Lecture 2: Financial markets

1. Lecture 2: Financial markets Mishkin chapter 2 – part A Page 23-28, 33-35

2. Quiz • Interest rate • Stock market v.s. bond market • Money supply and inflation

3. Financial system Indirect finance Financial Intermediaries (e.g. bank) Lender Borrower Money Money Financial instrument A (e.g. saving account) Financial instrument B (e.g. student loans) Regulation Financial instruments (e.g. bond, stock) Financial markets Money Direct finance

4. What’s a financial market? • What’s a market? • farmer’s market • buyers directly trade with sellers • What’s financing? • get funds • A financial market is a market in which financial assets are traded and funds are channeled.

5. Function of Financial Markets • Society • channel funds from savers (who have a surplus of money) to borrowers (those short of money) • efficiently allocate capital => increases production => promotes economic efficiency • Individuals • shift funds across time periods

6. Classifying Financial Markets • Money vs. capital markets • Debt vs. equity markets • Primary vs. secondary markets • Exchanges vs. over-the-counter (OTC) markets

7. Primary and Secondary Markets • Primary market • new issues • facilitate borrowing and lending • investment banks • Secondary market • resale • increase liquidity in the primary market • dealers and brokers

8. Exchanges and Over-the-Counter (OTC) Markets • Exchanges: buyers and sellers of securities meet in central locations. • e.g. New York Stock Exchange (NYSE) • OTC: dealers trade independently/at different locations. But efficient information flows make it very competitive. • e.g. government bond market

9. Recap • Structure of financial system (graph) • Functions of financial markets • Primary vs. secondary markets • Exchanges vs. OTCs