1. Financial Management
financial Markets

2. Readings Financial markets
e-finance/1/financial-markets.aspx

3. Financial Markets and Intermediaries
Connect buyers and sellers
Primary market: issuer to investor
Secondary market: investor to investor
Increase liquidity
Decrease transaction costs
Fees
Interest rate/dividends
Intermediary: “middle man” between direct parties

4. Securities Financial assets (≠ real assets)
A secondary market (investor-to-investor) exists
Debt securities = bonds, a form of lending
Equity securities = stocks, a form of ownership

5. Price/Yield Relationship
All securities have an inverse price/yield relationship
For any given security,
The lower the price, the higher the yield
The higher the price, the lower the yield
Yield formula:
yield = income/price

6. Yield Exercise: Bonds Bond investment terms (determined by issuer)
Par value: $1,000
Coupon: 8.00%
Annual interest payment: $1,000 x 8% = $80
If the price increases to $1,100, what is the yield?
If the yield increases to 8.50%, what is the price?

7. Yield Exercise: Common Stock
Stock investment:
Share price: $20.00
EPS: $6.00
Yield: $6/$20 = 30%
If the price increases to $24.00, what is the yield?
If the yield increases to 40%, what is the price?
If EPS increases to $9 and the yield decreases to 20%, what is the price?

8. Transaction Costs Fee earned by intermediary Common shares example
Buy price is $14.75/share, sell price is $14.63/share
What is intermediary fee for 10,000 shares?
Bonds example
Buy yield is 4.78%, sell yield is 4.98%
What is intermediary fee for a 5%, $1,000,000 bond?

9. Yield Exercise: Bonds Solution

10. Yield Exercise: Common Stock Solution

11. Transaction Costs Solution