Chapter 2 - Financial MarketsPrimary Market Debt IssuanceUnderwritten Stock Sale (Primary Market)Financial IntermediariesFinancial MarketsSlide 6Total U.S. FinancingSlide 8Function of Financial MarketsU.S. FinancingOpportunity Cost of CapitalCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 1Chapter 2 - Financial MarketsFinancing DecisionWhat is the Source of Funds or “Capital”Long Term? (Issue stock or bonds)Short Term? (Money Markets)Primary v. Secondary MarketPrimary Market (Company sells to investor)Secondary Market (Company not involved)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 2Irwin/McGraw-HillPrimary Market Debt IssuanceCompanyIssue DebtCashInvestorsCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 3Irwin/McGraw-HillUnderwritten Stock Sale (Primary Market)CompanyCompanyInvestment BankInvestment BankInvestors Investors $ $Sells sharesIssues sharesCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 4Irwin/McGraw-HillFinancial IntermediariesFundsFundsBanksInsurance Cos.Brokerage FirmsObligationsDepositorsPolicyholdersInvestorsObligationsCompanyIntermediaryInvestorCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 5Irwin/McGraw-HillFinancial MarketsBanksDepositors$2.5 milCashLoanDepositsCompanyIntermediaryInvestorCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 6Irwin/McGraw-HillFinancial MarketsInsurance CompanyPolicyholders$250 milCashLoanSell policies Issue StockCompanyIntermediaryInvestorCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 7Total U.S. Financing% Holdings of Corporate and Foreign Bonds (Qtr 1, 2005)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 8Total U.S. Financing% Holdings of Corporate Equities (Qtr 1, 2005)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 9Function of Financial MarketsTransporting cash across timeRisk transfer and diversificationLiquidityPayment mechanismProvide informationCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 10U.S. FinancingInformation Provided by Financial MarketsCommodity pricesInterest ratesCompany valuesCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin2- 11Opportunity Cost of
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