2015/7/5 Role of financial Assets Role of financial Assets Transfer funds from surplus units to deficit units. Transfer funds from surplus units to deficit units. Example 1: You have graduated from college for 3 Example 2: In your late 305, you have repaid all ars and the salary is just satisfying. Yo your mortgage and your income is more than want to buy a small apartment near your company, but your saving can only cover 30% of it. What can the surplus money? l enough to raise the family. what can you do with Role of financial assets Role of financial Assets Transfer funds from surplus units to deficit units. Transfer funds so as to redistribute unavoidable risk ssociated with cash flows generated from both ork, you have no salary. However, you can tangible and intangible assets. upport your own living with your pension and Example 4: You and your cousin are considering your saving personal investments in the security market. You Who contributes to your pension and your saving? prefer safe return and invest bonds, while he is apparently more aggressive and invests in the stock market with leverage. Whose investment is better? Role of financial Markets Role of financial Markets Intuitively, the financial markets are where we · Role of financial mark an buy or sell financial assets. Determine price or required rate of return Should financial markets be organized? of asset If not, how do you search for potential buyers Provide liquidity Reduce transactions costs which consists of What is the cost associated? search costs and information costs What about the credit risk?2015/7/5 3 Role of Financial Assets • Transfer funds from surplus units to deficit units. – Example 1: You have graduated from college for 3 years and the salary is just satisfying. You really want to buy a small apartment near your company, but your saving can only cover 30% of it. What can you do now? 0-13 Role of Financial Assets • Transfer funds from surplus units to deficit units. – Example 2: In your late 30s, you have repaid all your mortgage and your income is more than enough to raise the family. What can you do with the surplus money? 0-14 Role of Financial Assets • Transfer funds from surplus units to deficit units. – Example 3: You retire at age 65. Since you don’t work, you have no salary. However, you can support your own living with your pension and your saving. – Who contributes to your pension and your saving? – And how? 0-15 Role of Financial Assets • Transfer funds so as to redistribute unavoidable risk associated with cash flows generated from both tangible and intangible assets. – Example 4: You and your cousin are considering personal investments in the security market. You prefer safe return and invest on government bonds, while he is apparently more aggressive and invests in the stock market with leverage. – Whose investment is better? 0-16 0-17 Role of Financial Markets • Intuitively, the financial markets are where we can buy or sell financial assets. • Should financial markets be organized? • If not, how do you search for potential buyers or sellers? • What is the cost associated? • What about the credit risk? 0-18 Role of Financial Markets • Role of financial markets –Determine price or required rate of return of asset – Provide liquidity – Reduce transactions costs, which consists of search costs and information costs