2- 1

Fundamentals
of Corporate
Finance
Sixth Edition

Chapter 2
Financial Markets and
Institutions

Richard A. Brealey
Stewart C. Myers

Alan J. Marcus

Slides by
Matthew Will

McGraw Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved

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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
Money

Primary

OTC

Markets

Markets

Secondary
Markets

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Financial Markets
Financing Decision
Source of Funds Capital
Capital Structure
Money Markets
Euros

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Financial Markets

Issue Securities

Company

Cash
Reinvested

Cash

Investors

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Financial Markets
Financial markets

Corporation
Investment
in real assets

Reinvestment

Stock markets
Fixed-income markets
Money markets
Markets for
Commodities
Foreign exchange
Derivatives

Financial
Intermediaries
Mutual Funds
Pension funds
Financial Institutions
Banks
Insurance companies

Investors
worldwide

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Financial Institutions
Company

Obligations

Funds

Intermediaries
Banks
Insurance Cos.
Brokerage Firms

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Financial Institutions
Intermediaries

Obligations

Funds

Investors
Depositors
Policyholders
Investors

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Financial Markets

$
Bank of
America

$
Explorer
Fund

Sells
shares

Investors
Issues
shares

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Financial Markets
Company
Banks
Insurance Cos.

Obligations

Funds

Intermediary

Brokerage Firms
Obligations

Funds

Depositors
Policyholders
Investors

Investor

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Financial Markets
Company
Loan

Banks

$2.5 mil

Intermediary
Deposits

Depositors

Cash

Investor

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Financial Markets
Company
Issue Debt

Insurance
Company

$2.5 mil

Intermediary
Sell policies

Policyholders

Cash

Investor

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Total U.S. Financing

% Holdings of Corporate and Foreign Bonds (Qtr 3, 2007)
12.3

9.5

14.2

28.1

5.4
20.6

10

Households
Rest of world
Banks
Insurance Cos
Pension Funds
Mutual Funds
Other

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Total U.S. Financing

% Holdings of Corporate Equities (Qtr 3, 2007)
1.4
27.1

28.3

12.6
22.3

0.3

Households
Rest of world
Banks
Insurance Cos
Pension Funds
Mutual Funds
Other

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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

Interest rates on 30-year corporate bonds,

February 2008.

Credit Rating
AAA
AA
A
BBB
BB
B

Interest Rate
5.71%
5.78
6.38
7.12
9.84
10.82

Source: Bloomberg Composite Corporate Bond

Indexes.

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Value of Alaska Air Group

Data as of January, 2008

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Value Maximization

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