MATH3027 Financial economics revision notes
https://docplayer.net/4389646-Solutions-to-lectures-on-corporate-finance-second-edition-
peter-bossaerts-and-bernt-arne-odegaard.html
http://www2.econ.iastate.edu/tesfatsi/mish8a.htm
Lecture 1 ( Financial system ):
Financial system: Consists Of the financial intermediaries and the financial markets
Financial market:
Markets in which funds are transferred from those who have excess funds available to those who
have a shortage of available funds are called financial intermediaries.
Primary market: Is a financial market in which new issues of securities such as stocks or
bonds are sold to initial buyers by a corporation or government borrowing the fund.
Secondary market: Is a financial market in which securities that have been previously issued
can be resold. They help facilitate the buying and selling of these securities easier and
quicker which in turns make financial instruments more liquid. The increased liquidity make
them more desirable and thus easier for issuing firms to sell in the primary market.
Money market: Is a financial market in which only short-term debt instruments are traded
(generally those with a maturity of less than 1 year). More widely traded than longer term
securities and so tend to be more liquid.
Capital market: Is a financial market in which longer-term debt instruments (generally those
with maturity of 1 year or greater) and equity instruments are traded.
The three main roles of financial intermediaries include asset storage, loans, and
investments.
Financial intermediary’s vs financial markets:
Financial intermediaries are institutions which serves as a middleman which move funds
from parties with excess capital to parties needing funds allowing it to be at their most
productive use that can accelerate economic growth. They reallocate uninvested capital to
productive sectors of the economy through debt and equity.
Benefits of financial intermediaries:
- Provide liquidity services for investor
1. Substantially reduce transaction cost
, Institutions have developed expertise in efficiently allocating funds from one party to
another. They have access to economies of scale which reduce transaction costs. One way
they do this is by offering the same services or business across large chunks of individuals.
This in turn lowers average cost.
2. Reduce risk exposure of investors
Financial intermediaries can spread invested funds across a diverse range of investment and
loans rather to just one individual or security for example.
Financial intermediaries can substantially reduce transaction costs per dollar
of transactions because their large size allows them to take advantage of
economies of scale.
A bank avoids the free-rider problem by primarily making private loans
rather than by purchasing securities that are traded in the open market.
They are also better equipped with monitoring the parties they lend to enforcing restrictive
covenants in which an agreement is made by both parties where the debtor must operate
within certain rules outlined before the contract thus reducing the loss due to moral
hazards. The needs for banks and other financial intermediaries to engage in screening
and monitoring explains why they spend so much money on auditing and information
collecting activities.
• Long term customer relations (lecture 6 end notes)
Moral hazards are dangerous since borrowers may have incentives to engage in risky
activities to perhaps to earn a greater profit through an investment or to meet an
obligation. Agents can take actions that are partly unobservable.
Government regulations can reduce adverse selection and moral hazards problems in the
financial markets and enhance the efficient of the markets by increasing the amount of
information available to investors. Implementations of these regulations promotes more
investors to invest confidently and improve overall corporate investment.
Financial intermediaries perform two information producing activities: screening and
monitoring.
Deciding how much regulation is important. Too much regulation can stifle innovation and
drive-up costs, while too little can lead to mismanagement, corruption and collapse.
A financial institution can achieve cost savings by engaging in multiple
activities simultaneously for an investor say. These are called economies of
scope.
https://docplayer.net/4389646-Solutions-to-lectures-on-corporate-finance-second-edition-
peter-bossaerts-and-bernt-arne-odegaard.html
http://www2.econ.iastate.edu/tesfatsi/mish8a.htm
Lecture 1 ( Financial system ):
Financial system: Consists Of the financial intermediaries and the financial markets
Financial market:
Markets in which funds are transferred from those who have excess funds available to those who
have a shortage of available funds are called financial intermediaries.
Primary market: Is a financial market in which new issues of securities such as stocks or
bonds are sold to initial buyers by a corporation or government borrowing the fund.
Secondary market: Is a financial market in which securities that have been previously issued
can be resold. They help facilitate the buying and selling of these securities easier and
quicker which in turns make financial instruments more liquid. The increased liquidity make
them more desirable and thus easier for issuing firms to sell in the primary market.
Money market: Is a financial market in which only short-term debt instruments are traded
(generally those with a maturity of less than 1 year). More widely traded than longer term
securities and so tend to be more liquid.
Capital market: Is a financial market in which longer-term debt instruments (generally those
with maturity of 1 year or greater) and equity instruments are traded.
The three main roles of financial intermediaries include asset storage, loans, and
investments.
Financial intermediary’s vs financial markets:
Financial intermediaries are institutions which serves as a middleman which move funds
from parties with excess capital to parties needing funds allowing it to be at their most
productive use that can accelerate economic growth. They reallocate uninvested capital to
productive sectors of the economy through debt and equity.
Benefits of financial intermediaries:
- Provide liquidity services for investor
1. Substantially reduce transaction cost
, Institutions have developed expertise in efficiently allocating funds from one party to
another. They have access to economies of scale which reduce transaction costs. One way
they do this is by offering the same services or business across large chunks of individuals.
This in turn lowers average cost.
2. Reduce risk exposure of investors
Financial intermediaries can spread invested funds across a diverse range of investment and
loans rather to just one individual or security for example.
Financial intermediaries can substantially reduce transaction costs per dollar
of transactions because their large size allows them to take advantage of
economies of scale.
A bank avoids the free-rider problem by primarily making private loans
rather than by purchasing securities that are traded in the open market.
They are also better equipped with monitoring the parties they lend to enforcing restrictive
covenants in which an agreement is made by both parties where the debtor must operate
within certain rules outlined before the contract thus reducing the loss due to moral
hazards. The needs for banks and other financial intermediaries to engage in screening
and monitoring explains why they spend so much money on auditing and information
collecting activities.
• Long term customer relations (lecture 6 end notes)
Moral hazards are dangerous since borrowers may have incentives to engage in risky
activities to perhaps to earn a greater profit through an investment or to meet an
obligation. Agents can take actions that are partly unobservable.
Government regulations can reduce adverse selection and moral hazards problems in the
financial markets and enhance the efficient of the markets by increasing the amount of
information available to investors. Implementations of these regulations promotes more
investors to invest confidently and improve overall corporate investment.
Financial intermediaries perform two information producing activities: screening and
monitoring.
Deciding how much regulation is important. Too much regulation can stifle innovation and
drive-up costs, while too little can lead to mismanagement, corruption and collapse.
A financial institution can achieve cost savings by engaging in multiple
activities simultaneously for an investor say. These are called economies of
scope.
