Getting cranked up again. Going to have a quiz at the end of this class. Lecture at the beginning of class.Talking a bit about newspaper articles this week. Also about endowments.
If you want to leave a lot of money to an organization in your will, don’t. Instead, buy a life insurance policy with those funds, naming the organization as the beneficiary. Much higher payoff, lower taxes.
Chapter 8: Financial Institutions
Direct Finance is when a person invests directly in a company or enterprise. Loaning money to a friend is direct finance.
Indirect finance is any finance transactions performed via an intermediary.
Symmetric information indicates that both parties have equal information about the proposed transaction. Asymmetric information is the state where one party has more information relevent to the transaction than the other party. Asymmetric information is much more common, and very dangerous to financial transactions. Insurance is easily compromised by unequal information.
Moral Hazard is the risk that a borrower may have an incentive to behave in riskier behavior after a loan has been made or a debt instrument purchased.
Investment banks underwrite securities, meaning they guarantee that the issueing company will receive a minimum amount per stock or bond sold. Under firm commitment underwriting, the investment bank buys all the issued stocks or bonds, and then resells them to dealers and buyers. Under standby commitment underwriting, the investment bank commits to buy any outstanding stock after the initial sale.
Securities sales are regulated by the SEC (Securities and Exchanges Commission).