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D The Flow of Savings to Corporations


D Functions of Financial Markets
D Functions of Financial Intermediaries

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D The ultimate source of financing is
individual¶s savings
D Two forms of financing: internal and external
D Internal-retained cash and selling new shares
D External-loans and bonds
D Savings flow through financial markets (stock
exchanges) and financial intermediaries
(mutual funds, pension funds, insurance
companies)

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§ § 
Firm's Investors
Financial
operations §
Manager §'  



  
  (  
 )
(timberland)
§ §

(1) Investors buy shares with cash


(2)Cash is invested
(3) Timber harvest generates cash
(4a) Cash reinvested
(4b) Cash returned to investors

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 *'


  '-a market where securities are issued
and traded
D   Ú a traded financial assets (shares; bonds)
D  -a proportion of ownership claim on the firm, with no
maturity
D 
-debt securities issued by a company representing a
obligation to investors to make regular interest payments and
principal on a specified date in the future
D ' '§'+ 
&) is the most important
financial market
D ' ', ( ' Ú trading own common
equity (ordinary shares) of the firm
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D  ( '- market for sale of new issue of
securities (shares, bonds); its organized in banks,
brokerage co. (outside the exchange)

D 
( '- market in which previously
issued securities are traded among investors

D 
( '-'+ 
&
"c
D '+ 
&organized market for trading securities
D "cover the counter market

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 *'

Money

@rimary OTC
Markets Markets
Secondary
Markets
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" 

 *'
D + 
  'market for debt securities
(bonds)
D c  '- market for long-term financing
D *
( '- market for short-term financing
(less than 1 year)
D &
+ 
& '- inter bank market for
trading foreign currencies
D c   '- organized market for trading
commodities (corn, wheat, cotton, oil)
D  ' organized market for trading
derivatives (options, futures, warrants, forwards,
swaps)

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Issue Debt

Company Investors
Cash

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D 

 
  - an organization
that rises money from investors and
provide financing for individuals,
companies e t.c.
D mutual funds,
D pension funds,
D insurance co.,
D banks
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*   

D *   
 pools the savings of many
investors and invests in a portfolio of
securities;
D mutual funds offer investors low-cost
diversification and professional management;
D Two types: Open-end funds and Close-end funds
D funds pursue a wide variety of investment
strategies (only stocks, only bonds, only
dot.com.co¶s,high-tech growth stocks, mixture of
stock and bonds ³balanced´ funds, funds of
funds)
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*   


$ $

ank of Windsor Investors
America Fund
Sells Issues
shares shares

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D 


- investment plan set up by
employer (companies) for providing
employees retirement
D Defined contribution pension plan (a % of
monthly pay is contributed to a pension fund-
partly by employer, partly by employee)
D Defined benefit pension plan (the employer
invest to the pension fund)
D Tax advantages
D Macedonian experience

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" 

 
 


D
 
 
- sells insurance
policies and with cash finance companies
D 
'- collect deposits and lend money to
individuals and companies (short term and
long term loans)

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D Financial markets and intermediaries


channel savings to real investment
D Financial markets and intermediaries
provide financing for business
D Other functions
D Transporting cash across time
D @rovide liquidity
D Reduce and reallocate risk

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Company


anks Obligations Funds

Insurance Cos. Intermediary



rokerage Firms
Obligations Funds
Depositors
Investor
@olicyholders
Investors

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Company

Loan $2.5 mil


anks Intermediary

Deposits Cash

Investor
Depositors

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Company

Loan $250 mil


Insurance
Company Intermediary

Sell policies Cash


Issue Stock

Investor
@olicyholders

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*'

D Securities and commodity prices


D Interest rates
D Company values

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"
(cc
D Cost of capital- minimum acceptable rate of
return of invested capital;
D The cost of capital for corporate investment is
set by the rates of return on investment
opportunities in financial market; it¶s an
opportunity cost-the safest form of investment
(yield on treasury bills)
D Investment projects offering higher return that
the cost of capital are acceptable

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$(. 
D  -‘  

D  §'- 
D 
-   
D   ‘ 
 
 

D ' '§'+ 
&)O 
D ð   O 
    
D "
(   
  
    

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