FINANCIAL MARKET(FM)

Market- Product market and factor market FM Part of factor market- Market for Financial Assets

Assets and Financial Assets

An asset is any possession that has value in an exchange Can be tangible( building, land, machinery) or intangible(legal claims to some future benefits) Future benefits comes in the form of a claim to future cash Who makes the future cash payment is issuer Owner of financial asset is investor

Debt and Equity

The claims of the holder of financial assets may be a fixed(debt) or a varying or residual( Equity) Bonds are debt. Share is equity Convertible bond both equity and bond Debt is also called fixed income instruments Cash flow-expected cash to be received each period from investing in a particular financial assets

Role and properties of Financial assets

Transfer of funds from surplus to those who need Transfer in such a way as to redistribute the unavoidable risk associated with cash flow 10 properties-moneyness, divisibility, reversibility(round trip cost), term to maturity, liquidity, convertibility, currency, cash flow and return predictability, complexity and tax structure

Role of Financial Market(FM)

Financial assets are traded in financial market Three functions (a) helps in the determination of the required rate of return or price discovery process(b)provides a mechanism for an investor to sell a financial assets -Degree of liquidity(c ) reduces the search cost(explicit costadvertisement cost and implicit cost on locating a counter party) and information cost(Incurred in assessing the investment merits of a financial asset)

Classification of FM
Classification by type of claim, maturity of claim and by whether financial assets are newly issued By financial claim- debt market, equity market, stock market, fixed income market By maturity of claims- money market, capital market By issuing method- primarymarket, secondary market

Players in FM
Players include- entities those issue financial assets and those invest in financial assets Financial intermediaries Regulator Financial institutions functions-transform financial assets to liabilities done by financial intermediaries; exchange financial assets on behalf of customers; exchange financial assets for their own account; assist in creation of financial assets ; provide investment advice; manage the portfolios.

Role of Financial Intermediaries

Investment of financial Intermediaries their assets referred to as direct investment Example Commercial bank, Mutual funds Four economic functions- provide maturity intermediation, risk reduction via diversification, reducing the cost of contracting and information processing and providing payments mechnism