Slide 1Today’s OutlineSlide 3CapitalismCapital AllocationSupply and DemandTransfer MethodsBrokersTypes of Financial InstitutionsFunctions of Financial InstitutionsMarketsMarket CharacteristicsMarket FunctionsThe Market for StockExample: IPO’s and Junk BondsEfficient Market HypothesisTypes of EfficiencyAnomalies and Critique1 of 1812:50 AMTopic 2: Financial Markets and InstitutionsLarry Schrenk, InstructorFIN 614 Financial Management2 of 1812:50 AM•The Nature of Capitalism•Types of Exchange–Private–Brokers–MarketsToday’s Outline3 of 1812:50 AMThe Financial System4 of 1812:50 AM•Capital•Labor, Goods and Capital•Profits•WagesPrivately ControlledTraded in a MarketDistributed to Owners or ReinvestedPaid to LaborCapitalism5 of 1812:50 AM•Supply and Demand–Supply: Savings, Excess Funds–Demand: Capital Needs•Players–Individuals–Corporations–Government•Cost = Rate of Interest, Rate of Return, Cost of CapitalCapital Allocation6 of 1812:50 AMSupply and DemandInterest RateAmount of FundsDemandSupply7 of 1812:50 AM•Private Exchange–Direct Transfer•Brokers (Financial Intermediaries)–Third-Party Mediation•Markets–Public, Anonymous ExchangeTransfer Methods8 of 1812:50 AM•Mediates buyer and seller–Distinguish from ‘Agent’–Distinguish from ‘Dealer’•Commission•Financial Institutions–Also, Agents and DealersBrokers9 of 1812:50 AM•Depository–Commercial Banks–Credit Unions•Pension Funds and Life Insurance•Investment Vehicles–Investment Banks–Mutual Funds–Hedge Funds–Exchange Traded Funds–Private Equity CompaniesTypes of Financial Institutions10 of 1812:50 AM•Mediation of Savers and Firms•Pooling of Funds•Efficient Flow of Capital•Risk Reduction/AllocationFunctions of Financial Institutions11 of 1812:50 AM•Public, Centralized Exchange of Good and Services–Physical or Electronic•Financial Markets–Financial Assets Trade•Investable Funds•Return•RiskMarkets12 of 1812:50 AM•Price Discovery•Efficiency•Economic Growth•MonitoringMarket Characteristics13 of 1812:50 AM•Raise Capital•Investment Opportunities•Liquidity•Clearinghouse Market Functions14 of 1812:50 AM•Primary–IPO versus Seasoned Issue–Function?•Secondary–Transfer of Ownership–Function?–Importance for Firm?•Risk and Return ImplicationsThe Market for Stock15 of 1812:50 AM•IPO’s•Junk Bonds–Michael Milliken and Drexel Burnham Lambert–Fallen Angels & Rising StarsExample: IPO’s and Junk Bonds16 of 1812:50 AM•Expectation Implications•Informational Efficiency•Luck•Fair PriceEfficient Market Hypothesis17 of 1812:50 AM•Weak Form•Semi-Strong Form•Strong FormTypes of Efficiency18 of 1812:50 AM•January Effect•Bubbles–Black Monday, 19 October 1987 •Insider Trading•Technical Analysis•Fundamental Analysis•Behavioral Finance•Over- and Under-ReactionAnomalies and