1. The Four Basic Areas of Finance
Investments
Corporate Finance
International Finance
Financial Institutions and Markets

2. Investment Investment instruments Issue new securities?
Security Markets
Get Listed
Investment banks versus Investment
Goldman Sachs, Merrill Lynch, JPMorgan, Lehman Brother, Saloman Smith Barney, Morgan Stanley
underwriting: Underwrites IPOs, SEOs, places private equity ...
Brokage: execute security transaction, offers M&A advisory services ...

3. Corporate Finance Capital Budgeting Financial Policy Dividend Policy
Ownership Structure
Risk Management
Merger and Acquisition

4. International Finance
Foreign Exchange Risk
Political Risk
Terms like LIBOR, EURO, Eurodollar
What would be the impact on Japanese products if Yen Strengthens against Dollar?

5. Financial Institutions and Markets

6. Overview of Financial System
1. Function and Structure of Financial Markets
2. Function and Structure of Financial Intermediaries
3. Regulations

8. Function of Financial Markets
1. Allows transfers of funds from person or
business without investment opportunities to
one who has them
2. Improves economic efficiency

9. Classifications of Financial Markets
1. Debt Markets
Short-Term (maturity < 1 year) Money Market
Long-Term (maturity > 1 year) Capital Market
2. Equity Markets
Common Stock

10. Classifications of Financial Markets
1. Primary Market
New security issues sold to initial buyers
2. Secondary Market
Securities previously issued are bought and sold

11. Classifications of Financial Markets
1. Exchanges
Trades conducted in central locations
(e.g., New York Stock Exchange)
2. Over-the-Counter Markets
Dealers at different locations buy and sell

12. Internationalization of Financial Markets
International Bond Market
1. Foreign bonds
2. Eurobonds
Now larger than U.S. corporate bond market
World Stock Markets
U.S. stock markets are no longer always the largest: at one point, Japan's was larger

13. Terminology
Foreign bond: a bond sold in a foreign country and denominated in that country’s currency
Eurobond: a bond denominated in a currency other than the country in which it’s sold
Examples:
A UK company sells bonds in US denominated in US$
A UK company sells bonds in US denominated in Pounds
A US company sells bonds in UK denominated in US$
A US company sells bonds in UK denominated in Pounds
A UK company sells bonds in UK denominated in Pounds

14. Function of Financial Intermediaries
1. Engage in process of indirect finance
2. More important source of finance than securities markets
3. Needed because of transactions costs and asymmetric information

15. Function of Financial Intermediaries
Transactions Costs
1. Financial intermediaries make profits by reducing transactions costs
2. Reduce transactions costs by developing expertise and taking advantage of economies of scale

16. Asymmetric Information: Adverse Selection and Moral Hazard
1. Before transaction occurs
2. Potential borrowers most likely to produce adverse outcome are ones most likely to seek loan and be selected

17. Asymmetric Information: Adverse Selection and Moral Hazard
1. After transaction occurs
2. Hazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that won't pay loan back
Financial intermediaries reduce adverse selection and moral hazard problems, enabling them to make profits

18. Financial Intermediaries

19. Size of Financial Intermediaries

20. Regulation of Financial Markets
1. Increase Information to Investors
A. Decreases adverse selection and moral hazard problems
B. SEC forces corporations to disclose information
2. Ensuring the Soundness of Financial Intermediaries
A. Prevents financial panics
B. Chartering, reporting requirements, restrictions on assets and activities, deposit insurance, and anti-competitive measures
C. Regulation Q

21. Regulation of Financial Markets
3. Improving Monetary Control
A. Reserve requirements
B. Deposit insurance to prevent bank panics

22. Regulatory Agencies