Download Financial Instruments Markets and Institutions - Money and Banking - Lecture Slides and more Slides Economics in PDF only on Docsity! Chapter 3: Financial Instruments, Markets and Institutions • Financial Instruments • Financial Markets • Financial Institutions Docsity.com • People who need funds – borrowers/issuer/seller • People who have funds to give – lenders/savers/buyers Docsity.com Docsity.com I. Financial Instruments aka. securities, financial assets definition (p. 36 (1st) or 41 (2nd)) = written legal obligation of one party to transfer something of value, usually money, to antoher party at some future date, under certain conditions a security is an asset for the buyer/lender, but a liability for the issuer/borrower/seller Docsity.com example • shares of stock in Time Warner, Inc. – shares of ownership in TW – a claim on the earnings/assets of TW – a liability for Time Warner – an asset for me Docsity.com Valuing financial instruments • sizing, timing & certainty of promised cash flows • Size: how much is promised? – the larger the cash flows, the greater the value • Timing: when is it promised? – the sooner the cash flows are received, the greater the value Docsity.com • Certainty: how likely its it that payments will be made? – the likelier the payments the greater the value • Under what conditions? – e.g. insurance, derivatives – payments when we need them the most are more valuable Docsity.com examples (p. 43/44 or 46/47) • bank loans • stocks • bonds • home mortgages • asset-backed securities • option and futures contracts • insurance policies Docsity.com Debt vs. Equity Markets • debt security – cash flows are fixed – bonds, loans • equity security – cash flow variable, residual – common stock Docsity.com Exchanges vs. OTC Markets • exchange – buying & selling of securities in physical location – NYSE • OTC (over-the-counter) – dealers in many locations buy & sell securities Docsity.com Money vs. Capital Markets • money market – short-term debt securities (up to 1 yr.) – highly liquid, low risk • capital market – longer-term debt – equity Docsity.com III. Financial Institutions aka. financial intermediaries Why have them? • Transactions costs – search costs to find borrower & lender – contract costs – economies of scale Docsity.com • Risk sharing – intermediaries are experts at bearing risk • Asset transformation – short-term to long-term – illiquid to liquid Docsity.com Types of intermediaries • Depository institutions – “banks” – accept deposits, make loans Docsity.com
