The document provides an overview of financial markets and how they function. It discusses that financial markets bring together surplus and deficit economic units for their mutual benefit by facilitating the exchange of securities. It describes the roles of financial intermediaries like investment bankers, brokers, and dealers in facilitating transactions in primary and secondary markets for short-term money market securities and long-term capital market securities. The document also outlines some key concepts around securities, financial intermediaries, and the different financial markets.
This document discusses monetary policy and how the Federal Reserve uses it to manage the economy. It explains that the Fed uses open market operations, buying and selling U.S. treasury bonds, to increase or decrease the money supply. When the Fed buys bonds it injects money into the economy, lowering interest rates to stimulate investment and growth. When it sells bonds it removes money, raising rates but also slowing investment to prevent overheating. The goal is to keep rates and the economy stable over time using this tool to counter shifts in money demand from the private sector.
Impact of financial intermediaries on economyNosheen Ameen
Financial intermediaries such as banks facilitate the flow of money between savers and borrowers. They pool funds from many depositors and use these funds to issue loans to borrowers, helping overcome mismatches in maturity needs. Intermediaries also reduce information asymmetry and transaction costs. By acting as intermediaries, banks are able to efficiently channel funds to productive uses in the economy.
Role of financial markets and institutions ch.1 (uts)Rika Hernawati
This chapter discusses the role of financial markets and institutions. It begins by outlining the function of financial markets in facilitating the transfer of funds from savers to borrowers. It then describes the segments of financial markets, including direct and indirect financing. It also discusses the types of financial markets such as money markets, capital markets, primary and secondary markets. The chapter concludes by examining the various roles of financial institutions, such as commercial banks, savings institutions, securities firms and insurance companies, in connecting savers and borrowers in financial markets.
This document discusses the role of financial intermediaries in lending and borrowing. It explains that in a world without transaction costs or information problems, there would be no need for intermediaries. However, intermediaries exist to reduce transaction costs, allow for portfolio diversification, gather and produce information, and address issues of asymmetric information like adverse selection and moral hazard. The evolution of financial intermediaries in the US is then reviewed, highlighting the impact of deregulation, technology, and the rise of institutional investors like pension funds and mutual funds.
This document provides information about derivative markets and the risks they cover. It defines derivative instruments and describes some common types, including futures, options, and swaps. It then explains how the derivative market covers foreign exchange risk, interest rate risk, and commodity/product input risk. Companies can use derivatives to hedge against losses from fluctuations in currency exchange rates, interest rates, and raw material prices. The document also contains topics on insurance services in the US, the primary market, investment banks, financial intermediaries, globalization of financial markets, and the Basel Committee.
The document provides an overview of business finance and financial markets. It discusses that businesses need finance for fixed assets and working capital. Financial markets help mobilize savings from households and channel them to businesses through financial intermediation. There are two major mechanisms for this - banks and financial markets. Financial markets deal in the creation and exchange of financial assets in both the primary market (new issues) and secondary market (existing securities). Money markets deal in short-term funds of less than 1 year, while capital markets deal in long and medium-term funds. The key stock exchanges in India are the National Stock Exchange and Bombay Stock Exchange.
The money market facilitates short term borrowing and lending of up to one year. It connects lenders and borrowers through various institutions and deals with near money assets. The capital market enables long term borrowing and lending through an organized mechanism. It helps raise capital for industry and meets long term funding demands. Together, the money and capital markets are important components of a country's financial system.
Financial Markets - Arushi Sharma & Hisham Ahmed RizviHisham Rizvi
The document provides an overview of financial systems and financial markets. It discusses key concepts such as what constitutes a financial system and its components. It describes the structural and functional approaches to understanding financial systems. It also defines financial markets and distinguishes between primary and secondary markets. It explains capital markets and money markets, and the various instruments that trade on each. Finally, it discusses the role of financial regulators in maintaining integrity and stability in the financial system.
This document discusses monetary policy and how the Federal Reserve uses it to manage the economy. It explains that the Fed uses open market operations, buying and selling U.S. treasury bonds, to increase or decrease the money supply. When the Fed buys bonds it injects money into the economy, lowering interest rates to stimulate investment and growth. When it sells bonds it removes money, raising rates but also slowing investment to prevent overheating. The goal is to keep rates and the economy stable over time using this tool to counter shifts in money demand from the private sector.
Impact of financial intermediaries on economyNosheen Ameen
Financial intermediaries such as banks facilitate the flow of money between savers and borrowers. They pool funds from many depositors and use these funds to issue loans to borrowers, helping overcome mismatches in maturity needs. Intermediaries also reduce information asymmetry and transaction costs. By acting as intermediaries, banks are able to efficiently channel funds to productive uses in the economy.
Role of financial markets and institutions ch.1 (uts)Rika Hernawati
This chapter discusses the role of financial markets and institutions. It begins by outlining the function of financial markets in facilitating the transfer of funds from savers to borrowers. It then describes the segments of financial markets, including direct and indirect financing. It also discusses the types of financial markets such as money markets, capital markets, primary and secondary markets. The chapter concludes by examining the various roles of financial institutions, such as commercial banks, savings institutions, securities firms and insurance companies, in connecting savers and borrowers in financial markets.
This document discusses the role of financial intermediaries in lending and borrowing. It explains that in a world without transaction costs or information problems, there would be no need for intermediaries. However, intermediaries exist to reduce transaction costs, allow for portfolio diversification, gather and produce information, and address issues of asymmetric information like adverse selection and moral hazard. The evolution of financial intermediaries in the US is then reviewed, highlighting the impact of deregulation, technology, and the rise of institutional investors like pension funds and mutual funds.
This document provides information about derivative markets and the risks they cover. It defines derivative instruments and describes some common types, including futures, options, and swaps. It then explains how the derivative market covers foreign exchange risk, interest rate risk, and commodity/product input risk. Companies can use derivatives to hedge against losses from fluctuations in currency exchange rates, interest rates, and raw material prices. The document also contains topics on insurance services in the US, the primary market, investment banks, financial intermediaries, globalization of financial markets, and the Basel Committee.
The document provides an overview of business finance and financial markets. It discusses that businesses need finance for fixed assets and working capital. Financial markets help mobilize savings from households and channel them to businesses through financial intermediation. There are two major mechanisms for this - banks and financial markets. Financial markets deal in the creation and exchange of financial assets in both the primary market (new issues) and secondary market (existing securities). Money markets deal in short-term funds of less than 1 year, while capital markets deal in long and medium-term funds. The key stock exchanges in India are the National Stock Exchange and Bombay Stock Exchange.
The money market facilitates short term borrowing and lending of up to one year. It connects lenders and borrowers through various institutions and deals with near money assets. The capital market enables long term borrowing and lending through an organized mechanism. It helps raise capital for industry and meets long term funding demands. Together, the money and capital markets are important components of a country's financial system.
Financial Markets - Arushi Sharma & Hisham Ahmed RizviHisham Rizvi
The document provides an overview of financial systems and financial markets. It discusses key concepts such as what constitutes a financial system and its components. It describes the structural and functional approaches to understanding financial systems. It also defines financial markets and distinguishes between primary and secondary markets. It explains capital markets and money markets, and the various instruments that trade on each. Finally, it discusses the role of financial regulators in maintaining integrity and stability in the financial system.
Financial markets and institutions ITM3Aram Mohammed
Financial markets and institutions perform several key functions:
1) They channel funds from economic units with surplus funds to units with deficits through borrowing and lending.
2) They determine the prices of financial assets through trading in primary and secondary markets.
3) They facilitate the exchange of funds by providing information to market participants and helping manage risks.
Financial markets allow people and entities to trade financial securities and commodities. They provide a place for buyers and sellers to come together and exchange these assets. Securities traded include stocks, bonds, and derivatives, while commodities can be precious metals or agricultural goods. Financial markets have important functions such as transferring funds from savers to borrowers, providing liquidity for securities, and disseminating economic information. They play a key role in allocating resources in a market economy.
What is Financial Market :
Mechanism that allows people to buy and sell financial securities (such as stocks and bonds) and items of value at low transaction cost.
Markets work by placing many interested buyers and sellers in one “place”, thus making easier for them to find each other.
Introduction To Financial Institution Saguest3e1da1
The document provides an overview of financial markets and institutions. It defines key terms like financial market, security, and the two main types of markets - exchanges and over-the-counter. It also describes the main types of financial institutions like commercial banks, investment banks, and universal banks. Commercial banks' main activities are taking deposits and lending, while investment banks focus on underwriting new issues and secondary market activities. Many large financial institutions today are universal banks that engage in both commercial and investment banking activities.
The document discusses the members of a group project on financial markets at IBS Mumbai. It then provides information on various topics related to financial markets including definitions of financial markets and money markets, functions of financial markets, classifications of markets, components of money markets like call money market, treasury bill market, commercial paper and certificates of deposits. It also discusses primary and secondary markets, corporate debt market, forex market and money market intermediaries like Discount and Finance House of India.
Financial institutions and markets notes as per BPUT syllabus for MBA 2nd sem...Venkat Kothakota
The document provides information on the Indian financial market and its various components. It discusses the money market and capital market as the two main organized financial markets in India. The money market is further divided into unorganized and organized segments. The unorganized segment includes money lenders, indigenous bankers, and chit funds. The organized money market comprises treasury bills, commercial paper, certificates of deposit, the call money market, and the commercial bill market. The capital market provides long-term finance and consists of the industrial securities market, government securities market, and long-term loans market.
Saminar on Financial Market Money Market By Sanjay SindagiSanjay Sindagi
The document defines and describes financial markets. It states that a financial market facilitates the exchange of financial instruments between buyers and sellers. It discusses the key components of financial markets, including the money market, primary market, secondary market, capital market, debt market, and equity market. The document also outlines various money market instruments such as treasury bills, commercial papers, certificates of deposit, and repurchase agreements. It notes that financial markets play an important role in economic development by providing funding for trade, industries, and capital formation.
The document provides an overview of the financial system and its key components. It discusses how financial markets and institutions help channel funds from savers to borrowers, allowing for investment and economic growth. It then covers the major types of financial markets and instruments, including debt vs equity markets, primary vs secondary markets, money markets, capital markets, and derivatives. It also discusses the internationalization of financial markets through foreign bonds, Eurobonds, and Eurocurrencies.
