Integrative Case 1

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Chapter 2
The Financial Market Environment

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Overview
Money and capital markets and their major components are introduced in this chapter. Firms need to raise capital in order to survive. Financial institutions give firms access to the money they need to grow. However, greed can drive financial managers and institutions to commit actions that get them into trouble and even force bankruptcy. These bankruptcies result in limited capital flows to firms, and both they and the whole economy can suffer. Therefore, financial institutions and markets should be well regulated. The final section covers a discussion of the impact of taxation on the firm’s financial activities.

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The money market is created by a financial relationship between the suppliers and demanders of short-term debt securities maturing in one year or less, such as U.S. Treasury bills, commercial paper, and negotiable certificates of deposit. The Eurocurrency market is the international equivalent of the U.S. money market and is used for short-term bank time deposits denominated in dollars or other major currencies.

4. The capital market is a financial relationship created by a number of institutions and arrangements that allows the suppliers and demanders of long-term funds (with maturities greater than one year) to make transactions. The key securities traded in the capital markets are bonds plus common and preferred stock.

5. The broker market consists of national and regional securities exchanges. These organizations provide a location, such as the New York Stock Exchange, to bring together the buyers and sellers of debt and equity. They create a continuous market for securities, allocate scarce capital, determine and publicize security prices, and aid in new financing.

In contrast, dealer markets are electronic markets for the buyers and sellers of securities not listed on the major exchanges. In a dealer market, physical trading locations are replaced by security dealers who offer to buy or sell securities at stated bid/ask prices. Dealers buy securities from clients and sell them to other dealers, who in turn sell them to their clients. A majority
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