Chapter 2, the financial system and the level of interest rates. After studying this chapter you will be able to: Describe the role of the financial system in the economy and the two basic ways in which money flows through the system; discuss direct financing and the important role that investment banks play in this process; describe the primary, secondary, and money markets, explaining the special importance of secondary and money markets to business organizations; | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 2: The Financial System NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Describe the role of the financial system in the economy and the two basic ways in which money flows through the system Discuss direct financing and the important role that investment banks play in this process Describe the primary, secondary, and money markets, explaining the special importance of secondary and money markets to business organizations Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Explain what an efficient market is and why market efficiency is important to financial managers Explain how financial institutions serve the needs of consumers and small businesses Compute the nominal and the real rates of interest, differentiating between them Copyright© 2015 John Wiley & Sons, Inc. 4 The Financial System Financial markets and institutions Financial markets include markets for trading financial assets such as stocks and bonds Financial institutions include banks, credit unions, insurance companies, and finance companies The financial system at work The financial system is competitive Money is borrowed in small amounts and loaned in large amounts The system directs money to the best investment opportunities in the economy Lenders earn profit from the spread between lending and borrowing rates The Financial System How Funds Flow through the Financial System The primary function of a financial system is to efficiently transfer funds from lender-savers to borrower-spenders Basic mechanisms by which funds are transferred in the financial system Directly through financial markets Indirectly through financial institutions Direct Financing Direct transfer of funds Lender-saver contracts with a borrower-spender Minimum transaction $1 million Investment banks and money center banks help . | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 2: The Financial System NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Describe the role of the financial system in the economy and the two basic ways in which money flows through the system Discuss direct financing and the important role that investment banks play in this process Describe the primary, secondary, and money markets, explaining the special importance of secondary and money markets to business organizations Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Explain what an efficient market is and why market efficiency is important to financial managers Explain how financial institutions serve the needs of consumers and small businesses Compute the nominal and the real rates of interest, differentiating between them Copyright© 2015 John Wiley & Sons, Inc. 4 The Financial
