Chapter 8, Problem 1LO

To determine

Eight basic facts about the global financial system.

Explanation of Solution

1. The basic external source of financing around the world is not equity.
2. The businesses do not prefer much financing through marketable securities either in debt or equity.
3. Financial intermediaries or indirect finance is a more important source of finance than direct finance where the funds are raised directly from lenders.
4. One of the most heavily regulated sector of the economy is the financial system because the economic growth depends on their stability.
5. The most important source of external funds for the businesses is the financial intermediaries, particularly banks.
6. Only the large corporations have access to securities market to finance their businesses because small investors may find such investments costly.
7. Collateral is a very significant feature of a debt contract for both the borrowers and the lenders.
8. Debt contracts are large and complicated documents with many provisions and restrictions on the behavior of the borrower.

Economics Concept Introduction

Concept Introduction:

The global financial system is the financial structure in various countries and regions around the world. It mainly consists the methods and sources which different business entities use to obtain external funds. The methods of finance are usually debt, equity, or a mix of both.

The source for debt funds is the bond market and for equity, its security market. Although the financial system may be different in different countries due to their prevailing policies, market conditions, business processes, etc. there are some facts that are common to all these financial structures.

Frederic Mishkin, an American economist, observed the global financial system from a period of 1970 to 1996. He used these observations to determine eight facts about the global financial system.