Role of Financial Markets Note - A-Level & IB EconomicsQurious Education
Financial markets play several important roles in the economy. They facilitate saving and lending through banks and capital markets, allowing individuals and businesses to borrow money for consumption, investment, and trade. Financial markets also provide a venue for companies to raise capital through the issuance of stocks and bonds. By channeling funds from savers to borrowers, financial markets help allocate resources efficiently in the economy.
Financial markets allow for the exchange of funds between those who have savings (surplus units) and those who need funds for investment in real assets (deficit units). They do this through financial instruments that represent claims against issuers. There are two main types of financial markets - the money market for short-term instruments and the capital market for long-term debt and equity. Within each market, primary markets facilitate new issues while secondary markets allow for the exchange of existing securities. Financial intermediaries such as banks, insurance companies, and pension funds facilitate indirect finance by collecting funds through various financial claims and allocating them through purchases of direct claims.
Introduction To Financial Institutions And Marketsitsvineeth209
This document provides an introduction to financial institutions and markets. It discusses the key components of the financial system including money, credit, services and finance. It also outlines the main functions of financial institutions such as collecting funds from investors and directing them to providers. The document categorizes common financial institutions and describes financial markets as places where financial assets are traded. It defines various financial instruments and how they are categorized as cash instruments or derivatives.
This document defines key terms in finance and describes various financial institutions and markets. It begins by defining finance, money, and credit. It then discusses two main classifications of finance - public and private. Next, it examines different types of financial institutions like banks, investment companies, insurance companies, and credit unions. It also explores various financial markets and instruments. In closing, the document emphasizes the relationship between financial institutions and markets.
This document provides an overview of financial markets and institutions. It discusses the key functions of financial markets in channeling funds from surplus to deficit units. It describes the structure of financial markets, including the distinction between debt and equity markets, primary vs secondary markets, and money vs capital markets. The main instruments traded in these markets are also outlined. The document then discusses the role of financial institutions in providing indirect finance and transforming financial assets. It identifies the main types of financial institutions like depository institutions, contractual savings institutions, and investment intermediaries. Finally, it covers the rationale for regulating financial markets and institutions to increase information and ensure overall financial system stability.
The document provides information on various types of investments and financial markets. It discusses initial public offerings (IPOs) as well as the roles of intermediaries in the primary market. Specifically, it notes that an IPO allows a company to raise funds by selling shares to the public for the first time. A lead manager helps guide companies through the IPO process by conducting due diligence, drafting offering documents, and coordinating post-issue activities.
The document discusses various topics related to finance and economics including barriers to entry in financial services due to reputation risk, how financial products and derivatives are developed from existing markets and business needs, and examples of regulatory arbitrage in developing new financial instruments.
The document provides information about financial markets and money markets. It discusses:
1) What financial markets are and examples of primary and secondary markets. Primary markets involve the initial sale of securities while secondary markets involve existing securities changing hands.
2) Money markets, which involve short-term financial instruments with maturities of 1 year or less. Examples given are Treasury bills, federal funds, repurchase agreements, and certificates of deposit.
3) Key participants in US money markets including the Federal Reserve, government securities dealers, and commercial banks. The Treasury issues securities and the Federal Reserve influences money supply.
Financial institutions exist to facilitate transactions between surplus and deficit economic units. Direct financing between individuals is inefficient, so financial intermediaries like banks emerged to channel funds from savers to borrowers. Banks accept deposits from surplus units and lend to deficit units, engaging in indirect financing. Wholesale banks also facilitate large transactions between corporations through activities like securities brokering, asset management, and mergers/acquisitions advice.
This document provides an overview of money market securities and their use by financial institutions. It discusses various short-term debt instruments like Treasury bills, commercial paper, negotiable certificates of deposit, repurchase agreements, and bankers' acceptances. These securities generally mature within one year and are used by corporations and governments to obtain short-term funding. Financial institutions use money markets to earn returns on excess funds and maintain liquidity to meet cash needs. The value of these non-interest bearing securities is determined by the present value of future payments using the required rate of return.
The document provides an overview of financial markets and various asset classes within them, including equities and fixed income securities. It discusses the structure and components of financial markets, how equity and fixed income products work, economic indicators, and how to build an investment portfolio. Key topics covered include the types and functioning of capital markets, primary and secondary markets, equity valuation methods, risk analysis, and bond characteristics.
Proceso de dopcion de niif de pymes en latinoamerica actualizado 2012mamache
Este documento describe el proceso de adopción de las Normas Internacionales de Información Financiera (NIIF) en Argentina y Brasil. En Argentina, la Federación Argentina de Consejos Profesionales de Ciencias Económicas y la Comisión Nacional de Valores han trabajado juntas para adoptar gradualmente las NIIF entre 2009-2010, con aplicación completa para ciertas entidades a partir de 2012. En Brasil, el Consejo Federal de Contabilidad, la Comisión de Valores Mobiliarios y la Secretaría de la Recaudación Federal han emitido normas
The document discusses accounting concepts and conventions. It defines 12 key accounting concepts: historical cost, entity, going concern, money measurement, accounting period, dual aspect, accrual, matching, materiality, disclosure, conservatism, and consistency. It provides examples to illustrate each concept. The concepts establish the fundamental assumptions, principles, and rules of accounting used to prepare and present financial statements.
Financial markets and institutions ITM3Aram Mohammed
Financial markets and institutions perform several key functions:
1) They channel funds from economic units with surplus funds to units with deficits through borrowing and lending.
2) They determine the prices of financial assets through trading in primary and secondary markets.
3) They facilitate the exchange of funds by providing information to market participants and helping manage risks.
Financial markets allow people and entities to trade financial securities and commodities. They provide a place for buyers and sellers to come together and exchange these assets. Securities traded include stocks, bonds, and derivatives, while commodities can be precious metals or agricultural goods. Financial markets have important functions such as transferring funds from savers to borrowers, providing liquidity for securities, and disseminating economic information. They play a key role in allocating resources in a market economy.
What is Financial Market :
Mechanism that allows people to buy and sell financial securities (such as stocks and bonds) and items of value at low transaction cost.
Markets work by placing many interested buyers and sellers in one “place”, thus making easier for them to find each other.
Introduction To Financial Institution Saguest3e1da1
The document provides an overview of financial markets and institutions. It defines key terms like financial market, security, and the two main types of markets - exchanges and over-the-counter. It also describes the main types of financial institutions like commercial banks, investment banks, and universal banks. Commercial banks' main activities are taking deposits and lending, while investment banks focus on underwriting new issues and secondary market activities. Many large financial institutions today are universal banks that engage in both commercial and investment banking activities.
The document discusses the members of a group project on financial markets at IBS Mumbai. It then provides information on various topics related to financial markets including definitions of financial markets and money markets, functions of financial markets, classifications of markets, components of money markets like call money market, treasury bill market, commercial paper and certificates of deposits. It also discusses primary and secondary markets, corporate debt market, forex market and money market intermediaries like Discount and Finance House of India.
Financial institutions and markets notes as per BPUT syllabus for MBA 2nd sem...Venkat Kothakota
The document provides information on the Indian financial market and its various components. It discusses the money market and capital market as the two main organized financial markets in India. The money market is further divided into unorganized and organized segments. The unorganized segment includes money lenders, indigenous bankers, and chit funds. The organized money market comprises treasury bills, commercial paper, certificates of deposit, the call money market, and the commercial bill market. The capital market provides long-term finance and consists of the industrial securities market, government securities market, and long-term loans market.
Saminar on Financial Market Money Market By Sanjay SindagiSanjay Sindagi
The document defines and describes financial markets. It states that a financial market facilitates the exchange of financial instruments between buyers and sellers. It discusses the key components of financial markets, including the money market, primary market, secondary market, capital market, debt market, and equity market. The document also outlines various money market instruments such as treasury bills, commercial papers, certificates of deposit, and repurchase agreements. It notes that financial markets play an important role in economic development by providing funding for trade, industries, and capital formation.
The document provides an overview of the financial system and its key components. It discusses how financial markets and institutions help channel funds from savers to borrowers, allowing for investment and economic growth. It then covers the major types of financial markets and instruments, including debt vs equity markets, primary vs secondary markets, money markets, capital markets, and derivatives. It also discusses the internationalization of financial markets through foreign bonds, Eurobonds, and Eurocurrencies.
Role of Financial Markets Note - A-Level & IB EconomicsQurious Education
Financial markets play several important roles in the economy. They facilitate saving and lending through banks and capital markets, allowing individuals and businesses to borrow money for consumption, investment, and trade. Financial markets also provide a venue for companies to raise capital through the issuance of stocks and bonds. By channeling funds from savers to borrowers, financial markets help allocate resources efficiently in the economy.
Financial markets allow for the exchange of funds between those who have savings (surplus units) and those who need funds for investment in real assets (deficit units). They do this through financial instruments that represent claims against issuers. There are two main types of financial markets - the money market for short-term instruments and the capital market for long-term debt and equity. Within each market, primary markets facilitate new issues while secondary markets allow for the exchange of existing securities. Financial intermediaries such as banks, insurance companies, and pension funds facilitate indirect finance by collecting funds through various financial claims and allocating them through purchases of direct claims.
Introduction To Financial Institutions And Marketsitsvineeth209
This document provides an introduction to financial institutions and markets. It discusses the key components of the financial system including money, credit, services and finance. It also outlines the main functions of financial institutions such as collecting funds from investors and directing them to providers. The document categorizes common financial institutions and describes financial markets as places where financial assets are traded. It defines various financial instruments and how they are categorized as cash instruments or derivatives.
This document defines key terms in finance and describes various financial institutions and markets. It begins by defining finance, money, and credit. It then discusses two main classifications of finance - public and private. Next, it examines different types of financial institutions like banks, investment companies, insurance companies, and credit unions. It also explores various financial markets and instruments. In closing, the document emphasizes the relationship between financial institutions and markets.
This document provides an overview of financial markets and institutions. It discusses the key functions of financial markets in channeling funds from surplus to deficit units. It describes the structure of financial markets, including the distinction between debt and equity markets, primary vs secondary markets, and money vs capital markets. The main instruments traded in these markets are also outlined. The document then discusses the role of financial institutions in providing indirect finance and transforming financial assets. It identifies the main types of financial institutions like depository institutions, contractual savings institutions, and investment intermediaries. Finally, it covers the rationale for regulating financial markets and institutions to increase information and ensure overall financial system stability.
