EC223 Chapter 2: Ch 2
Document Summary
An overview of the financial system page 49-73. Direct finance (ious debt, bond, stocks) Lender (savers) to borrower (spenders) direct finance (not most informal way) Or can through financial intermediaries (indirect finance) In direct finance (the route at the bottom of figure 2-1), borrowers borrow funds directly from lenders in financial markets by selling them securities (also called financial instruments), which are claims on the borrower s future income or assets. Securities are assets for the person who buys them but liabilities (ious or debts) for the individual or firm that sells (issues) them. Classification of financial market: debt and equity, debt markets a firm or an individual can obtain funds in a financial market in two ways. Equities often make periodic payments (dividends) to their holders and are considered long-term securities because they have no maturity date. Disadvantage: shareholder is a residual claimant firm has to pay the debtors first.
