Managerial Finance
Jdr
PPT_Chapter_02.pptx
Copyright © 2015 by The McGraw-Hill Companies, Inc. All rights reserved
Chapter 2
Financial Markets and Institutions
2- ‹#›
Topics Covered
2.1 The Importance of Financial Markets and Institutions
2.2 The Flow of Savings to Corporations
2.3 Functions of Financial Markets and of Financial Intermediaries
2.4 The Crisis of 2007-2009
2- ‹#›
3
2
2
2
2
2
Businesses have to go to financial markets and institutions for the financing they need to grow
Financing Decision
Source of Funds (Capital)
Capital Structure
Financial Markets
2- ‹#›
6
5
5
5
5
5
Financial Markets
2- ‹#›
6
5
5
5
5
5
The Flow of Savings to Corp.
Cash raised from share issues
Cash
reinvested
Corporation
Investment in real assets
Investors
Shareholders in closely held corporation
2- ‹#›
12
11
7
7
7
7
Corporation
Investment in real assets
Investors
worldwide
Financial markets
Stock markets
Fixed-income markets
Money markets
Financial Institutions
Banks
Insurance Companies
Financial Intermediaries
Mutual Funds
Pension Funds
Reinvestment
The Flow of Savings to Corp.
2- ‹#›
The Flow of Savings to Corp.
Money
Primary Markets
OTC
Markets
Secondary Markets
2- ‹#›
The Flow of Savings to Corp.
Financial Market
Market where securities are issued and traded.
Primary Market
Market for the sale of new securities by corporations.
Secondary Market
Market in which previously issued securities are traded among investors.
2- ‹#›
12
11
7
7
7
7
Financial Market – Market where securities are issued and traded.
Primary Market – Market for the sale of new securities by corporations.
Secondary Market – Markets in which previously issued securities are traded among investors.
The Flow of Savings to Corp.
2- ‹#›
Fixed-income market
Market for debt securities
Capital market
Market for long-term financing
Money market
Market for short-term financing (less than 1 year)
The Flow of Savings to Corp.
2- ‹#›
Foreign exchange markets
Chapter 22
Commodities markets
Chapter 24
Markets for options and other derivatives
Chapters 23 and 24
The Flow of Savings to Corp.
Presidential futures prices, 2012 election
Source: Iowa Electronic Markets: www.biz.uiowa.edu/iem
2- ‹#›
Obama 41000 41001 41002 41003 41004 41005 41006 41007 41008 41009 41010 41011 41012 41013 41014 41015 41016 41017 41018 41019 41 020 41021 41022 41023 41024 41025 41026 41027 41028 41029 41030 41031 41032 41033 41034 41035 41036 41037 41038 41039 41040 41041 41042 41043 41044 41045 41046 41047 41048 41049 41050 41051 41052 41053 41054 41055 41056 41057 41058 41059 41060 41061 41062 41063 41064 41065 41066 41067 41068 41069 41070 41071 41072 41073 41074 41075 41076 41077 41078 41079 41080 41081 41082 41083 41084 41085 41086 41087 41088 41089 41090 41091 41092 41093 41094 41095 41096 41097 41098 41099 41100 41101 41102 41103 41104 41105 41106 41107 41108 41109 41110 41111 41112 41113 41114 41115 41116 41117 41118 41119 41120 41121 41122 41123 41124 41125 41126 41 127 41128 41129 41130 41131 41132 41133 41134 41135 41136 41137 41138 41139 41140 41141 41142 41143 41144 41145 41146 41147 41148 41149 41150 41151 41152 41153 41154 41155 41156 41157 41158 41159 41160 41161 41162 41163 41164 41165 41166 41167 41168 41169 41170 41171 41172 41173 41174 41175 41176 41177 41178 41179 41180 41181 41182 41183 41184 41185 41186 41187 41188 41189 41190 41191 41192 41193 41194 41195 41196 41197 41198 41199 41200 41201 41202 41203 41204 41205 41206 41207 41208 41209 41210 41211 41212 41213 41214 41215 41216 41217 41218 41219 41220 41221 0.61499999999999999 0.62 0.61499999999999999 0.60099999999999998 0.63 0. 