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Chapter Approach
Chapter 2 Financial Markets Road to success with
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Fundamentals of Corporate
Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus
Slides by
Matthew Will
Chapter 2
McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Financial Markets and Institutions
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Topics Covered
The Importance of Financial Markets and Institutions
The Flow of Savings to Corporations Functions of Financial Markets and of
Financial Intermediaries Value Maximization and the Cost of Capital
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Financial Markets
Primary
Markets
Secondary
Markets
OTC
Markets
Money
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Financial Markets
Financing Decision Source of Funds “Capital” Capital Structure Money Markets Euros
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Financial Markets
Company
Issue Securities
Cash
InvestorsCash Reinvested
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Corporation
Investment in real assets
Investorsworldwide
Financial markets
Stock marketsFixed-income marketsMoney marketsMarkets for Commodities Foreign exchange Derivatives
Financial Intermediaries
Mutual Funds Pension funds
Financial Institutions
Banks Insurance companies
Reinvestment
Financial Markets
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Financial Institutions
Company
Intermediaries
Banks
Insurance Cos.
Brokerage Firms
ObligationsFunds
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Financial Institutions
Intermediaries
Investors
Depositors
Policyholders
Investors
ObligationsFunds
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Financial Markets
Bank of AmericaBank of America
Explorer Fund
Explorer Fund
Investors
Investors
$ $
Sells shares
Issues shares
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Financial Markets
Funds
Funds
Banks
Insurance Cos.
Brokerage Firms
Obligations
Depositors
Policyholders
Investors
Obligations
Company
Intermediary
Investor
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Financial Markets
Banks
Depositors
$2.5 mil
Cash
Loan
Deposits
Company
Intermediary
Investor
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Financial Markets
Insurance Company
Policyholders
$2.5 mil
Cash
Issue Debt
Sell policies
Company
Intermediary
Investor
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Total U.S. Financing
9.5
28.1
1020.6
5.4
14.2
12.3 HouseholdsRest of worldBanksInsurance CosPension FundsMutual FundsOther
% Holdings of Corporate and Foreign Bonds (Qtr 3, 2007)
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Total U.S. Financing
27.1
12.6
0.3822.3
28.3
1.4 HouseholdsRest of worldBanksInsurance CosPension FundsMutual FundsOther
% Holdings of Corporate Equities (Qtr 3, 2007)
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Function of Financial Markets
Transporting cash across time Risk transfer and diversification Liquidity Payment mechanism Provide information
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U.S. Financing
Information Provided by Financial Markets Commodity prices Interest rates Company values
Credit Rating Interest RateAAA 5.71%AA 5.78A 6.38BBB 7.12BB 9.84B 10.82
Source: Bloomberg Composite Corporate BondIndexes.
Interest rates on 30-year corporate bonds,February 2008.
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Value of Alaska Air Group
Data as of January, 2008
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Value Maximization
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Web Resources
