Integrative Case 1 Essay examples

4331 Words Nov 17th, 2015 18 Pages
Chapter 2
The Financial Market Environment

( Instructor’s Resources

Money and capital markets and their major components are introduced in this chapter. Firms need to raise capital in order to survive. Financial institutions give firms access to the money they need to grow. However, greed can drive financial managers and institutions to commit actions that get them into trouble and even force bankruptcy. These bankruptcies result in limited capital flows to firms, and both they and the whole economy can suffer. Therefore, financial institutions and markets should be well regulated. The final section covers a discussion of the impact of taxation on the firm’s financial activities.

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Until the late 1990s, the Glass-Steagall Act created a separation between the two. A shadow banking system, where non-deposit-taking enterprises lend money to firms needing cash, has grown to be as large as the traditional banking system.

2. Financial markets provide a forum in which suppliers of funds and demanders of loans and investments can transact business directly.

Primary market is the name used to denote the fact that a security is being issued by the demander of funds to the supplier of funds. An example would be Microsoft Corporation selling new shares of common stock to the public.

Secondary market refers to the trading of securities among investors subsequent to the primary market issuance. In secondary market trading, no new funds are being raised by the demander of funds. The security is trading ownership among investors. An example would be individual “A” buying common stock of Microsoft through a broker from individual “B.”

Financial institutions and financial markets are not independent of each other. It is quite common to find financial institutions actively participating in both the money market and the capital market as both suppliers and demanders of funds. Financial institutions often channel their investments and obtain needed financing through the financial markets. This relationship exists because

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