The document provides information on various types of investments and financial markets. It discusses initial public offerings (IPOs) as well as the roles of intermediaries in the primary market. Specifically, it notes that an IPO allows a company to raise funds by selling shares to the public for the first time. A lead manager helps guide companies through the IPO process by conducting due diligence, drafting offering documents, and coordinating post-issue activities.
The document discusses various topics related to finance and economics including barriers to entry in financial services due to reputation risk, how financial products and derivatives are developed from existing markets and business needs, and examples of regulatory arbitrage in developing new financial instruments.
The document provides information about financial markets and money markets. It discusses:
1) What financial markets are and examples of primary and secondary markets. Primary markets involve the initial sale of securities while secondary markets involve existing securities changing hands.
2) Money markets, which involve short-term financial instruments with maturities of 1 year or less. Examples given are Treasury bills, federal funds, repurchase agreements, and certificates of deposit.
3) Key participants in US money markets including the Federal Reserve, government securities dealers, and commercial banks. The Treasury issues securities and the Federal Reserve influences money supply.
Financial institutions exist to facilitate transactions between surplus and deficit economic units. Direct financing between individuals is inefficient, so financial intermediaries like banks emerged to channel funds from savers to borrowers. Banks accept deposits from surplus units and lend to deficit units, engaging in indirect financing. Wholesale banks also facilitate large transactions between corporations through activities like securities brokering, asset management, and mergers/acquisitions advice.
This document provides an overview of money market securities and their use by financial institutions. It discusses various short-term debt instruments like Treasury bills, commercial paper, negotiable certificates of deposit, repurchase agreements, and bankers' acceptances. These securities generally mature within one year and are used by corporations and governments to obtain short-term funding. Financial institutions use money markets to earn returns on excess funds and maintain liquidity to meet cash needs. The value of these non-interest bearing securities is determined by the present value of future payments using the required rate of return.
The document provides an overview of financial markets and various asset classes within them, including equities and fixed income securities. It discusses the structure and components of financial markets, how equity and fixed income products work, economic indicators, and how to build an investment portfolio. Key topics covered include the types and functioning of capital markets, primary and secondary markets, equity valuation methods, risk analysis, and bond characteristics.
Proceso de dopcion de niif de pymes en latinoamerica actualizado 2012mamache
Este documento describe el proceso de adopción de las Normas Internacionales de Información Financiera (NIIF) en Argentina y Brasil. En Argentina, la Federación Argentina de Consejos Profesionales de Ciencias Económicas y la Comisión Nacional de Valores han trabajado juntas para adoptar gradualmente las NIIF entre 2009-2010, con aplicación completa para ciertas entidades a partir de 2012. En Brasil, el Consejo Federal de Contabilidad, la Comisión de Valores Mobiliarios y la Secretaría de la Recaudación Federal han emitido normas
The document discusses accounting concepts and conventions. It defines 12 key accounting concepts: historical cost, entity, going concern, money measurement, accounting period, dual aspect, accrual, matching, materiality, disclosure, conservatism, and consistency. It provides examples to illustrate each concept. The concepts establish the fundamental assumptions, principles, and rules of accounting used to prepare and present financial statements.
Este documento presenta un cuestionario sobre Normas Internacionales de Información Financiera (NIIF) con 30 preguntas de selección múltiple y espacios en blanco para completar con palabras clave. El cuestionario abarca temas como cuentas contables, estados financieros, objetivos de la ley que adoptó las NIIF en Colombia, y los grupos de aplicación de las normas.
El documento describe los impactos y procesos de implementación de las Normas Internacionales de Información Financiera (IFRS) por una compañía. Se explican las excepciones y exenciones aplicadas en la transición a las IFRS, así como los ajustes preliminares realizados al balance general de transición del 1 de enero de 2011. Los principales ajustes se refieren a inventarios, pagos anticipados, propiedad planta y equipo, crédito mercantil, impuestos diferidos y cuentas de capital.
La adopción de las nuevas normas NIIF no debe ser un
proceso que genere traumatismos o malestares en el
interior de la empresa ni en los negocios que desarrolla.
Por el contrario, debe ser un proceso donde la empresa
y sus miembros unifican esfuerzos y conocimientos para
lograr la modernización de la contabilidad ante los
nuevos retos de la economía mundial y los negocios
globales. contactenos@strategy-e.com
La Taxonomía NIIF es un sistema de clasificación que contiene nombres de elementos y características relacionadas. Los nombres de elementos permiten a las entidades marcar la información a revelar en la versión electrónica de los estados financieros preparados según las NIIF, de manera que los usuarios puedan acceder a la información y organizarla más fácilmente. Los nombres de los elementos disponen de etiquetas que describen su significado contable.
Asesoría Tributaria en un Chile cambiante
Este documento resume un estudio de caso sobre los efectos de la implementación de las Normas Internacionales de Información Financiera para Pequeñas y Medianas Entidades (NIIF para las PYMES) en una empresa de servicios de consultoría en Bogotá. El estudio encontró diferencias financieras como mayores activos por impuestos diferidos y ajustes en cuentas por cobrar a largo plazo, así como efectos no financieros como necesidad de capacitar al personal y posibles cambios en software contable. En general, la implementación generó variaciones en los est
Manual de procedimiento auditoria tributariajuliocesaros
Este documento es el Manual de Procedimiento Tributario y Régimen Sancionatorio para Entidades Territoriales publicado por el Ministerio de Hacienda y Crédito Público de Colombia. El manual establece las normas sobre actuación, deberes y obligaciones formales, declaraciones tributarias, y procedimientos para la administración tributaria a nivel de las entidades territoriales de Colombia. El documento contiene 752 páginas con artículos que describen aspectos como la capacidad y representación de los contribuyentes, formas de notificación, deberes de present
Este documento presenta los estados financieros consolidados de una corporación multinacional ficticia preparados de acuerdo con las Normas Internacionales de Información Financiera (NIIF) emitidas al 1 de agosto de 2007. Incluye el balance general consolidado, estado de resultados consolidado, estado de ingresos y gastos reconocidos consolidado, estado de flujo de efectivo consolidado y notas explicativas. El propósito es ilustrar un posible formato de estados financieros bajo las NIIF y reflejar los requerimientos de revelación actualmente vigentes
Dokumen tersebut membahas tentang pengakuan pendapatan, termasuk:
1. Prinsip-prinsip pengakuan pendapatan yaitu manfaat ekonomi akan mengalir ke perusahaan dan manfaat tersebut dapat diukur secara andal.
2. Pengakuan pendapatan pada saat penjualan, penyimpangan dari dasar penjualan, dan pengakuan pendapatan kontrak jangka panjang.
3. Metode pengukuran pendapatan seperti metoda angs
El documento describe el proceso de adopción de las Normas Internacionales de Información Financiera (NIIF) en el sector de seguros privados de Chile. La Superintendencia de Valores y Seguros de Chile guió a las compañías aseguradoras en la adopción de las NIIF a través de oficios circulares. El proceso comenzó evaluando el impacto de las NIIF en las inversiones financieras y tomó varios años, incluyendo etapas como encuestas de preparación, mesas de trabajo, presentación de estados financieros
Tabla de Contenido - Normas Internacionales de Información Financiera NIIC-IFRSyalcone
Este documento presenta un resumen de los 10 primeros capítulos de un texto sobre las Normas Internacionales de Información Financiera (NIIF). En el Capítulo 1 se describen aspectos generales de las NIIF como su estructura, propósito y proceso de formulación. Los capítulos 2 al 7 resumen cada una de las normas contables NIC 16, NIC 2, NIC 17, NIC 38, NIC 40 y NIC 36 respectivamente. Finalmente, los capítulos 8 y 9 resumen las normas NIIF 5 sobre activos no corrientes mant
Este documento describe los conceptos y objetivos clave de la planificación tributaria. Explica que la planificación tributaria busca minimizar la carga impositiva de una empresa de manera legal, considerando las implicancias tributarias de sus acciones. También detalla los elementos fundamentales de la planificación tributaria, como el sujeto, objeto, finalidad, proceso y procedimientos involucrados.
Financial Market is the market where financial securities like stocks and bonds and commodities like valuable metals are exchanged at efficient market prices. Here, by efficient market prices we mean the unbiased price that reflects belief at collective speculation of all investors about the future prospect. The trading of stocks and bonds in the Financial Market can take place directly between buyers and sellers or by the medium of Stock Exchange. Financial Markets can be domestic or international.
Investment BankingTwo basic methods exist for transferring funds.docxmariuse18nolet
Investment Banking
Two basic methods exist for transferring funds from savers to users. The indirect transfer occurs through a financial intermediary such as a bank. You lend funds to the bank, which in turn lends the funds to the ultimate borrower. (The role of commercial banks and the various types of financial intermediaries was covered in Chapter 2.) The alternative is the direct sale of securities to investors in the primary market.
While most purchases of stocks (and bonds) occur in the secondary markets such as the New York Stock Exchange, the initial sales occur in the primary markets. The primary and secondary markets perform different functions, but both are important financial institutions. Secondary markets increase your willingness to buy securities and primary markets are the means by which your savings are transferred to firms and governments.
The initial sale of a security in the primary market is often executed with the assistance of investment bankers. While this initial sale occurs only once, it is exceedingly important, because it is the process by which securities come into existence. If firms and governments did not issue securities, you would have to find alternative uses for your savings. Firms and governments, however, do need funds, and they tap your savings through issuing and selling new securities in the primary markets. The secondary markets provide you with a means to sell these securities (or buy more) once they have been issued.
This chapter also briefly describes the major federal laws that govern the issuing and subsequent trading in securities. The purpose of this legislation is not to ensure that you will earn a positive return. Instead its purpose is to ensure that you and all investors receive timely and accurate information. You continue to bear the risk associated with buying stocks and bonds.
The Transfer of Funds to Business
One purpose of financial markets is to facilitate the transfer of funds from individuals (and firms and governments) with funds to invest to those individuals (and firms and governments) that need funds. One method is an indirect transfer through a financial intermediary such as a commercial bank. The other method is the direct investment in the firm by the general public. This transfer occurs when you start your own business and invest your savings in the operation. But the direct transfer is not limited to investing in your own business. Firms (and governments) also raise funds by selling securities directly to the general public.
The Role of Investment Bankers
While companies could sell securities directly to you (and some do sell modest amounts of securities through programs such as the dividend reinvestment plans described in Chapter 10), the majority of these sales are executed through investment bankers. In effect, an investment banker serves as a middleman to channel money from investors to firms and governments that need the funds. If this sale is the first sale of .
