Finance (Basic)
Ludek Benada
Department of Finance
Office 533
75970@mail.muni.cz

Financial markets
Definition: ….
q
q
q
Financial markets provide channels for allocation of savings to investment.
q

Functions of FM
qBorrowing and Lending
qPrice determination
qInformation Aggregation and Coordination
qRisk Sharing
qLiquidity
qEfficiency

Interest rate
Type of interest:
Simple interest  x   Compound interest
Inflation    Nominal  x  Real IR

Major components of FM
qMoney market (T-Bills, ….)
qCapital market (Stocks, …)

Practical examples
The client saved to the bank from 08/03/2011 to 05/05/2011 an amount of 15,000.00 to an annual
interest rate of 8%. How much was the interest during this period?
The client saved for two years 10,000.00 to the bank. The interest rate was 6% per annum. The
inflation was in this period 2%. How much got the client from the bank in two years? What was his
real gain?

Subtypes of FMs
qCM:
qFEM
qIM
qFM
qDM
qCM
qMM

Capital markets
qPrimary markets
q
q
q
qSecondary markets

Secondary market
qSpot market
q
q
qForward market

The major players in FMs
qBrokers
qDealers
qInvestment Banks
qFinancial Intermediaries

Financial market structures
qOTC
q
qCE
q
qECN

Index
Definition:
qTypes of indices:

Efficient-market hypothesis
FMs are informationally efficient.
qThree version of the hypothesis:
q Weak
q Semi-strong
q Strong

Asymmetric Information in FMs
AI means…


Two types of AI
Adverse selection is a problem that arises for a buyer of goods, services, or assets when the buyer
has difficulty assessing the quality of these items in advance of purchase. (Loan Markets)
Moral Hazard exists in a market if, after the signing of a purchase agreement between the buyer and
seller (of asset) the seller changes his behavior in such a way that the probabilites (risk) used
by the buyer to determine the terms of the purchase agreement are no longer accurate.

Thank you for your attention