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
2- 2
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
2- 3
Financial Markets
Money
Primary
OTC
Markets
Markets
Secondary
Markets
2- 4
Financial Markets
 Financing Decision
Source of Funds “Capital”
 Capital Structure
 Money Markets
 Euros

2- 5
Financial Markets
Issue Securities
Company
Cash
Reinvested
Cash
Investors
2- 6
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
2- 7
Financial Institutions
Company
Obligations
Funds
Intermediaries
Banks
Insurance Cos.
Brokerage Firms
2- 8
Financial Institutions
Intermediaries
Obligations
Funds
Investors
Depositors
Policyholders
Investors
2- 9
Financial Markets
$
Bank of
America
$
Explorer
Fund
Sells
shares
Investors
Issues
shares
2- 10
Financial Markets
Company
Banks
Insurance Cos.
Obligations
Funds
Intermediary
Brokerage Firms
Obligations
Funds
Depositors
Policyholders
Investors
Investor
2- 11
Financial Markets
Company
Loan
Banks
$2.5 mil
Intermediary
Deposits
Depositors
Cash
Investor
2- 12
Financial Markets
Company
Issue Debt
Insurance
Company
$2.5 mil
Intermediary
Sell policies
Policyholders
Cash
Investor
2- 13
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
2- 14
Total U.S. Financing
% Holdings of Corporate Equities (Qtr 3, 2007)
1.4
27.1
28.3
12.6
22.3
8
0.3
Households
Rest of world
Banks
Insurance Cos
Pension Funds
Mutual Funds
Other
2- 15
Function of Financial Markets
 Transporting cash across time
 Risk transfer and diversification
 Liquidity
 Payment mechanism
 Provide information
2- 16
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.
2- 17
Value of Alaska Air Group
Data as of January, 2008
2- 18
Value Maximization
2- 19
Web Resources