Investment Management - Financial Market and InstitutionsDr. John V. Padua
This document provides an overview of financial markets and institutions. It defines key terms like financial system, markets, institutions and regulations. It describes the main components and functions of the financial system including borrowing/lending, price determination and risk sharing. It also outlines the major types of financial institutions like commercial banks, investment funds, insurance companies and their risk-reducing roles. Finally, it discusses reasons for financial regulation including increasing information transparency and ensuring system stability.
Investment Management Financial Market and InstitutionsDr. John V. Padua
This document provides an overview of financial markets and institutions. It defines key terms like financial system, markets, institutions and regulations. It describes the main components and functions of the financial system including borrowing/lending, price determination and risk sharing. It also outlines the major types of financial institutions like commercial banks, investment funds, insurance companies and their risk-reducing roles. Finally, it discusses reasons for financial regulation including increasing information transparency and ensuring system stability.
Chapter 02_Overview of the Financial SystemRusman Mukhlis
This chapter provides an overview of the financial system, including the functions of financial markets and intermediaries in channeling funds from lenders to borrowers. It describes the structure of markets, such as debt versus equity, and primary versus secondary markets. It also discusses the internationalization of markets and the role of regulation in ensuring stability and transparency.
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)ow do funds flow throughout the economy? How do financial markets operate and relate to one another? As an individual investor or a financial manager you need to know. Your future decision-making skills depend on it. Investors' funds flow through financial markets such as the New York Stock Exchange and mortgage markets. Financial institutions-commercial banks (e.g., Bank of America), investment banks (e.g., Morgan Stanley), and mutual funds (e.g., Fidelity)-act as intermediaries to channel funds from individual savers or investors through financial markets. This chapter looks at the nature and operations of financial markets and discusses the financial institutions (FIs) that participate in those markets. Bonds, stocks, and other securities that trade in the markets are covered in
Chapters 7 and 8.
In this chapter we also examine how significant changes in the way financial institutions deliver services played a major role in forming the severe financial crisis that began in late 2008. We examine some of the crisis's underlying causes, review some of the major events that occurred during that time, and discuss some resulting regulatory and industry changes that are in effect today in Appendix 6A, which is available in Connect or through your course instructor.
LEARNING GOALSLG6-
1 Differentiate between primary and secondary markets and between money and capital markets.LG6-
2 List the types of securities traded in money and capital markets.LG6-
3 Identify different types of financial institutions and the services that each provides.LG6-
4 Analyze specific factors that influence interest rates.LG6-
5 Offer different theories that explain the shape of the term structure of interest rates.LG6-
6 Demonstrate how forward interest rates derive from the term structure of interest rates.
*See Appendix 6A: The Financial Crisis: The Failure of Financial Institution Specialness in Connect.
viewpoints
business APPLICATION
Page 130
DPH Corporation needs to issue new bonds either this year or in two years. DPH Corp. is a profitable firm, but if the U.S. economy were to experience a downturn, the company would see a big drop in sales over the next two years as its products are very sensitive to changes in the overall economy. DPH Corp. currently has $10 million in public debt outstanding, but its bonds are not actively traded. What questions must DPH Corp. consider as its managers decide whether to issue bonds today or in two years? How can DPH Corp. get these bonds to potential buyers and thus raise the needed capital?
FINANCIAL MARKETS
Financial markets exist to manage the flow of funds from investors to borrowers as well as from one investor to another. We generally differentiate financial markets by their primary financial instruments' characteristics (such as bond maturities) or the.
An Intro to the Financial Services IndustryEric Tachibana
The Financial Service Industry is one of the most attractive industries to target if you are a consultant. However, when selling into, or delivering for, Financial Services Institutions (FSIs), it is useful to have some understanding of how FSI business models work, and the unique requirements that drive their IT strategies.This deck is a living document that hopes to act as a primer for consultants who need to support FSI clients, but who may not have prior experience in the sector.
1 Role of Financial Markets and InstitutionsCHAPTER OBJECTIVES.docxlorainedeserre
1 Role of Financial Markets and Institutions
CHAPTER OBJECTIVES
The specific objectives of this chapter are to:
· ▪ describe the types of financial markets that facilitate the flow of funds,
· ▪ describe the types of securities traded within financial markets,
· ▪ describe the role of financial institutions within financial markets, and
· ▪ explain how financial institutions were exposed to the credit crisis.
A financial market is a market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in financial markets when one party purchases financial assets previously held by another party. Financial markets facilitate the flow of funds and thereby allow financing and investing by households, firms, and government agencies. This chapter provides some background on financial markets and on the financial institutions that participate in them.
1-1 ROLE OF FINANCIAL MARKETS
Financial markets transfer funds from those who have excess funds to those who need funds. They enable college students to obtain student loans, families to obtain mortgages, businesses to finance their growth, and governments to finance many of their expenditures. Many households and businesses with excess funds are willing to supply funds to financial markets because they earn a return on their investment. If funds were not supplied, the financial markets would not be able to transfer funds to those who need them.
Those participants who receive more money than they spend are referred to as surplus units (or investors). They provide their net savings to the financial markets. Those participants who spend more money than they receive are referred to as deficit units. They access funds from financial markets so that they can spend more money than they receive. Many individuals provide funds to financial markets in some periods and access funds in other periods.
EXAMPLE
College students are typically deficit units, as they often borrow from financial markets to support their education. After they obtain their degree, they earn more income than they spend and thus become surplus units by investing their excess funds. A few years later, they may become deficit units again by purchasing a home. At this stage, they may provide funds to and access funds from financial markets simultaneously. That is, they may periodically deposit savings in a financial institution while also borrowing a large amount of money from a financial institution to buy a home.
Many deficit units such as firms and government agencies access funds from financial markets by issuing securities, which represent a claim on the issuer. Debt securities represent debt (also called credit, or borrowed funds) incurred by the issuer. Deficit units that issue the debt securities are borrowers. The surplus units that purchase debt securities are creditors, and they receive interest on a periodic basis (such as every six months). Debt securities have a maturity da ...
The document provides an overview of the Australian financial markets syllabus for Year 11 Economics students. It describes the key topics students will examine, including different types of financial markets and products, institutions that regulate markets, interest rates, borrowers and lenders. It also defines important financial market concepts such as bonds, securities, primary and secondary markets, and the role of financial intermediaries in connecting lenders and borrowers.
The credit market allows companies and governments to raise funds by issuing debt securities that investors can purchase. It includes instruments like bonds, loans, and commercial paper. The size of the global credit market is over $100 trillion, making it more than twice the size of the global equity market. Investors utilize the credit market to earn fixed incomes from bonds and interest payments. The health and activity in the credit market provides insights into investor sentiment and future economic conditions.
This document provides an overview of financial markets and institutions. It begins with definitions of financial markets and how they function to channel funds from surplus to deficit units. It describes the structure of financial markets, including the key differences between debt and equity markets, primary and secondary markets, and money and capital markets. The main instruments traded in both money and capital markets are outlined. The document then shifts to defining financial institutions and their primary functions in facilitating indirect finance. The major types of financial institutions such as depository institutions, contractual savings institutions, and investment intermediaries are described. Finally, the document discusses regulations of financial markets, which aim to increase information for investors and ensure overall financial system soundness.
This document provides an overview of financial markets and institutions. It begins with definitions of financial markets and systems, describing how financial markets channel funds from surplus to deficit units. It then covers the structure of financial markets, including debt vs equity markets, primary vs secondary markets, and money vs capital markets. The main instruments traded on financial markets are also outlined. The document discusses the functions of financial markets and introduces the role of financial institutions in providing indirect finance. It concludes with a section on financial regulation and why regulating financial markets aims to increase information for investors and ensure system soundness.
1. Financial markets exist to connect lenders and borrowers, allowing companies and governments to raise capital from investors.
2. The money market provides short-term funding of up to one year, while the capital market supplies long-term funding greater than one year through stock and bond markets.
3. The capital markets are closely watched as indicators of economic conditions. Companies and governments issue stocks and bonds to raise funds for capital projects, acquisitions, or expanding business lines. Investors provide the funds by purchasing these securities.
This presentation discusses investment banking and security markets. It explains that investment banking assists companies with raising capital through activities like IPOs, mergers and acquisitions. It also discusses the roles of underwriting and providing financial advice. The document then describes the primary and secondary security markets. The primary market involves new securities offerings, while the secondary market is for existing securities. It also outlines different types of secondary markets like stock exchanges and over-the-counter markets. Finally, it briefly touches on market makers, dealers, and different trading venues like call, continuous, third and fourth markets.
This document provides an overview of financial markets and institutions. It begins by defining financial markets as channels that allow funds to flow from economic units with savings to those that need funds. It then describes the key components of financial markets, including the debt and equity markets, primary and secondary markets, and money and capital markets. It also outlines the main instruments traded in these markets, such as stocks, bonds, bills, and notes. The document concludes by defining financial institutions as intermediaries that collect funds from savers and allocate them to borrowers. It categorizes the main types of financial institutions as brokers, dealers, investment banks, and other financial intermediaries.
This document provides an overview of financial markets and institutions. It begins by defining key terms like financial system and financial markets. It then describes the basic structure and functions of financial markets, including the main instruments traded in debt, equity, money, and capital markets. The document also outlines the primary roles and types of financial institutions, with a focus on financial intermediaries. It concludes by discussing some of the key reasons for regulating financial systems, such as increasing information for investors and ensuring the soundness of financial intermediaries.
This document provides an overview of financial markets and institutions. It begins by defining financial markets as systems that channel funds from surplus to deficit units. It then describes the key components of financial markets, including the debt and equity markets, primary and secondary markets, and money and capital markets. It also outlines the major instruments traded in these markets. The document further discusses the functions of financial markets in borrowing/lending, price determination, coordination, risk sharing, liquidity, and efficiency. It then defines financial institutions and describes their role in indirect finance. It outlines the major types of financial institutions and regulations implemented to protect investors and ensure financial system soundness.
The document provides an overview of financial markets and systems. It discusses the functions of financial markets, types of markets including stock markets, bond markets, and money markets. It also describes market participants, types of financial institutions like commercial banks and their roles, and financial instruments. Financial regulation and Bangladesh's financial system are also briefly covered.
