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Financial Intermediaries

Financial Intermediaries. Indirect Finance An Institution stands between lender and borrower. Direct Finance Borrowers and lenders deal directly with each other. Financial Instruments. Serve as: Means of payment E.g., Stock options Stores of Value … like all assets

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Financial Intermediaries

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  1. Financial Intermediaries Indirect Finance • An Institution stands between lender and borrower. Direct Finance • Borrowers and lenders deal directly with each other.

  2. Financial Instruments Serve as: • Means of payment • E.g., Stock options • Stores of Value … like all assets • Allow for trading of risk • E.g., Futures contracts, options, insurance contracts

  3. Examples of Financial Instruments • Bank Loans • Bonds • Home Mortgages • Stocks • Asset-backed securities

  4. Value of Financial Instruments Depend on: 1. Size the promised payment. 2. When the payment will be received. 3. The likelihood the payment will be made (risk). 4. The conditions under which the payment will be made.

  5. Financial Markets: Roles of Financial Markets. • Offer liquidity to borrowers and savers. • Pool and communicate Information. • Allow risk sharing Effective Financial Markets • Reduce transaction costs. • Communicate information accurately. • Protect investors

  6. Structures of Financial Markets Primary vs. Secondary Markets • Investment banks/underwriting Centralized Exchanges vs. Over-the-counter Markets. • Specialists/brokers/dealers Debt vs. Equity • Bonds … Stocks Underlying Assets vs. Derivatives • Futures/options

  7. Financial Institutions The structure of the financial industry • Depository Institutions • Insurance Companies • Pension Funds • Security Firms • Finance Companies • Government Sponsored Enterprises

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