2- 17 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 Source: Bloomberg Composite Corporate Bond Indexes. Interest rates on 30-year corporate bonds, February 2008.

2- 18 Value of Alaska Air Group Data as of January, 2008

2- 19 Value Maximization

2- 20 Web Resources