1. 1 Lecture 2: Financial markets Mishkin chapter 2 – part A Page 23-28, 33-35

2. 2 Quiz Interest rate Stock market v.s. bond market Money supply and inflation

3. 3 Financial system Financial Intermediaries (e.g. bank) Financial markets Money Indirect finance Direct finance Lender Borrower Regulation Financial instrument B (e.g. student loans) Financial instrument A (e.g. saving account) Financial instruments (e.g. bond, stock)

4. 4 What’s a financial market? What’s a market?  farmer’s market  buyers directly trade with sellers What’s financing?  get funds A financial market is a market in which financial assets are traded and funds are channeled.

5. 5 Function of Financial Markets Society  channel funds from savers (who have a surplus of money) to borrowers (those short of money)  efficiently allocate capital => increases production => promotes economic efficiency Individuals  shift funds across time periods

6. 6 Classifying Financial Markets Money vs. capital markets Debt vs. equity markets Primary vs. secondary markets Exchanges vs. over-the-counter (OTC) markets

7. 7 Primary and Secondary Markets Primary market  new issues  facilitate borrowing and lending  investment banks Secondary market  resale  increase liquidity in the primary market  dealers and brokers

8. 8 Exchanges and Over-the-Counter (OTC) Markets Exchanges: buyers and sellers of securities meet in central locations.  e.g. New York Stock Exchange (NYSE) OTC: dealers trade independently/at different locations. But efficient information flows make it very competitive.  e.g. government bond market

9. 9 Recap Structure of financial system (graph) Functions of financial markets Primary vs. secondary markets Exchanges vs. OTCs