Final Exam Flashcards
(11 cards)
Problems of direct non-market intermediation
Search costs
How do you find someone to lend money to?
Double co-incidence of wants:
Do they want to borrow exactly what you want to lend?
Contracting costs
How do you write a contract so that you will get your money back?
Default
How do you know the borrower is not a deadbeat?
If you don’t receive payment how do you enforce your contract?
Liquidity
If you want your money back early how can you sell it
information asymmetry
When the seller knows more about the product then the buyer.
Used cars is a good example
Intermediation
Bringing borrowers and lenders together
Financial Intermediation: Financial Institutions
- Chartered banks
- Life insurance companies
- Property and casualty insurers
- Pensions
Market Intermediaries
Market Intermediaries are called brokers:
- Real estate brokers, stock brokers, etc.
Toronto Stock Exchange (TSE)
- Central meeting place
- Incorporated in 1878
- 1997 closed its trading floor became a computerized dealer
Junior equities on the TSX venture
Initial Listing
First time shares go onto a market is called an IPO
After that they are traded on a secondary market.
Seasoned Equity Offering
After the first IPO any other funds raised will be through a seasoned equity offering or SEO
Over the counter OTC (unlisted)
Small illiquid stocks and some large cap foreign stocks
Investment funds - Closed end
A collective fund with a fixed number of shares. Supply is limited so price is driven by supply and demand.
If they are traded below net asset value its called a discount and above a premium. (Generally at 10%-20% discount to NAV)
Investment Fund - Open End : Mutual Fund
These funds can accommodate demand by issuing new shares. Thus the value is equal to the funds underlying assets
