I to BF---Chapter 2 (MID)

Financial institutions represent intermediaries in the financial market who raise funds and
direct them into investments and loans. The most significant participants that engage in
transactions with financial institutions involve:
 Government,
 Business companies,
 Individuals.
We can categorize them as net suppliers or net demanders of funds.
Net Supplier: The net supplier of funds are generally individuals or Households who save more
money than they invest
Net demander: Business and governments are generally net demander of funds, means that they
borrow more money than they save.

Financial markets have the following functions and roles:

 Providing liquid markets and connecting lenders and borrowers, and in such a way saving
the time, effort, and financial resources necessary to find other sources of funds;
 Enabling the most productive and efficient allocation of funds;
 Enabling lenders to earn dividend/interest on their funds;
 Enabling price determination of assets based on demand and supply;
 Providing information to traders/participants at the market;
 Helping to reduce transaction costs;
 Enabling balanced growth of the economy, etc.

What is Eurocurrency market?

The Eurocurrency market represents the international money market in which short-term deposits
of banks that are denominated in a currency other than local are borrowed and lent.

Trade in a broker market involves a transaction of security between buyer and seller with a help of
a broker. Transaction happens on the securities exchange floor. Broker markets help companies to
raise funds through:
 Sale of new securities or
 Resale of securities that they already own.
The seller and the buyer never interact directly at a dealer market. Market makers are dealers of
security and they offer to buy or sell a security at a certain price. Therefore, two trades are
performed in a dealer market:
 First, security is sold to a dealer by the first party;
 After that, security is bought from the same or another dealer by the second party
what is a Capital Gain?
A Capital Gain is described as the increase in the value of a capital asset. This is realized
when the asset is sold. So, if a company sells a capital asset for more than it paid for the asset, the
difference between the sale price and the purchase price is called a capital gain.
So, it can be calculated by the following formula:
Capital Gain=Sale price – Purchase price

1.15. Describe the Tax treatment of ordinary income and that of capital gains. What is the
difference between the Average Tax rate and the margin tax rate?
Companies can earn:
 Ordinary income and
 Capital gain.
The ordinary income of a company represents income received from business activities, that is,
income received from the sale of goods and services. Companies pay taxes on ordinary income
based on the corporate tax rate schedule.
The company receives capital gain based on the sale of the financial asset (like stock) if the sale
price of the asset is higher than its purchasing price. Capital gains increase the ordinary income of
companies. The sum of capital gains and ordinary income is taxed based on the corporate tax rate
schedule.
The marginal tax rate is the tax rate that should be paid on an additional (dollar) of income.
The marginal tax rate fluctuates with the increase of taxable income of the company. For
example:
 The marginal tax rate is 15 percent for taxable income from $0 to $50,000;
 The marginal tax rate is the highest (39 percent) for the level of taxable income that ranges
from $100,000 to $335,000.
The average tax rate represents the rate that is calculated as a fraction between total taxes
due and taxable income (before tax earnings). Usually, the marginal tax rate differs from the
average tax rate because the marginal tax rate changes with the change of the company’s income.
 Common stock
 Preferred Stock
 Money market
 Capital market
 Financial market
 Primary market
 Secondary market
o Difference between primary and secondary market
 Role of financial Institutions
 Functions of financial institution and financial market