Financial Markets and Financial Institutions

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Three Types of Financial Markets

Bond Market

A bond is a debt security that promises periodic payments for a specified time.

Stock Market

A stock represents a share of ownership in a corporation.

Foreign Exchange Market

The foreign exchange market is where one country's currency is exchanged for another.

Structure of Financial Markets

Debt and Equity Markets

Primary and Secondary Markets

Exchange and Over-the-counter Markets

Money and Capital Markets

Financial Institutions

Financial Intermediaries

Institutions that borrow funds from people who have saved and make loans to other people, such as banks, insurance companies, finance companies.

Function of Financial Intermediaries

Engage in indirect finance

Mitigate frictions between savers and borrowers that cannot be solved directly,

- Transaction costs: time and money it takes to carry out a financial transaction.

- Asymmetric information that may lead to adverse selection and moral hazard.

- Risks

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