Investment banks perform various services including facilitating capital raising activities for corporations through public offerings and private placements, advising on mergers and acquisitions, and making markets for securities. They earn fees from underwriting securities, providing financial advisory services, and engaging in proprietary trading. Research divisions within investment banks analyze companies and publish reports to assist internal and external clients. Regulations governing investment banking activities are established by government entities like the SEC in the US and SEBI in India.
The securities market consists of equity, debt, and derivatives markets. The debt market can be divided into government securities, corporate debt, and money markets. The derivatives market includes options and futures markets. Merchant banking facilitates companies raising capital through securities offerings by providing services related to origination, underwriting, distribution, and issue management. Leading merchant bankers in India include both public and private sector banks as well as foreign investment banks.
Similar to Chapter02 financial marketsandinterestrates (20)
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1. 24
Financial
Markets and
Interest Rates
“It is better to give than to lend, and it
costs about the same.”
—Philip Gibbs
A Flight to Quality and a Flight to Liquidity
In 2008 financial markets were in turmoil. Common stocks plunged as seen
in the S&P 500 Index that dropped 39% in that year. So too did bonds
except for the highest quality bonds such as U.S. Treasury securities. The
benchmark ten year U.S. Treasury note was up 21% in 2008. Gold prices
also rose as investors looked for a safe haven for their money.
Corporations and municipalities with anything less than super high
bond ratings had great difficulty raising funds. Investors wanted safety. The
financial crisis has taught us what can happen when financial markets break
down. What are financial markets? How do they help businesses, individuals,
and government entities to raise funds? How do they help investors adjust
their portfolios when needs and preferences change? These are some of the
questions addressed in this chapter.
2. 25
Morguefile.com
(http://morguefile.com/archive/?display=31962&)
Learning Objectives
After reading this chapter,
you should be able to:
1. Describe how the U.S.
financial system works.
2. Define financial securities.
3. Explain the function of
financial intermediaries.
4. Describe the securities
traded in the money and
capital markets.
5. Identify the determinants of
the nominal interest rate.
6. Construct and analyze a
yield curve.
Chapter Overview
One of the central duties of a financial manager is to acquire capital—that is,
to raise funds. Few companies are able to fund all their activities solely with
funds from internal sources. Most find it necessary at times to seek funding
from outside sources. For this reason, all business people need to know about
financial markets.
As we see in this chapter, there are a number of financial markets, and
each offers a different kind of financial product. In this chapter we discuss the
relationship between firms and the financial markets and briefly explain how the
financial system works, including the role of financial intermediaries—investment
bankers, brokers, and dealers. Next, we explore the markets themselves and
describe financial products ranging from government bonds to corporate stocks.
Finally, we examine interest rates.
The Financial System
In the U.S. economy, several types of individuals or entities generate and spend
money. We call these economic units. The main types of economic units include
governments, businesses, and households (households may be one person or more
than one person). Some economic units generate more income than they spend and
have funds left over. These are called surplus economic units. Other economic
units generate less income than they spend and need to acquire additional funds
in order to sustain their operations. These are called deficit economic units.
3. 26 Part I The World of Finance
The purpose of the financial system is to bring the two groups—surplus economic
units and deficit economic units—together for their mutual benefit.
The financial system also makes it possible for participants to adjust their holdings
of financial assets as their needs change. This is the liquidity function of the financial
system—that is, the system allows funds to flow with ease.
To enable funds to move through the financial system, funds are exchanged for
financial products called securities. A clear understanding of securities is essential to
understanding the financial system, so before we go further, let’s examine what securities
are and how they are used.
Securities
Securities are documents that represent the right to receive funds in the future. The
person or organization that holds a security is called a bearer. A security certifies that
the bearer has a claim to future funds. For example, if you lend $100 to someone and
the person gives you an IOU, you have a security. The IOU is your “claim check” for
the $100 you are owed. The IOU may also state when you are to be paid, which is
referred to as the maturity date of the security. When the date of payment occurs, we
say the security matures.
Securities have value because the bearer has the right to be paid the amount specified,
so a bearer who wanted some money right away could sell the security to someone else
for cash. Of course, the new bearer could sell the security to someone else too, and so
on down the line. When a security is sold to someone else, the security is being traded.
Business firms, as well as local, state, and national governments, sell securities to
the public to raise money. After the initial sale, investors may sell the securities to other
investors. As you might suspect, this can get to be a complicated business. Financial
intermediaries facilitate this process. Markets are available for the subsequent traders
to execute their transactions.
Financial Intermediaries
Financial intermediaries act as the grease that enables the machinery of the financial
system to work smoothly. They specialize in certain services that would be difficult for
individual participants to perform, such as matching buyers and sellers of securities.
Three types of financial intermediaries are investment bankers, brokers, and dealers.
Investment Bankers Institutions called investment banking firms exist to help
businesses and state and local governments sell their securities to the public.
Investment bankers arrange securities sales on either an underwriting basis or a
best efforts basis. The term underwriting refers to the process by which an investment
banker (usually in cooperation with other investment banking firms) purchases all the
new securities from the issuing company and then resells them to the public.
Investment bankers who underwrite securities face some risk because occasionally
an issue is overpriced and can’t be sold to the public for the price anticipated by the
investment banker. The investment banker has already paid the issuing company or
municipality its money up front, and so it must absorb the difference between what it
paid the issuer and what the security actually sold for. To alleviate this risk, investment
bankers sometimes sell securities on a best efforts basis. This means the investment
banker will try its best to sell the securities for the desired price, but there are no
guarantees. If the securities must be sold for a lower price, the issuer collects less money.
Take Note
The words surplus and
deficit do not imply
something necessarily
good or bad. They
simply mean that some
economic units need
funds, and others have
funds available. If Disney
needs $2 billion to build
a theme park in a year
when its income is “only”
$1.5 billion, Disney is
a deficit economic unit
that year. Likewise, if a
family earns $40,000
in a year but spends
only $36,000, it is a
surplus economic unit for
that year.
4. 27Chapter 2 Financial Markets and Interest Rates
Brokers Brokers—often account representatives for an investment banking firm—
handle orders to buy or sell securities. Brokers are agents who work on behalf of an
investor. When investors call with orders, brokers work on their behalf to find someone
to take the other side of the proposed trades. If investors want to buy, brokers find sellers.
If investors want to sell, brokers find buyers. Brokers are compensated for their services
when the person whom they represent—the investor—pays them a commission on the
sale or purchase of securities. Brokers are obligated to find “suitable investments” for
their clients. They do not generally have the higher duty that comes when one is acting
as a fiduciary. A fiduciary is obligated to put the interests of the principal ahead of all
others, including the interests of the fiduciary herself.
Dealers Dealers make their living buying securities and reselling them to others. They
operate just like car dealers who buy cars from manufacturers for resale to others. Dealers
make money by buying securities for one price, called the bid price, and selling them
for a higher price, called the ask (or offer) price. The difference, or spread, between the
bid price and the ask price represents the dealer’s fee.
Financial Markets
As we have pointed out, the financial system allows surplus economic units to trade with
deficit economic units. The trades are carried out in the financial markets.
Financial markets are categorized according to the characteristics of the participants
and the securities involved. In the primary market, for instance, deficit economic units
sell new securities directly to surplus economic units and to financial institutions. In
the secondary market, investors trade previously issued securities among themselves.
Primary and secondary markets can be further categorized as to the maturity of the
securities traded. Short-term securities—securities with a maturity of one year or less—
are traded in the money market; and long-term securities—securities with a maturity
of more than one year1
—are traded in the capital market. A number of other financial
markets exist, but we are mainly concerned with these four. In the following sections,
we examine each of these markets in turn.
The Primary Market
When a security is created and sold for the first time in the financial marketplace, this
transaction takes place in the primary market. J.P. Morgan Securities Inc. helped
SolarWinds Inc. sell stock to the public in 2009.This was a primary market transaction.
In this market the issuing business or entity sells its securities to investors (the investment
banker simply assists with the transaction).
The Secondary Market
Once a security has been issued, it may be traded from one investor to another. The
secondary market is where previously issued securities—or “used” securities—are
traded among investors. Suppose you called your stockbroker to request that she buy 100
shares of stock for you. The shares would usually be purchased from another investor
Take Note
Do not confuse financial
markets with financial
institutions. A financial
market is a forum
in which financial
securities are traded (it
may or may not have
a physical location). A
financial institution is
an organization that
takes in funds from some
economic units and
makes them available
to others.
1
The distinction between “short term” and “long term” is arbitrarily set at one year or less for the former and more than one year
for the latter.
5. 28 Part I The World of Finance
in the secondary market. Secondary market transactions occur thousands of times daily
as investors trade securities among themselves. These transactions may occur on an
exchange or on the over-the-counter market.
The Money Market
Short-term securities (a maturity of one year or less) are traded in the money market.
Networks of dealers operate in this market. They use phones and computers to make
trades rapidly among themselves and with the issuing entities. The specific securities
traded in the money market include Treasury bills, negotiable certificates of deposit,
commercial paper, and other short-term debt instruments.
The Capital Market
Long-term securities (maturities over one year) trade in the capital market. Federal, state,
and local governments, as well as large corporations, raise long-term funds in the capital
market. Firms usually invest proceeds from capital market securities sales in long-term
assets such as buildings, production equipment, and so on. Initial offerings of securities
in the capital market are usually large deals put together by investment bankers, although
after the original issue, the securities may be traded quickly and easily among investors.
The two most widely recognized securities in the capital market are bonds and stocks.
Security Exchanges
Security exchanges, such as the NewYork Stock Exchange (NYSE), are organizations
that facilitate trading of stocks and bonds among investors. Corporations arrange for their
stocks or bonds to be listed on an exchange so that investors may trade the company’s
stocks and bonds at an organized trading location. Corporations list their securities on
exchanges because they believe that having their securities traded at such a location
will make them easier to trade and, therefore, boost the price. Exchanges accept listings
because they earn a fee for their services.
Each exchange-listed stock is traded at a specified location on the trading floor called
the post. The trading is supervised by specialists who act either as brokers (bringing
together buyers and sellers) or as dealers (buying or selling the stock themselves).
Prominent international securities exchanges include the NYSE, theAmerican Stock
Exchange (AMEX), and major exchanges in Tokyo, London, Amsterdam, Frankfurt,
Paris, Hong Kong, and Mexico.
The Over-the-Counter (OTC) Market
In contrast to the organized exchanges, which have physical locations, the
over‑the‑counter market has no fixed location—or, more correctly, it is everywhere.
