ABSTRACT
INTRODUCTION Chapter 1 presented the role of fi nancial markets and fi nancial intermediaries, which is the effi cient transfer of funds from surplus units (or savers) to defi cit units (or investors). This was also called the economic function of the fi nancial markets (described more fully in the next section). Figure 4.1 depicts this mutual relationship in a simple format. So, for example, if you want to fi nance the purchase of your new car and you do not have the money to do it outright, you will have to borrow the money (say, from a bank). Similarly, businesses that want to expand their productive capacity and need fi nancing can obtain it from various sources, including a bank. Finally, governments, in order to provide the services people want, also tap the fi nancial markets. Similarly, borrowers return part of their income (in various forms) to savers and the fi nancial markets through fi nancial intermediaries. Therefore fi nancial markets allow for this mutually benefi cial exchange among participants and contribute to the enhancement of the society’s welfare in general.
