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Financial Markets and Intermediaries

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What are financial markets? What function do they perform? How would an economy be worse off without them?

Define in a technical sense what we mean by financial intermediary. Give an example of your definition.

Distinguish between the money and capital markets.

What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

What is an investment banker, and what major functions does he or she perform?

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Solution Summary

This solution discusses financial markets and intermediaries.

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(1)
In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. An economy would be worse without it due to the increasing transaction costs or frictions in the economy.

(2)
A financial intermediary is an institution, firm or individual who performs intermediation between two or more parties in a financial context. Typically the first party is a provider of a product or service and the second ...

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