Chapter One ‘Chapter 1-3 Role of Financial markets & ie: Financial warket Amarket in which financial assets (securities) Such as stocks and bonds can be purchased or sold. Funds are transfepsed in in financial markets when one party purchases financial assets previously held by another party > Role of Financial Markets Financial markets transfer funds from those who have excess funds to those feec~>- SAefable ceive more money than they spend, ABest | Securities: repregent 4 claim on the issuers -bt securities - debt (also called credit, or borrowed funds) incuired by the issuer Equity securities - (also called stocks) paces ey a ownership in the firm ; DA» “EB or boron? Rel | \f Source: 4 Lmck '( (Cimnen) i X.. Equa 4 ee Stocks ey OWNSancial Management » Bact vals oh pest }) Accommoda' ting Corporate Final hereby corporations (acting as deficit units) can obtain > DU as the mechanism wl Fond funds from investors (acting as surplus Units) Su = With opp 7 @)accommodating Investment Needs: Financial institutions serve as : intermediaries to connect the investment management activity with the i corporate finance activity (Exhibit 1 1) Exhibit 1.1 How Financial Markets Facilitate Corporate Finance & Investment Management “il Secondary r markets facilitate the Pafling of existing securities, which allows For'a changé in the ownership of the securities ol Piss Vey wisc- Ifasecurity is illiquid, investors may not be able to fi find a willing bi mayer for ee secondary market and may have to sell ie security ata large | Later ear bib ~ iS 4 Count just to attract a buyerFinancial Management Chapter One Securities Traded in Financial Markets Securities can be classified as money market securities, capital market securities, or derivative securities. Ul Vv ; 4s Money Market $ | fa joney Market Securities (ep) Jeno (2 H4G. « % Money markets facilitate the sale of short-term debt securities by deficit units to surplus units ws Debt sourition that have a maturity of one year or less | (ae ) Jevlee (Le YU tl Chad 6 2 — ‘2nd; Capital Market Securities - facilitate the sale of long-term securities by deficit units to surplus units. ait +s Bonds - long-term debt securities issued by t the Treasury, ap aee Soyationé to finance their operations t SbiieiRions created to finance the ye = debt obligations representing claims peo Leis» eye aryan government agencies, and coi BF. Mortgages - long-term purchase of real estate. ona package of rnsrtgags A in the corporations that issued them o ' 34: Derivative Securities - financial contracts whose values are derived Soh LpPlact nn tae aves] pa) )iaed zd | = speculation - allow an investor to speculate on movements in the value of from the values of underlying assets } | the underlying assets without having to purchase those assets | Lb) clo) = Riskmanagement -| financial institutions and other firms can use derivative securities to adjust the risk oftheir existing investments in | securities By: Mahmoud AbdullahFinancial Management Ul Obed aaj pues Valuation of Sec Pull yingledl 4. Lmmpact of information on vatation 1 Palle Se ; > Estimate Future cash flows by obtaining information that may influence ea stock's future cash flows. (Exhibit 1, 2) Use gconomic meee inst raton tovaluea security ay, Nest. No ara Ayar Published opinions about the firm’s management to value a security | Sa ee | 2.mpact of the internet on valuation % More timely pricing _» on time * More accurate pricing *S More informative pricing Aa ar . 3.Lmpact of Behavi ral al Finance on lo alization GHG, % Various conditions can afféc Bi pte din 2H 4. Vocortaie acsak, veg of Securities _3 Limited information leads to uncertainty in the valuation of securities ey Ceepetdl 625 Ot) ulead 48 By: Mahmoud Abdullahnancial Management Chapter One Exhibit 1.2 Use of information to Make Investment Decisions CU 7 ren Pg Cd andi | Sources | | Defeat F | Onis ) — 12)\ | Aye. > Op Ve es Pasged's | Keehn? | 5 Mat i At