The function of financial marketsFinancial markets perform the essential economic function of channeling funds from those who have saved surplus funds, because they spend less than their income, to those who have a shortage of funds, because they wish to spend more than their income. Those who have saved lending funds are the lenders-savers and those who must borrow funds to finance their spending are the borrowers-spenders. The principal lenders-savers are households, but business firms and the government (particularly state and local government) as well as foreigners and their governments sometimes also find themselves with excess funds and so lend them out. The most important borrowers-spenders are business firms and the government, but households and foreigners also borrow to finance their purchases of cars, furniture and houses. In direct finance borrowers borrow funds directly from lenders in financial markets by selling them securities (also called financial instruments), which are claims on the borrower’s future income or assets. While securities are assets for the person who buys them, they are liabilities (an IOU or a debt) for the individual or firm that sells (issues) them. For example, if General Motors needs to borrow funds to pay for a new factory to manufacture front-wheel-drive cars it might borrow the funds from a saver by selling him a bond, a security that promises to make payments periodically for a specified period of time. Financial markets contribute to higher production and efficiency in the overall economy. They also directly improve the well-being of consumers by allowing them to time their purchases better. They provide funds to young people to buy what they need and can eventually afford, without forcing them to wait until they have saved up the entire purchase price. Financial markets that are operating efficiently improve the economic welfare of everyone in the society. There are two ways that a firm or an individual can obtain funds in a financial market. The most common method is to issue a debt instrument, such as a bond or a mortgage, which is a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest payments) until a specified date (the maturity date) when a final payment is made. The maturity of a debt instrument is the time (term) to that instrument’s expiration date. A debt instrument is short term if its maturity is a year or less and is long term if its maturity is ten years or longer. Debt instruments with a maturity between one and ten years are said to be intermediate term. The second method of raising funds is by issuing equities, such as common stock, which are claims to share in the net income (income after expenses and taxes) and the assets of a business firm. If you own one share of common stock in a company that has issued one million shares, then you are entitled to one one-millionth of the firm’s net income and one one-millionth of the firm’s assets. Equities usually make periodic payments (dividends) to their shareholders and are considered to be long-term securities because they have no maturity date.
1. Answer the questions:
1. How would you distinguish between direct finance and indirect finance? 2. Why are financial markets necessary? 3. What is the main function of financial market? 4. How do efficiently operating financial markets improve the economic welfare? 2. Match each of the words on the left with the correct explanation on the right:
3. Complete the text by inserting the following words in the gaps:
lenders, borrowers, middleman, lenders-savers, funds, financial intermediary, borrowing, loans, liability, bond, financial market, the bank
Funds can move from......(1) to......(2) by the route, called indirect finance, because it involves a......(3) financial intermediary that stands between the......(4) and the borrowers-spenders and helps transfer......(5) from one to the other. A......(6) does this by......(7) funds from the lenders-savers and then, in turn, makes......(8) to borrowers-spenders. A bank, for example, might acquire funds by issuing a......(9) to the public in the form of savings deposits and then use the funds to acquire an asset by making a loan to General Motors or by buying a GM......(10) in the......(11). The ultimate result is that funds have been transferred from the public to GM with the help of the financial intermediary (......(12)).
4. Translate the sentences into English:
1. Большинство сбережений осуществляется семейными хозяйствами, а большинство инвестиций - фирмами. 2. При косвенном финансировании средства, перемещающиеся от семейных хозяйств к фирмам, проходят через финансовые рынки. 3. Самая важная функция финансовых посредников - это приведение активов и долговых обязательств в соответствие с запросами потребителей. 4. Выпуская свои собственные долговые обязательства, финансовые посредники увеличивают размеры денежных фондов. 5. Сбережениями называется та часть дохода семейных хозяйств, которая не идет на покупку товаров и услуг или на уплату налогов. 6. В январе 2011 года чистый доход компании составил $23,000, большая часть которого была направлена на инвестиции. 7. Большинство банков выдает ссуды на основе простых векселей. 8. Долгосрочные ценные бумаги имеют срок погашения более десяти лет. 9. В условиях современной рыночной экономики появление свободных средств связано с тем фактом, что величина расходов семейных хозяйств в среднем, как правило, меньше величины их доходов.
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