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1、Chapter 2An Overview of the Financial System 2005 Pearson Education Canada Inc.Function of Financial Markets1.Allows transfers of funds from person or business without investment opportunities to one who has them2.Improves economic efficiency2 2005 Pearson Education Canada Inc.Classifications of Fin
2、ancial Markets1.Debt MarketsShort-term(maturity 1 year)Capital Market2.Equity MarketsCommon stocks1.Primary MarketNew security issues sold to initial buyers2.Secondary MarketSecurities previously issued are bought and sold1.ExchangesTrades conducted in central locations(e.g.,Toronto Stock Exchange a
3、nd New York Stock Exchange)2.Over-the-Counter MarketsDealers at different locations buy and sell3 2005 Pearson Education Canada Inc.Internationalization of Financial MarketsInternational Bond Market1.Foreign bonds2.EurobondsNow larger than U.S.corporate bond marketWorld Stock MarketsU.S.stock market
4、s are no longer always the largest:Japan sometimes larger4 2005 Pearson Education Canada Inc.Function of Financial IntermediariesFinancial Intermediaries1.Engage in process of indirect finance2.More important source of finance than securities markets3.Needed because of transactions costs and asymmet
5、ric informationTransactions Costs1.Financial intermediaries make profits by reducing transactions costs2.Reduce transactions costs by developing expertise and taking advantage of economies of scale5 2005 Pearson Education Canada Inc.Function of Financial IntermediariesRisk Sharing1.Create and sell a
6、ssets with low risk characteristics and then use the funds to buy assets with more risk(also called asset transformation).2.Also lower risk by helping people to diversify portfolios6 2005 Pearson Education Canada Inc.Asymmetric Information:Adverse Selection,and Moral HazardAdverse Selection1.Before
7、transaction occurs2.Potential borrowers most likely to produce adverse outcomes are ones most likely to seek loans and be selectedMoral Hazard1.After transaction occurs2.Hazard that borrower has incentives to engage in undesirable(immoral)activities making it more likely that wont pay loan backFinan
8、cial intermediaries reduce adverse selection and moral hazard problems,enabling them to make profits7 2005 Pearson Education Canada Inc.Financial Intermediaries 2005 Pearson Education Canada Inc.8Size of Financial Intermediaries9 2005 Pearson Education Canada Inc.Regulatory Agencies 2005 Pearson Edu
9、cation Canada Inc.10Regulatory Agencies 2005 Pearson Education Canada Inc.11Regulation of Financial MarketsTwo Main Reasons for Regulation1.Increase information to investorsA.Decreases adverse selection and moral hazard problemsB.Securities commissions force corporations to disclose information2.Ensuring the soundness of financial intermediariesA.Prevents financial panicsB.Chartering,reporting requirements,restrictions on assets and activities,deposit insurance,and anti-competitive measures12 2005 Pearson Education Canada Inc.