62 0.621 0.621 0.60499999999999998 0.61799999999999999 0.63300000000000001 0.63 0.626 0.625 0.625 0.621 0.622 0.61 0.6 0.6 0.6 0.59899999999999998 0.59499999999999997 0.60499999999999998 0.59399999999999997 0.59399999999999997 0.59299999999999997 0.59399999999999997 0.59399999999999997 0.59699999999999998 0.59699999999999998 0.59699999999999998 0.59699999999999998 0.59399999999999997 0.59699999999999998 0.59799999999999998 0.59799999999999998 0.61499999999999999 0.60099999999999998 0.59899999999999998 0.59899999999999998 0.59899999999999998 0.59899999999999998 0.60699999999999998 0.58499999999999996 0.58899999999999997 0.59899999999999998 0.60099999999999998 0.5989999 9999999998 0.60699999999999998 0.59799999999999998 0.59 0.6 0.58799999999999997 0.58799999999999997 0.58699999999999997 0.58699999999999997 0.57999999999999996 0.58799999999999997 0.58599999999999997 0.58599999999999997 0.57799999999999996 0.55900000000000005 0.53 0.54200000000000004 0.54100000000000004 0.54100000000000004 0.53500000000000003 0.54100000000000004 0.54100000000000004 0.53 0.53400000000000003 0.53400000000000003 0.53 0.54900000000000004 0.54900000000000004 0.55000000000000004 0.55000000000000004 0.55000000000000004 0.57399999999999995 0.55100000000000005 0.55000000000000004 0.55000000000000004 0.54200000000000004 0.54100000000000004 0.54100000000000004 0.55400000000000005 0.55400000000000005 0.57199999999999995 0.57199999999999995 0.56000000000000005 0.56000000000000005 0.56499999999999995 0.57099999999999995 0.57099999999999995 0.6 0.59 0.59 0.59499999999999997 0.59599999999999997 0.57699999999999996 0.59099999999999997 0.57399999999999995 0.57299999999999995 0.57099999999999995 0.57099999999999995 0.56799999999999995 0.59899999999999998 0.6 0.59499999999999997 0.59499999999999997 0.59499999999999997 0.59399999999999997 0.59199999999999997 0.59199999999999997 0.59099999999999997 0.57199999999999995 0.58499999999999996 0.57899999999999996 0.58399999999999996 0.58199999999999996 0.57999999999999996 0.57999999999999996 0.57999999999999996 0.6 0.57999999999999996 0.61 0.58599999999999997 0.6 0.59 0.6069999 9999999998 0.59 0.58199999999999996 0.59699999999999998 0.60399999999999998 0.62 0.60199999999999998 0.6 0.628 0.625 0.625 0.625 0.625 0.64 0.59499999999999997 0.60499999999999998 0.6 0.59 0.62 0.59599999999999997 0.58799999999999997 0.59599999999999997 0.624 0.63 0.65200000000000002 0.65100000000000002 0.66 0.67900000000000005 0.66700000000000004 0.64500000000000002 0.65100000000000002 0.68100000000000005 0.69199999999999995 0.68 0.65900000000000003 0.67 0.70399999999999996 0.7 0.69899999999999995 0.75 0.72799999999999998 0.72199999999999998 0.72399999999999998 0.73199999999999998 0.76200 000000000001 0.76800000000000002 0.8 0.8 0.79800000000000004 0.81699999999999995 0.80500000000000005 0.80600000000000005 0.80600000000000005 0.77 0.77 0.69 0.67 0.72499999999999998 0.68600000000000005 0.71099999999999997 0.67100000000000004 0.64 0.64200000000000002 0.65100000000000002 0.62 0.61899999999999999 0.63800000000000001 0.66200000000000003 0.67500000000000004 0.65 0.625 0.622 0.60899999999999999 0.61 0.63100000000000001 0.57599999999999996 0.61399999999999999 0.64500000000000002 0.625 0.627 0.622 0.63 0.63600000000000001 0.66300000000000003 0.69 0.74 0.71199999999999997 0.751 0.79 0.98499999999999999 0.999 0.999 Romney 41000 41001 41002 41003 41004 41005 41006 41007 41008 41009 41010 41011 41012 41013 41014 41015 41016 41017 41018 41019 41020 41021 41022 41023 41024 41025 41026 41027 41028 41029 41030 41031 41032 41033 41034 41035 41036 41037 41038 41039 41040 41041 41042 41043 41044 41045 41046 41047 41048 41049 41050 41051 41052 41053 41054 41055 41056 41057 41058 41059 41060 41061 41062 41063 41064 41065 41066 41067 41068 41069 41070 41071 41072 41073 41074 41075 41076 41077 41078 41079 41080 41081 41082 41083 41084 41085 41086 41087 41088 41089 41090 41091 41092 41093 41094 41095 41096 41097 41098 41099 41100 41101 41102 41103 41104 41105 41106 41107 41108 41109 41110 41111 41112 41113 41114 41115 41116 41117 41118 41119 41120 41121 41122 41123 41124 41125 41126 41127 41128 41129 41130 41131 41132 41133 41134 41135 41136 41137 41138 41139 41140 41141 41142 41143 41144 41145 41146 41147 41148 41149 41150 41151 41152 41153 41154 41155 41156 41157 41158 41159 41160 41161 41162 41163 41164 41165 41166 41167 41168 41169 41170 41171 41172 41173 41174 41175 41176 41177 41178 