The over-the-counter market, or OTC, is a network of dealers around the world who
maintain inventories of securities for sale and cash for purchasing. Say you wanted to
buy a security that is traded OTC. You would call your broker, who would then shop
among competing dealers who have the security in their inventory. After locating the
dealer with the best price, your broker would buy the security on your behalf.
The largest and best-known OTC market for common stock is called Nasdaq. Nasdaq
dealers enter their bid and ask prices in a worldwide computer network. Many securities
issued by very small companies are simply bought and sold over the telephone.
Interactive Module
Go to www.textbookmedia.
com and find the free
companion material for this
book. There is additional
information there on the
New York Stock Exchange.
Note how specialists do
their jobs and how trades
are executed on the NYSE.
SuperDot is also explained.
Interactive Module
Go to www.textbookmedia.
com and find the free
companion material for this
book. There is additional
information there on
Nasdaq. Note how market
makers do their jobs and
how trades are executed in
the Nasdaq market.
6. 29Chapter 2 Financial Markets and Interest Rates
Market Efficiency
The term market efficiency refers to the ease, speed, and cost of trading securities. In
an efficient market, securities can be traded easily, quickly, and at low cost. Markets
lacking these qualities are considered inefficient.
The major stock markets are generally efficient because investors can trade thousands
of dollars worth of shares in minutes simply by making a phone call or hitting a few
computer keys and paying a relatively small commission. In contrast, the real estate
market is relatively inefficient because it might take you months to sell a house and you
would probably have to pay a real estate agent a large commission to handle the deal.
The more efficient the market, the easier it is for excess funds in the hands of surplus
economic units to make their way into the hands of deficit economic units. In an inefficient
market, surplus economic units may end up with excess funds that are idle while deficit
economic units may not get the funds they need. When this happens, economic activity
and job creation will be lower than it could be, and deficit economic units may not be
able to achieve their goals because they could not obtain needed funds.
Financial markets help firms and individual investors buy and sell securities
efficiently. So far, we have discussed the various markets in which securities are traded.
Now let’s turn to the securities themselves.
Securities in the Financial Marketplace
Securities are traded in both the money and capital markets. Money market securities
include Treasury bills, negotiable certificates of deposit, commercial paper, Eurodollars,
and banker’s acceptances. Capital market securities include bonds and stock.We describe
each of these securities briefly in the following discussion.
Securities in the Money Market
Governments, corporations, and financial institutions that want to raise money for a
short time issue money market securities. Buyers of money market securities include
governments, corporations, and financial institutions that want to park surplus cash
for a short time and other investors who want the ability to alter or cash in their
investments quickly.
Money market securities are very liquid; that is, they mature quickly and can be
sold for cash quickly and easily. Money market securities also have a low degree of risk
because purchasers will only buy them from large, reputable issuers (investors don’t
want to spend a long time checking the issuers’ credit for an investment that may only
last a few days). These two characteristics, liquidity and low risk, make money market
securities the ideal parking place for temporary excess cash.
Let’s take a closer look at the main money market securities.
Treasury Bills Every week the United States Treasury issues billions of dollars of
Treasury bills (T-bills). These money market securities are issued to finance the federal
budget deficit (if any) and to refinance the billions of dollars of previously issued
government securities that come due each week. After the T-bills are initially sold by
the U.S. government, they are traded actively in the secondary market. At maturity, the
government pays the face value of the T-bill.
7. 30 Part I The World of Finance
Treasury bills are considered the benchmark of safety because they have essentially
no risk. This is because obligations of the U.S. government are payable in U.S. dollars—
and, theoretically, the U.S. government could print up all the dollars it needs to pay off
its obligations. Treasury bills are issued in one-month, three-month, six-month, and
one-year maturities. The U.S. Treasury reintroduced the one-year bill in 2008 after
having stopped issuing them in 2001.
Negotiable Certificates of Deposit You may already be familiar with the certificates
of deposit (CDs) that you can purchase from your local bank. They are simply pieces
of paper that certify that you have deposited a certain amount of money in the bank,
to be paid back on a certain date with interest. Small-denomination consumer CDs are
very safe investments and they tend to have low interest rates.
Large-denomination CDs (of $100,000 to $1 million or more), with maturities of
two weeks to a year, are negotiable CDs because they can be traded in the secondary
market after they are initially issued by a financial institution. Large corporations and
other institutions buy negotiable CDs when they have cash they wish to invest for a
short period of time; they sell negotiable CDs when they want to raise cash quickly.
Commercial Paper Commercial paper is a type of short-term promissory note—
similar to an IOU—issued by large corporations with strong credit ratings. Commercial
paper is unsecured.This means the issuing corporation does not pledge any specific assets
as collateral that the lender (the one who buys the commercial paper note) can take on
a priority basis if the issuing corporation defaults on the note. That is why commercial
paper is only issued by financially strong, reliable firms.
Commercial paper is considered to be a safe place to put money for a short period
of time. The notes themselves are issued and traded through a network of commercial
paper dealers. Most of the buyers are large institutions.
Banker’s Acceptances A banker’s acceptance is a short-term debt instrument that is
guaranteed for payment by a commercial bank (the bank “accepts” the responsibility to
pay). Banker’s acceptances, thus, allow businesses to avoid problems associated with
collecting payment from reluctant debtors. They are often used when firms are doing
business internationally because they eliminate the worry that the lender will have to
travel to a foreign country to collect on a debt.
Securities in the Capital Market
When governments, corporations, and financial institutions want to raise money for a
long period of time, they issue capital market securities. In contrast to money market
securities, capital market securities are often not as liquid or safe. They are not generally
suitable for short-term investments.
The two most prominent capital market securities are bonds and stocks. We’ll
examine these two securities in some depth now.
Bonds Bonds are essentially IOUs that promise to pay their owners a certain amount
of money on some specified date in the future—and in most cases, interest payments
at regular intervals until maturity. When companies want to borrow money (usually
a fairly large amount for a long period of time), they arrange for their investment
8. 31Chapter 2 Financial Markets and Interest Rates
bankers to print up the IOUs and sell them to the public at whatever price they can
get. In essence, a firm that issues a bond is borrowing the amount that the bond sells
for on the open market.
Bond Terminology and Types Although many types of bonds exist, most bonds have
three special features: face value, maturity date, and coupon interest.
• Face value: The amount that the bond promises to pay its owner at some date in
the future is called the bond’s face value, or par value, or principal. Bond face
values range in multiples of $1,000 all the way up to more than $1 million. Unless
otherwise noted, assume that all bonds we discuss from this point forward have a
face value of $1,000.
• Maturity date: The date on which the issuer is obligated to pay the bondholder the
bond’s face value.
• Coupon interest: The interest payments made to the bond owner during the life of the
bond. Some bonds pay coupon interest once a year; many pay it twice a year. Some
bonds don’t pay any interest at all. These bonds are called zero-coupon bonds.
The percentage of face value that the coupon interest payment represents is called
the coupon interest rate. For example, assuming the face value of the bond was $1,000,
a bond owner who received $80 interest payments each year would own a bond paying
an 8 percent coupon interest rate:
$80 / $1,000 = .08, or 8%
The major types of bonds include Treasury bonds and notes, issued by the federal
government; municipal bonds, issued by state and local governments; and corporate
bonds, issued by corporations. The significant differences among these types of bonds
are described in the following sections.
Treasury Notes and Bonds When the federal government wants to borrow money for
periods of more than a year, it issues Treasury notes or Treasury bonds. T-notes have
initial maturities from 2, 3, or 10 years. Treasury bonds have maturities greater than 10
years. The U.S. Treasury stopped issuing T-bonds in November 2001 (although some
bonds issued prior to that time are still available in the secondary market). In February
2006 the Treasury resumed issuing T-bonds when it auctioned some with a maturity
of 30 years. Both T-notes and T-bonds pay interest semiannually, in addition to the
principal, which is paid at maturity. T-notes are auctioned by the Treasury every three
months to pay off old maturing securities and to raise additional funds to finance the
federal government’s new deficit spending.
The name originated decades ago when holders of bearer bonds would actually
tear off coupons from their bond certificates and mail them to the bond issuer to get
their interest payments, hence, the name coupon interest. Today, bonds are sold on a
“registered” basis, which means the bonds come with the owner’s name printed on them.
Interest payments are sent directly to the owner.
Although Treasury securities, such as T-notes and T-bonds, are extremely low
risk, they are not risk free. Without the congressional authority to print money, the
U.S. Treasury cannot legally pay its obligations, including the interest and principal
on Treasury securities. In March 2006 the U.S. Treasury Secretary wrote to Congress,
9. 32 Part I The World of Finance
imploring it to immediately raise the $8.2 trillion debt limit to avoid the first-ever
U.S. default on its obligations.2
After some debate, Congress accommodated the
administration’s request, putting the new limit at $9 trillion. Had Congress not done so
the situation could conceivably have resulted in a default. The national debt had grown
to over $11 trillion in 2009. The federal government’s fiscal policy, designed to get us
out of the financial crisis, will surely further increase the amount of the federal debt.
In September 1998, the Treasury began selling securities directly from its Web site
at www.publicdebt.treas.gov.
Municipal Bonds The bonds issued by state and local governments are known as
municipal bonds or “munis.” Many investors like municipal bonds because their coupon
interest payments are free of federal income tax.
Municipal bonds come in two types: general obligation bonds (GOs) and revenue
bonds. They differ in where the money comes from to pay them off. General obligation
bonds are supposed to be paid off with money raised by the issuer from a variety of
different tax revenue sources. Revenue bonds are supposed to be paid off with money
generated by the project the bonds were issued to finance—such as using toll bridge
fees to pay off the bonds to finance the toll bridge.
Corporate Bonds Corporate bonds are similar to T-bonds and T-notes except they are
issued by corporations. Like T-bonds and T-notes, they pay their owner interest during
the life of the bond and repay principal at maturity. Unlike T-bonds and T-notes, however,
corporate bonds sometimes carry substantial risk of default. As a last resort, the U.S.
government can print money to pay off its Treasury bill, note, and bond obligations; but
when private corporations run into trouble, they have no such latitude. Corporations’
creditors may get paid late or not at all.
Relatively safe bonds are called investment-grade bonds. Many financial institutions
and money management firms are required to invest only in those corporate bonds that
are investment grade. Relatively risky bonds are called junk bonds.3
Junk bonds are
generally issued by troubled companies, but they may be issued by financially strong
companies that later run into trouble.
