1. 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

2. 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

3. Financial Markets
Money
Primary
Markets
OTC
Markets
Secondary
Markets

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

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

6. 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

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

8. Financial Institutions
Intermediaries
Obligations
Funds
Investors
Depositors
Policyholders

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

10. 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

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

12. 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

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

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

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

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

17. Value of Alaska Air Group
Data as of January, 2008

18. Value Maximization

19. Web Resources www.nyse.com www.nasdaq.com