Many financial intermediaries play an important role in the debt markets. Investment banking firms market debt securities on behalf of issuers. Dealers make markets in the resale (secondary) market. Brokers act as agents for buyers and sellers in the resale markets. Mutual funds, insurance companies, pension funds, commercial banks, and thrifts are large lenders in the debt markets. The purpose of this chapter is to describe the major functions of these intermediaries in the debt markets.

A vast literature discusses the reasons for the existence of these financial intermediaries. Financial intermediaries exist because they expedite the flow of funds from economic sectors with surpluses to sectors with deficits. Financial intermediaries provide a number of advantages including the following: (1) pooling of small savings, (2) diversification of risks, (3) economies of scale in monitoring information and evaluating investment risks, and (4) lower transactions costs.

Initial Sale of Securities (Primary Market)

When securities are issued, they may be sold directly to buyers, as in the case of the US Treasury, which sells securities directly to the public and to bond dealers. Alternatively, security issues are sold to investment banking firms, which market the securities.

Original issues of securities are classified as public or private offerings. The exact meaning of the term public is a technical legal question. In practical terms, a public offering has a ...

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