This completes our introduction to bonds. Now let’s turn our attention to the other
major security in the capital market, corporate stock.
Corporate Stock Rather than borrowing money by issuing bonds, a corporation may
choose to raise money by selling shares of ownership interest in the company. Those
shares of ownership are stock. Investors who buy stock are called stockholders.
As a source of funds, stock has an advantage over bonds: The money raised from
the sale of stock doesn’t ever have to be paid back, and the company doesn’t have to
make interest payments to the stockholders.
A corporation may issue two types of corporate stock: common stock and preferred
stock. Let’s look at their characteristics.
Common Stock Common stock is so called because there is nothing special about it.
The holders of a company’s common stock are simply the owners of the company. Their
2
Source: www.CBSnews.com, March 6, 2006.
3
The term junk bond is a slang term that is now widely accepted. Firms trying to sell junk bonds often dislike the term, of
course. They would prefer such bonds be referred to as high yield securities.
10. 33Chapter 2 Financial Markets and Interest Rates
ownership entitles them to the firm’s earnings that remain after all other groups having
a claim on the firm (such as bondholders) have been paid.
Each common stockholder owns a portion of the company represented by the
fraction of the whole that the stockholder’s shares represent. Thus, if a company issued
1 million shares of common stock, a person who holds one share owns one-millionth
of the company.
Common stockholders receive a return on their investment in the form of common
stock dividends, distributed from the firm’s profits, and capital gains, realized when
they sell the shares.4
Preferred Stock Preferred stock is so called because if dividends are declared by the
board of directors of a business, they are paid to preferred stockholders first. If any funds
are left over, they may be paid to the common stockholders. Preferred stockholders
are not owners and normally don’t get to vote on how the firm is run as do common
stockholders Also, holders of preferred stock have a lower expected return than do
holders of common stock because preferred stock is a less risky investment. The party
that is paid last, the common stockholder, is taking a greater risk since funds may run
out before getting to the end of the line.
Of course, there is no guarantee that a common stockholder’s stock will increase in
price. If the price goes down, the stockholder will experience a capital loss.
Interest
No one lends money for free. When people lend money to other people, a number of
things could happen that might prevent them from getting all their money back.Whenever
people agree to take risk, compensation is required before they will voluntarily enter
into an agreement. In financial activities, we refer to this compensation as interest.
Interest represents the return, or compensation, a lender demands before agreeing to
lend money. When we refer to interest, we normally express it in percentage terms,
called the interest rate. Thus, if you lend a person $100 for one year, and the return you
require for doing so is $10, we would say that the interest rate you are charging for the
loan is $10/$100 = .10, or 10 percent.
Determinants of Interest Rates
The prevailing rate of interest in any situation is called the nominal interest rate. In the
preceding example, the nominal interest rate for the one-year $100 loan is 10 percent.
The nominal interest rate is actually the total of a number of separate components,
as shown in Figure 2-1 on the next page. We will explore each of these components in
the following sections.
The Real Rate of Interest Lenders of money must postpone spending during the time
the money is loaned. Lenders, then, lose the opportunity to invest their money for that
period of time. To compensate for the burden of losing investment opportunities while
they postpone their spending, lenders demand, and borrowers pay, a basic rate of return—
the real rate of interest. The real rate of interest does not include adjustments for any
other factors, such as the risk of not getting paid back. We’ll describe this in a moment.
4
Of course, there is no guarantee that a common stockholder’s stock will increase in price. If the price goes down, the
stockholder will experience a capital loss.
11. 34 Part I The World of Finance
Let’s continue with the example on page 29, in which you lent a person $100.
The total interest rate that you charged was 10 percent (the nominal interest rate).
The portion of the total nominal rate that represents the return you demand for
forgoing the opportunity to spend your money now is the real rate of interest. In
our example, assume the real rate of interest is 2 percent.
Additions to the real rate of interest are called premiums. The major premiums are
the inflation premium, the default risk premium, the liquidity risk premium, and the
maturity risk premium.
The Inflation Premium Inflation erodes the purchasing power of money. If inflation is
present, the dollars that lenders get when their loans are repaid may not buy as much as
the dollars that they lent to start with. Therefore, lenders who anticipate inflation during
the term of a loan will demand additional interest to compensate for it. This additional
required interest is the inflation premium.
If, when you lent $100, you thought that the rate of inflation was going to be 4
percent a year during the life of the loan, you would add 4 percent to the 2 percent
real rate of interest you charged for postponing your spending. The total interest
rate charge—so far—would be 6 percent.
The Nominal Risk-Free Rate The interest rate that we have built so far, containing the
real rate of interest and a premium to cover expected inflation, is often called the nominal
risk-free rate of interest, as shown earlier in Figure 2-1. It is called this because it does
not include any premiums for the uncertainties associated with borrowing or lending.
The yield on short-term U.S. Treasury bills is often used as a proxy for the risk-free
rate because the degree of uncertainty associated with these securities is very small.
Figure 2-1 Components
of the Nominal Interest Rate
The nominal interest rate is
composed of the real interest
rate plus a number of premiums.
The nominal risk-free interest rate
is the real rate plus an inflation
premium. When risk premiums
are added, the result is the total
nominal interest rate.
Inflation Premium Inflation Premium
Real Rate of Interest Default Risk Premium Real Rate of Interest
Nominal Risk-Free
Interest Rate
+ =Risk Premiums Nominal Interest Rate
Illiquidity Risk Premium
Maturity Risk Premium Default Risk Premium
Illiquidity Risk Premium
Maturity Risk Premium
12. 35Chapter 2 Financial Markets and Interest Rates
Risk Premiums The remaining determinants of the nominal interest rate represent extra
charges to compensate lenders for taking risk. Risks in lending come in a number of
forms. The most common are default risk, illiquidity risk, and maturity risk.
The Default Risk Premium A default occurs when a borrower fails to pay the
interest and principal on a loan on time. If a borrower has a questionable reputation or
is having financial difficulties, the lender faces the risk that the borrower will default.
The default risk premium is the extra compensation lenders demand for assuming
the risk of default.
In our $100 loan example, if you weren’t completely sure that the person
to whom you had lent $100 would pay it back, you would demand extra
compensation—let’s say, two percentage points—to compensate for that risk.
The total interest rate demanded so far would be 2 percent real rate of interest + 4
percent inflation premium + 2 percent default risk premium = 8 percent.
The Illiquidity Risk Premium Sometimes lenders sell loans to others after making
them. (This happens often in the mortgage business, in which investors trade mortgages
among themselves.) Some loans are easily sold to other parties and others are not. Those
that are easily sold are liquid, and those that aren’t sold easily are considered illiquid.
Illiquid loans have a higher interest rate to compensate the lender for the inconvenience
of being stuck with the loan until it matures. The extra interest that lenders demand to
compensate for the lack of liquidity is the illiquidity risk premium.
You will probably not be able to sell your $100 loan to anyone else and
will have to hold it until maturity. Therefore, you require another 1 percent to
compensate for the lack of liquidity. The total interest rate demanded so far is 2
percent real rate of interest + 4 percent inflation premium + 2 percent default risk
premium + 1 percent illiquidity risk premium = 9 percent.
The Maturity Risk Premium If interest rates rise, lenders may find themselves stuck
with long-term loans paying the original rate prevailing at the time the loans were made,
whereas other lenders are able to make new loans at higher rates. On the other hand, if
interest rates go down, the same lenders will be pleased to find themselves receiving
higher interest rates on their existing long-term loans than the rate at which other lenders
must make new loans. Lenders respond to this risk that interest rates may change in the
future in two ways:
• If lenders think interest rates might rise in the future, they may increase the rate
they charge on their long-term loans now and decrease the rate they charge on their
short-term loans now to encourage borrowers to borrow short term.
• Conversely, if lenders think interest rates might fall in the future, they may decrease
the rate they charge on their long-term loans now and increase the rate they charge
on their short-term loans now to encourage borrowers to borrow long term (locking
in the current rate).
This up or down adjustment that lenders make to their current interest rates to
compensate for the uncertainty about future changes in rates is called the maturity risk
premium. The maturity risk premium can be either positive or negative.
Take Note
You can find the yield on
U.S. Treasury bills very
easily just by looking in
The Wall Street Journal
on page C-1. Yields on
T-bills and a number
of other securities are
published there every
business day. You can
also find these yields
at the Federal Reserve’s
website at http://.
www.federalreserve.
gov/releases/. Click
“Interest Rates” when
you get there.
13. 36 Part I The World of Finance
In our example, if you thought interest rates would probably rise before you
were repaid the $100 you lent, you might demand an extra percentage point to
compensate for the risk that you would be unable to take advantage of the new
higher rates. The total rate demanded is now 10 percent (2 percent real rate of
interest + 4 percent inflation premium + 2 percent default risk premium + 1 percent
illiquidity risk premium + 1 percent maturity risk premium = 10 percent, the
nominal interest rate).
The total of the real rate of interest, the inflation premium, and the risk premiums
(the default, illiquidity, and maturity risk premiums) is the nominal interest rate, the
compensation lenders demand from those who want to borrow money.
Next, we will consider the yield curve—a graph of a security’s interest rates
depending on the time to maturity.
The Yield Curve
A yield curve is a graphical depiction of interest rates for securities that differ only in
the time remaining until their maturity. Yield curves are drawn by plotting the interest
rates of one kind of security with various maturity dates. The curve depicts the interest
rates of these securities at a given point in time.
Yield curves of U.S. Treasury securities are most common because with Treasury
securities it is easiest to hold constant the factors other than maturity. All Treasury
securities have essentially the same default risk (almost none) and about the same
degree of liquidity (excellent). Any differences in interest rates observed in the yield
curve, then, can be attributed to the maturity differences among the securities because
other factors have essentially been held constant. Figure 2-2 shows a Treasury securities
yield curve for April 13, 2006.
Making Use of theYield Curve The shape of the yield curve gives borrowers and lenders
useful information for financial decisions. Borrowers, for example, tend to look for the
low point of the curve, which indicates the least expensive loan maturity. Lenders tend to
look for the highest point on the curve, which indicates the most expensive loan maturity.
Finding the most advantageous maturity is not quite as simple as it sounds because
it depends on more factors than cost. For instance, the least expensive maturity is not
always the most advantageous for borrowers. If a firm borrows short term, for example,
it may obtain the lowest interest rate, but the loan will mature in a short time and may
have to be renewed at a higher rate if interest rates have risen in the interim. Borrowing
for a longer term may cost a borrower more at the outset but less in the long run because
the interest rate is locked in.
