FIN 345 1st Edition Lecture 4Outline of Current Lecture1. Financial Markets and the Investment Banking Process – Objectivesa. Explain financial markets and their role in improving the standard of living in aneconomyb. The importance of efficient financial marketsc. Why there are so many different financial markets and how they are differentiatedd. Describe an investment banking house and its role in helping firms raise fundse. How financial markets in the U.S. differ from other parts of the world2. Financial Markets: A system comprised of individuals and institutions, instruments, and procedures that brings together borrowers and saversa. Participants (borrowers and savers): Firms, Government, Individuals3. Flow of fundsa. Provides the ability to transfer income through timei. Borrowing sacrifices future income to increase current income ii. Saving, or investing, sacrifices current income in exchange for greater expected income in the futureb. Direct transfer: businesses sell stock directly to investorsc. Indirect transfer through investment bankers: investment banker acts as middleman and facilitates issuance of securities by reselling the securities to saversd. Indirect transfer through financial intermediary: organizations such as banks or mutual finds obtains funds from savers and then use the money to lend or to purchase securities4. Market Efficiencya. Economic efficiency: funds are allocated to their optimal use at the lowest cost.Transactions costs associated with buying and selling.b. Information efficiency: prices of investments reflect existing information and adjust quickly when new information enters the marketi. Three categories:1. Weak-form efficiency: all past (historical) information is reflectedin current market prices2. Semistrong-form efficiency: current market prices reflect all publicly available information3. Strong-form efficiency: current market prices reflect all information, whether it is public or private5. Types of financial marketsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. Money markets: instruments traded mature in one year or less (short-term markets)b. Capital markets: includes instruments with maturities greater than one year (long-term markets)c. Debt markets: loans – treasury, corporate, mortgage-backed, money market, municipal, etc.d. Equity markets: stock markets; equity refers to ownershipe. Primary: corporations raise funds by issuing new securities.i. A new security that’s going to be issued this week in the market is calledIPO (Initial Public Offering)f. Secondary: securities are traded among investors after they have been issued. 6. Derivatives Marketsa. Options, futures and swaps are securities whose values are determined, or derived directly from other assetsb. Derivatives can be used to manage risk or to speculate7. Types of stock market transactionsa. Secondary market: trading existing stocksb. Primary market: established firm issues additional sharesc. Initial Public Offering (IPO): privately held company offers stock to the public for the first time – called “going public”8. Physical Stock Exchangesa. New York Stock Exchange (NYSE)b. American Stock Exchange (AMEX)c. Chicago Stock Exchange