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Flashcards in Final Exam Deck (11)
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1

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

2

information asymmetry

When the seller knows more about the product then the buyer.
Used cars is a good example

3

Intermediation

Bringing borrowers and lenders together

4

Financial Intermediation: Financial Institutions

- Chartered banks
- Life insurance companies
- Property and casualty insurers
- Pensions

5

Market Intermediaries

Market Intermediaries are called brokers:
- Real estate brokers, stock brokers, etc.

6

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

7

Initial Listing

First time shares go onto a market is called an IPO
After that they are traded on a secondary market.

8

Seasoned Equity Offering

After the first IPO any other funds raised will be through a seasoned equity offering or SEO

9

Over the counter OTC (unlisted)

Small illiquid stocks and some large cap foreign stocks

10

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)

11

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