41179 41180 41181 41182 41183 41184 41185 41186 41187 41188 41189 41190 41191 41192 41193 41194 41195 41196 41197 41198 41199 41200 41201 41202 41203 41204 41205 41206 41207 41208 41209 41210 41211 41212 41213 41214 41215 41216 41217 41218 41219 41220 41221 0.38500000000000001 0.38 0.38500000000000001 0.39900000000000002 0.37 0.38 0.379 0.379 0.39500000000000002 0.38200000000000001 0.36699999999999999 0.37 0.374 0.375 0.375 0.379 0.378 0.39 0.4 0.4 0.4 0.40100000000000002 0.40500000000000003 0.395000000000 00002 0.40600000000000003 0.40600000000000003 0.40700000000000003 0.40600000000000003 0.40600000000000003 0.40300000000000002 0.40300000000000002 0.40300000000000002 0.40300000000000002 0.40600000000000003 0.40300000000000002 0.40200000000000002 0.40200000000000002 0.38500000000000001 0.39900000000000002 0.40100000000000002 0.40100000000000002 0.40100000000000002 0.40100000000000002 0.39300000000000002 0.41500000000000004 0.41100000000000003 0.40100000000000002 0.39900000000000002 0.40100000000000002 0.39300000000000002 0.40200000000000002 0.41000000000000003 0.4 0.41200000000000003 0.41200000000000003 0.41300000000000003 0.41300000000000003 0.42000000000000004 0.41200000000000003 0.41400000000000003 0.41400000000000003 0.42200000000000004 0.44099999999999995 0.47 0.45799999999999996 0.45899999999999996 0.45899999999999996 0.46499999999999997 0.45899999999999996 0.45899999999999996 0.47 0.46599999999999997 0.46599999999999997 0.47 0.45099999999999996 0.45099999999999996 0.44999999999999996 0.44999999999999996 0.44999999999999996 0.42600000000000005 0.44899999999999995 0.44999999999999996 0.44999999999999996 0.45799999999999996 0.45899999999999996 0.45899999999999996 0.44599999999999995 0.44599999999999995 0.42800000000000005 0.42800000000000005 0.43999999999999995 0.43999999999999995 0.43500000000000005 0.42900000000000005 0.42900000000000005 0.4 0.41000000000000003 0.41000000000000003 0.40500000000000003 0.40400000000000003 0.42300000000000004 0.40900000000000003 0.42600000000000005 0.42700000000000005 0.42900000000000005 0.42900000000000005 0.43200000000000005 0.40100000000000002 0.4 0.40500000000000003 0.40500000000000003 0.40500000000000003 0.40600000000000003 0.40800000000000003 0.40800000000000003 0.40900000000000003 0.42800000000000005 0.41500000000000004 0.42100000000000004 0.41600000000000004 0.41800000000000004 0.42000000000000004 0.42000000000000004 0.42000000000000004 0.4 0.42000000000000004 0.39 0.41400000000000003 0.4 0.41000000000000003 0.39300000000000002 0.41000000000000003 0.41800000000000004 0.40300000000000002 0.39600000000000002 0.38 0.39800000000000002 0.4 0.372 0.375 0.375 0.375 0.375 0.36 0.40500000000000003 0.39500000000000002 0.4 0.41000000000000003 0.38 0.40400000000000003 0.41200000000000003 0.40400000000000003 0.376 0.37 0.34799999999999998 0.34899999999999998 0.33999999999999997 0.32099999999999995 0.33299999999999996 0.35499999999999998 0.34899999999999998 0.31899999999999995 0.30800000000000005 0.31999999999999995 0.34099999999999997 0.32999999999999996 0.29600000000000004 0.30000000000000004 0.30100000000000005 0.25 0.27200000000000002 0.27800000000000002 0.27600000000000002 0.26800000000000002 0.23799999999999999 0.23199999999999998 0.19999999999999996 0.19999999999999996 0.20199999999999996 0.18300000000000005 0.19499999999999995 0.19399999999999995 0.19399999999999995 0.22999999999999998 0.22999999999999998 0.31000000000000005 0.32999999999999996 0.27500000000000002 0.31399999999999995 0.28900000000000003 0.32899999999999996 0.36 0.35799999999999998 0.34899999999999998 0.38 0.38100000000000001 0.36199999999999999 0.33799999999999997 0.32499999999999996 0.35 0.375 0.378 0.39100000000000001 0.39 0.36899999999999999 0.42400000000000004 0.38600000000000001 0.35499999999999998 0.375 0.373 0.378 0.37 0.36399999999999999 0.33699999999999997 0.31000000000000005 0.26 0.28800000000000003 0.249 0.20999999999999996 1.5000000000000013E-2 1.0000000000000009E-3 1.0000000000000009E-3
The Flow of Savings to Corp.
