CHAPTER 1 The Role and Environment of Managerial Finance 23primary market
Financial market in which
securities are initially issued; the
only market in which the issuer
is directly involved in the
transaction.
secondary market
Financial market in which
preowned securities (those that
are not new issues) are traded.
money market
A financial relationship created
between suppliers and
demanders of short-term funds.
marketable securities
Short-term debt instruments,
such as U.S. Treasury bills,
commercial paper, and
negotiable certificates of deposit
issued by government, business,
and financial institutions,
respectively.
FIGURE 1.4Flow of Funds
Flow of funds for financial
institutions and markets
Private
PlacementSuppliers
of FundsDemanders
of FundsFinancial
InstitutionsFinancial
MarketsFundsDeposits/SharesFundsLoansSecuritiesSecuritiesSecuritiesSecuritiesFunds FundsFundsFundsAll securities are initially issued in the primary market.This is the only mar-
ket in which the corporate or government issuer is directly involved in the trans-
action and receives direct benefit from the issue. That is, the company actually
receives the proceeds from the sale of securities. Once the securities begin to trade
between savers and investors, they become part of the secondary market.The pri-
mary market is the one in which “new” securities are sold. The secondary market
can be viewed as a “preowned” securities market.The Relationship Between Institutions and Markets
Financial institutions actively participate in the financial markets as both suppliers
and demanders of funds. Figure 1.4 depicts the general flow of funds through and
between financial institutions and financial markets; private placement transac-
tions are also shown. The individuals, businesses, and governments that supply
and demand funds may be domestic or foreign. We next briefly discuss the money
market, including its international equivalent—theEurocurrency market.We then
end this section with a discussion of the capital market, which is of key importance
to the firm.The Money Market
The money marketis created by a financial relationship between suppliers and
demanders of short-term funds(funds with maturities of one year or less). The
money market exists because some individuals, businesses, governments, and
financial institutions have temporarily idle funds that they wish to put to some
interest-earning use. At the same time, other individuals, businesses, govern-
ments, and financial institutions find themselves in need of seasonal or temporary
financing. The money market brings together these suppliers and demanders of
short-term funds.
Most money market transactions are made in marketable securities—short-
term debt instruments, such as U.S. Treasury bills, commercial paper, and