BUSINESS FINANCE
Most money market
FINANCIAL INSTITUTIONS AND MARKETS
Most successful firms have ongoing needs
for funds. They can obtain funds from
external sources in 3 ways. One is through
a financial institution that accepts savings
and transfers them to those that need
funds. Another is through financial
markets, organized forums in which the
suppliers and demanders of various types of
funds can make transactions. A third is
through private placement.
(1) FINANCIAL INSTITUTION – An
intermediary that channels the
savings of individuals, businesses,
and governments into loans or
investments. Many financial
institutions directly or indirectly pay
savers interest on deposited funds;
others provide services for a fee.
The major financial institutions are
commercial banks, savings and loans, credit
unions, savings banks, insurance
companies, pension funds and mutual
funds.
Key customers : Individuals as a group are
the net suppliers for financial institutions.
They save more money than they borrow.
On the other hand, firms are net
demanders of funds. They borrow more
than they save.
(2) FINANCIAL MARKETS – Forums in
which suppliers of funds and
demanders of funds can transact
business directly. The two key
financial markets are the money
market and the capital market.
MONEY MARKET – A financial relationship
created between suppliers and demanders
of short term funds (with maturities of one
year or less).
transactions are made in marketable
securities.
Marketable securities – short term debt
instruments such as treasury bills (T-bills),
commercial paper, and negotiable
certificates of deposit issued by
government, business, and financial
institutions, respectively.
CAPITAL MARKET – A market that enables
suppliers and demanders of long term funds
to make transactions. The key capital
market securities are bonds (long term
debt) and both common and preferred
stock.
Bonds – long term debt instrument used by
business and government to raise large
sums of money, generally from a diverse
group of lenders.
(3) PRIVATE PLACEMENT - The sale of a
new security issue, typically bonds
or preferred stock, directly to an
investor or group of investors. Most
firms, however, raise money
through a public offering of
securities, which is the non-exclusive
sale of either bonds or stocks to the
general public.
All securities are initially issued in the
primary market. Once the securities begin
to trade between savers and investors, they
become part of the secondary market.
PRIMARY MARKET – in which securities are
initially issued; the only market in which the
issuer is directly involved in the transaction.
SECONDARY MARKET – in which pre-owned
securities (those that are not new issues)
are traded.