The paper 'Financial Architecture and Economic Performance' is a perfect example of a Finance and Accounting Assignment. The modern financial system comprises of six elements that include; ultimate lenders, financial intermediaries, financial instruments, creation of money, financial markets, and price discovery (Allen, Chui & Maddaloni, 2004). The ultimate lenders comprise of the non-financial economic units that undertake the process of lending and borrowing. The ultimate lenders directly or indirectly lend to borrowers through financial intermediaries. The financial intermediaries are intermediate during the process of borrowing and lending. The financial intermediaries position themselves between the borrowers and the lenders and earn a margin as the benefit of the intermediation. Financial instruments are instruments created by the ultimate borrowers to satisfy the financial needs of the participants in the financial system.
The instruments offered can either be marketable such as treasury bills or nonmarketable such as retirement annuities. The creation of money through bank deposits by financial institutions such as banks is carried out to satisfy the demand for bank credit. Banks have the creation of money as a unique feature. Price discovery is the establishment in the financial markets that gives price to the money.
In this case, the rate interest rate is the price of money lent by the financial institutions The modern financial system plays an important role in the economic growth and strengthening of the economy. Economic development and strengthening depend on the available infrastructure. In the absence of major industries such as power, oil, and coal, the development of other industries is affected. Financial services provide the needed funds from the growth of the infrastructure industries. Also, the financial system assists the government to raise short and long term funds through issuing bills and bonds.
Therefore, the capital market, foreign exchange market, and the money market enable the government to meet its credit needs. In your own words discuss the function and purpose of both the primary and secondary markets in a modern financial system? The key function of the primary financial market is to facilitate capital growth by allowing participants to convert savings into investments. The primary market facilitates the issuing of new stock by companies to raise money directly from households to meet the financial obligations or for expansion (Tadasse, 2002).
Also, the primary market facilitates how the government raises funds by providing channels that the government can use to raise funds from the public to finance the projects in the public sector. Through primary markets, companies are able to issue initial public offers (IPOs). The IPOs are stock offerings that authorize a share of the company ownership to the extent of the value of the stock. The issuing of the IPOs can be at par or above par depending on the future prospects and past performance.
Also, the primary market can be used by the government to directly issue securities to the public when seeking funds for the public works projects. The secondary market facilitates subsequent trading and selling of stock after the IPO. It is in the secondary market that investors buy securities from other investors rather than directly from the companies. The secondary market facilitates stock trading by proving highly liquid, safe, and readily available resale of stocks (Grinblatt & Titman, 2002). The secondary markets provide investors with protection by organizing and regulating the financial market by ensuring fair and open market place that protects the investors from fraud and scams.
Moreover, the secondary market is where facilitates the occurrence of bulk exchange trade. However, primary markets have high volatility compared to secondary markets because of the difficulty of accurately gauging the demand of the investors for new securities until several days of trading.
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