Financial Management: Principles and Applications

Financial Management: Principles and Applications

Chapter 14

14-1

What are financial markets?

Financial markets are institutions and procedures that facilitate transactions in all types of financial claims. Also known as securities, other examples of financial markets are home purchases, common stock ownership, and life insurance. There are two types of markets: primary and secondary. Primary markets provide a forum for securities to be offered for the first time to potential investors, while secondary markets provide a forum for all securities after the initial purchase to be offered.

What functions do financial markets perform?

Financial markets provide a mechanism to facilitate the transfer of savings from economic units with a surplus to the economic markets with a deficit.

How would the economy be worse off without them?

The wealth of the economy would be less without financial markets. The rate of capital formation would not be as high if the markets did not exist. Dwellings, productive plant and equipment, inventory, and consumer durables would still occur, but at lower rates.

14-3

Distinguish between the money and capital markets.

Money markets are all institutions and procedures that facilitate transactions in short-term credit instruments, while capital markets are institutions and procedures that facilitate transactions in long-term financial instruments.

14-4

What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?