1. Financial Markets and Institutions – BA 543
Tuesday Bexell 415
12:00 noon to 2:50 p.m.
6:00 p.m. to 8:50 p.m.

2. Chapter 2 – Financial Intermediation
Definition of Financial Intermediation
Transforming acquired financial assets into preferred type of asset (liability) for owner (borrower)
Example: Car Loan (Funds from Depositors are packaged in loans for customers buying a car)
Example: Swap (Bond swap from fixed to floating rate)
Performed by Financial Institutions
Many of these intermediation functions are completed with large institutions
Completed in Financial Markets

3. Chapter 2 – Financial Intermediation
A closer look at Financial Institutions
Types
Banks – Commercial, Investment, Savings and Loans, Credit Unions, etc.
Investment Companies
Insurance Companies
Others – Pension Funds, Foundations, etc.
Functions
Transforming, Exchanging, and Designing Financial Assets
Advising and Managing Financial Assets

4. Chapter 2 – Financial Intermediation
Direct Investing with Intermediaries
Commercial Bank
Direct Deposit – CD – Promised Payment at the end of the Investment Period
Dollars are loaned to a borrower (to buy a car) with a different payment schedule
Indirect Investing with Intermediaries
Mutual Fund Company (Investment Company)
Buy mutual fund shares at NAV (no load)
Company uses funds to buy stocks and bonds

5. Chapter 2 – Financial Intermediation
Four Functions of Intermediation
Maturity
Borrow in the long, lend in the short
Risk Reduction (Diversification)
Eliminate firm specific risk via a portfolio
Cost Reduction of Information/Contracting
Share information acquired across large set of individuals
Payment Mechanisms
Checks, Credit Cards, Debit Cards, etc.

6. Chapter 2 – Financial Intermediation
Asset/Liability Management for Financial Institutions
Nature of Business – Buy and Sell Money
Buy Low, Sell High – Spread
Nature of Liabilities
Timing and Amount of Outflow of Cash
Table 2-1 Page 25
Liquidity of Claims against Financial Institutions – can obligations be met with current assets of the institution?

7. Chapter 2 – Financial Intermediation
Growth of Financial Intermediaries through Financial Innovation
Market Broadening Instruments – attracts new investors
Zero-Coupon Bonds – TGIRS, LYONS, etc
Risk Management Instruments
Options
Arbitrage Instruments – Price Stability
Index Assets for direct trade
Motivation? Risk Transfer or Abritrage

8. Chapter 2 – Financial Intermediation
Asset Management Firms
AKA money managers, fund managers, portfolio managers, etc.
Manage funds of
Individuals
Businesses
Endowments
Foundations
New Type of Fund – Hedge Fund
Private funds, professionally managed and not available to public
Not formally defined…we will skip for this class