Financial Intermediary
An organization that raises money from investors and provides financing for individuals, corporations, or other organizations
Financial Institution
A bank, insurance company, or similar financial intermediary
2- ‹#›
12
11
7
7
7
7
Financial Intermediary – An organization that raises money from investors and provides financing for individuals, corporations, or other organizations
Mutual Fund – An investment company that pools the savings of many investors and invests in a portfolio of securities
Hedge Fund – A private investment pool, open to wealthy or institutional investors, that is only lightly regulated and therefore can pursue more speculative policies than mutual funds
Pension Fund – Fund set up by an employer to provide for employees’ retirement
Mutual Fund
An investment company that pools the savings of many investors and invests in a portfolio of securities
Hedge Fund
A private investment pool, open to wealthy or institutional investors, that is only lightly regulated and therefore can pursue more speculative policies than mutual funds
Pension Fund
Fund set up by an employer to provide for employees’ retirement
The Flow of Savings to Corp.
2- ‹#›
12
11
7
7
7
7
Financial Intermediary – An organization that raises money from investors and provides financing for individuals, corporations, or other organizations
Mutual Fund – An investment company that pools the savings of many investors and invests in a portfolio of securities
Hedge Fund – A private investment pool, open to wealthy or institutional investors, that is only lightly regulated and therefore can pursue more speculative policies than mutual funds
Pension Fund – Fund set up by an employer to provide for employees’ retirement
The Flow of Savings to Corp.
Bank of America
Explorer Fund
Investors
$
$
Sells shares
Issues shares
2- ‹#›
12
11
7
7
7
7
The Flow of Savings to Corp.
Company
Intermediaries
Banks
Insurance Cos.
Brokerage Firms
Obligations
Funds
2- ‹#›
The Flow of Savings to Corp.
Intermediaries
Investors
Depositors
Policy Holders
Investors
Obligations
Funds
2- ‹#›
The Flow of Savings to Corp.
Banks
Insurance Cos.
Brokerage Firms
Depositors
Policyholders
Investors
Funds
Funds
Company
Intermediary/
Institutions
Investor
Obligations
Obligations
2- ‹#›
16
15
8
8
8
8
The Flow of Savings to Corp.
Bank
Depositors
$2.5 mil
$2.5 mil
Company
Institution
Investor
Loan
Deposits
2- ‹#›
16
15
8
8
8
8
The Flow of Savings to Corp.
Insurance Company
Policyholders
$2.5 mil
$2.5 mil
Company
Institution
Investor
Issue Debt
Sell Policies
2- ‹#›
16
15
8
8
8
8
Total U.S. Financing
% Holdings of Corporate and Foreign Bonds (Qtr 4, 2012)
2- ‹#›
Households (19.2%) Mutual funds, etc. (16.9%) Pension funds (5.0%) Insurance companies (20.1%) Rest of world (20.5%) Banks & savings institutions (6.0%) Other (12.4%) 0.19189305398115936 0.16854160966266662 5.029120900 5980532E-2 0.20062541531485753 0.20470625024430286 6.0180588672165108E-2 0.12376187311886799
Total U.S. Financing
% Holdings of Corporate Equities (Qtr 4, 2012)
2- ‹#›
Pension funds (16.3%) Mutual funds, etc. (24.1%) Insurance companies (6.8%) Rest of world (12.1%) Households (39.5%) Other (1.1%) 16.330735906380106 24.125829863846068 6.780620569370992 12.116715427028245 39.533869697310685 1.1122285360639135
Function of Financial Markets
Transporting cash across time
Risk transfer and diversification
Liquidity
Payment mechanism
Provide information
2- ‹#›
18
Function of Financial Markets
Information Provided by Financial Markets
Commodity prices
Interest rates
Company values
Credit Rating Interest Rate
AAA 3.35%
AA 3.93
A 4.28
BBB 5.08
BB 5.27
B 6.35
Source: Thomas Rueters
Interest rates on 30-year corporate bonds,
July 2013.
2- ‹#›
18
Function of Financial Markets
Market Capitalization
| Number of Shares | x | Stock Price | = | Market Capitalization | |
| Callaway Golf (ELY) | 71.00 | x | $6.58 | = | $467.00 |
| Alaska Air Group (ALK) | 70.34 | x | $57.50 | = | $4,045.00 |
| Estée Lauder (EL) | 386.65 | x | $65.70 | = | $25,402.00 |
| Yum! Brands (YUM) | 450.73 | x | $67.72 | = | $30,523.00 |
| General Electric (GE) | 10,398.00 | x | $23.77 | = | $247,167.00 |
2- ‹#›
18
The Crisis of 2007-2009
Easy money
Subprime mortgages
Mortgage backed securities
Bear Sterns
AIG
IMF
Greece
2- ‹#›
18