Lenders face the opposite situation. Granting long-term loans at relatively high
interest rates may look attractive now; but if short-term rates rise, the lenders may miss
profitable opportunities because their funds have already been invested. Both borrowers
and lenders must balance their desire for return with their tolerance for risk.
To see a cool animated presentation of current and previous yield curves go to the
website http://www.smartmoney.com/onebond/indexcfm?story=yieldcurve to see The
Living Yield curve. There you will see how the yield curve changed when economic
conditions changed.
14. 37Chapter 2 Financial Markets and Interest Rates
What’s Next
In this chapter we investigated financial markets, securities, and interest rates. In the next
chapter, we will look at another part of the financial environment, financial institutions.
Summary
1. Describe how the U.S. financial system works.
The financial system is made up of surplus economic units, entities and individuals
that have excess funds, and deficit economic units, entities and individuals that need to
acquire additional funds. The financial system provides the network that brings these
two groups together so that funds flow from the surplus economic units to the deficit
economic units.
2. Define financial securities.
Securities are documents that represent a person’s right to receive funds in the future.
Firms issue securities in exchange for funds they need now, and investors trade securities
among themselves.
Figure 2-2
The Yield Curve as of
May 15, 2009.
Interest rates (in percent) of
U.S. Treasury securities of
varying maturities.
Data Source: Federal Reserve Statistical
Release
(http://www.ustreas.gov/offices/domestic-
finance/debt-management/interest-rate/
yield.shtml)
1 3 6 1 2 3 5 7 10 20 30
mo. mo. mo. yr. yr. yr. yr. yr. yr. yr. yr.
Maturity
PercentYield
4.09%
4.07%
3.14%
2.65%
2.01%
1.30%
0.88%
0.50%
0.29%
0.17%
0.11%
15. 38 Part I The World of Finance
3. Explain the function of financial intermediaries.
Financial intermediaries act to put those in need of funds in contact with those who
have funds available. Investment banking firms help businesses acquire funds from
the public by issuing securities in the financial marketplace. Brokers help members of
the public trade securities with each other. Dealers buy and sell securities themselves.
4. Identify the different financial markets.
Financial markets are forums in the financial system that allow surplus economic units to
transact with deficit economic units and for portfolio adjustments to be made. Securities
change hands in financial markets. The financial markets include the primary market,
in which new securities are issued for the first time; the secondary market, in which
previously issued securities are traded among investors; the money market, in which
securities with maturities of less than one year are traded; and the capital market, in
which securities with maturities longer than one year are traded. Some securities are
traded on organized exchanges, such as the New York Stock Exchange, and others are
traded over the counter (OTC) in a network of securities dealers.
5. List and define the securities traded in the money and capital markets.
Securities traded in the money market include:
• Treasury bills: short-term debt instruments issued by the U.S. Treasury that
are sold at a discount and pay face value at maturity.
• Negotiable certificates of deposit (CDs): certificates that can be traded in
financial markets and represent amounts deposited at banks that will be repaid
at maturity with a specified rate of interest.
• Commercial paper: unsecured short-term promissory notes issued by large
corporations with strong credit ratings.
• Banker’s acceptances: documents that signify that a bank has guaranteed
payment of a certain amount at a future date if the original promisor
doesn’t pay.
The two major securities traded in the capital market include:
• Bonds: long-term securities that represent a promise to pay a fixed amount
at a future date, usually with interest payments made at regular intervals.
Treasury bonds are issued by the U.S. government, corporate bonds are issued
by firms, and municipal bonds are issued by state and local governments.
• Stocks: shares of ownership interest in corporations. Preferred stock comes
with promised dividends but usually no voting rights. Common stock may
come with dividends, paid at the discretion of the board, but does have voting
rights. Common stockholders share in the residual profits of the firm.
16. 39Chapter 2 Financial Markets and Interest Rates
6. Identify the determinants of the nominal interest rate.
The nominal interest rate has three main determinants:
• The real rate of interest: the basic rate lenders require to compensate for
forgoing the opportunity to spend money during the term of the loan.
• An inflation premium: a premium that compensates for the expected erosion
of purchasing power due to inflation over the life of the loan.
• Risk premiums: premiums that compensate for the risks of default (the risk that
the lender won’t be paid back), illiquidity (the risk that the lender won’t be able
to sell the security in a reasonable time at a fair price), and maturity (the risk
that interest rates may change adversely during the life of the security).
7. Construct and analyze a yield curve.
A yield curve is a graphical depiction of interest rates on securities that differ only in
the time remaining until their maturity. Lenders and borrowers may use a yield curve
to determine the most advantageous loan maturity.
ST-1. To minimize risk, why don’t most firms simply
finance their growth from the profits they earn?
ST-2. What market would a firm most probably go to
if it needed cash for 90 days? If it needed cash
for 10 years?
ST-3. If your company’s stock were not listed on the
New York Stock Exchange, how could investors
purchase the shares?
ST-4. What alternatives does Microsoft, a very large
and secure firm, have for obtaining $3 million
for 60 days?
ST-5. Assume Treasury security yields for today are
as follows:
• One-year T-notes, 5.75%
• Two-year T-notes, 5.5%
• Three-year T-notes, 5.25%
• Five-year T-notes, 5.0%
• Ten-year T-notes, 4.75%
• Twenty-year, T-bonds 4%
• Thirty-year, T-bonds 3.25%
Draw a yield curve based on these data.
Review Questions
1. What are financial markets? Why do they exist?
2. What is a security?
3. What are the characteristics of an efficient market?
4. How are financial trades made on an organized
exchange?
5. How are financial trades made in an over-the-
counter market? Discuss the role of a dealer in the
OTC market.
6. What is the role of a broker in security transactions?
How are brokers compensated?
7. What is a Treasury bill? How risky is it?
8. Would there be positive interest rates on bonds in
a world with absolutely no risk (no default risk,
maturity risk, and so on)? Why would a lender
demand, and a borrower be willing to pay, a
positive interest rate in such a no-risk world?
Self-Test
17. 40 Part I The World of Finance
Build Your Communication Skills
The Financial
System
Financial
Markets
Financial
Markets
CS-1. Imagine the following scenario:
Your firm has decided to build a new plant in
South America this year. The plant will cost
$10 million and all the money must be paid
up front. Your boss has asked you to brief the
board of directors on the options the firm has
for raising the $10 million.
Prepare a memo for the board members outlining
the pros and cons of the various financing options
open to the firm. Divide into small groups.
Each group member should spend five minutes
presenting his or her financing option suggestions
to the rest of the group members, who should act
as the board members.
CS-2. Prepare an IOU, or “note,” that promises to
pay $100 one year from today to the holder
of the note.
a. Auction this note off to someone else in
the class, having the buyer pay for it with a
piece of scratch-paper play money.
b. Compute the note buyer’s percent rate of
return if he or she holds the note for a year
and cashes it in.
c. Ask the new owner of the note to auction
it off to someone else. Note the new buyer’s
rate of return based on his or her purchase
price.
d. Discuss the operation of the market the class
has created. Note the similarities between it
and the bond market in the real world.
Problems
2-1. a. What are “surplus economic units”? Give two examples of entities in the
financial system that typically would be classified as surplus economic units.
b. What are “deficit economic units”? Give two examples of entities in the
financial system that typically would be classified as deficit economic units.
2-2. Answer the following, true or false:
a. Trades among investors at the New York Stock Exchange are primary market
transactions.
b. The money market is where firms go to obtain funding for long-term
projects.
c. Your firm has $2,000,000 of excess funds that will not be needed for one
month. You would most likely go to the capital market to invest the money
until needed.
d. Gold and international currencies are traded in the money market.
2-3. a. Arrange the following markets in order from most efficient to least efficient.
1. The real estate market
2. The money market
3. The secondary market (New York Stock Exchange)
4. The over-the-counter market
b. Explain the rationale you used to order the markets the way you did in part a.
18. 41Chapter 2 Financial Markets and Interest Rates
2-4. a. What characteristics must a security have to be traded in the money market?
b. Give two examples of securities that are traded in the money market.
2-5. Public Service Company of North Carolina issued $150 million worth of bonds
this year. The bonds had a face value of $1,000 each, and each came with a
promise to pay the bearer $66.25 a year in interest during the life of the bond.
What is the coupon interest rate of these bonds?
2-6. If the real rate of interest is 2 percent, inflation is expected to be 3 percent
during the coming year, and the default risk premium, illiquidity risk premium,
and maturity risk premium for the Bonds-R-Us corporation are all 1 percent
each, what would be the yield on a Bonds-R-Us bond?
2-7. Assume Treasury security yields for today are as follows:
• Three-month T-bills, 4.50%
• Six-month T-bills, 4.75%
• One-year T-notes, 5.00%
• Two-year T-notes, 5.25%
• Three-year T-bonds, 5.50%
• Five-year T-bonds, 5.75%
• Ten-year T-bonds, 6.00%
• Thirty-year T-bonds, 6.50%
Draw a yield curve based on these data. Discuss the implications if you are:
a. a borrower
b. a lender
Securities in the
Financial Market
Securities in the
Financial Market
Nominal
Interest Rate
Yield Curve
19. 42 Part I The World of Finance
ST-1. In most cases, profits are insufficient to provide the funds needed, especially
with large projects. Financial markets provide access to external sources of
funds.
ST-2. To obtain cash for 90 days, a business firm would most probably go to the
money market, in which it would sell a 90-day security. To obtain cash for
10 years, a firm would sell a security in the capital market.
ST-3. Investors would simply purchase the shares on another exchange, or over the
counter from a dealer. (Investors simply call their brokers to purchase stock.
Brokers decide where to get it.)
ST-4. Microsoft could
• obtain a 60-day loan from a financial institution
• delay payments to its suppliers
• sell commercial paper notes in the money market
ST-5. The yield curve follows:
Answers to Self-Test
6%
5%
4%
3%
2%
1%
0%
0 5 10 15 20 25 30
Maturity in Years
YieldtoMaturity
Take Note
Notice that this yield
curve is downward
sloping, which indicates
that lenders expect
interest rates to fall in the
future. (See the discussion
about the maturity risk
premium on pages
31–32.) A downward
sloping curve such as this
one is called an inverted
yield curve.