Financial Markets and Intermediaries: An Overview, Study notes of Banking and Finance

Download Financial Markets and Intermediaries: An Overview and more Study notes Banking and Finance in PDF only on Docsity! Chapter 2 An Overview of the Financial System 2-2 Function of Financial Markets 1. Allows transfers of funds from person or business without investment opportunities to one who has them 2. Improves economic efficiency 2-3 Classifications of Financial Markets 1. Debt markets
maturity = number of years until expiration date
short-term: maturity < 1 year
intermediate-term: maturity between 1 and 10 years
long-term: maturity > 10 years
typical examples: bonds, mortgages 2. Equity markets
common stocks – pay dividends, give voting rights, but owner is residual claimant Although the average person is more aware of the equity market, the debt market is usually much larger. 2-4 Classifications of Financial Markets (cont.) 1. Primary market
new security issues sold to initial buyers – issuer receives “all” the proceedings
usually “behind closed doors” – investment banks underwrite securities (i.e., guarantee a price and then sell it to the public) 2. Secondary market
securities previously issued are bought and sold – issuers don’t receive anything from the transaction
NYSE and NASDAQ are secondary markets; also forex markets, futures or options markets
brokers are agents of investors, matching buyers and sellers
dealers trade at stated prices Liquidity of a financial instrument = the easiness to sell and raise cash 2-5 Classifications of Financial Markets (cont.) 1. Exchanges: trades conducted in central locations (e.g., New York Stock Exchange, Chicago Board of Trade) 2. Over-the-counter markets: dealers at different locations buy and sell (e.g., the U.S. government bond market) 1. Money markets: short-term instruments (maturity < 1 year) smaller price fluctuations, used for investments of temporary funds (corporations or banks) 2. Capital markets: longer-term instruments (long-term bonds) or stocks – usually held by insurance companies or pension funds 2-6 Internationalization of Financial Markets
International bond market
trades in:
foreign bonds = bonds sold in a foreign country and denominated in that country’s currency
Eurobonds = bonds denominated in a currency other than that of the country in which they are sold
a variant of Eurobonds is Eurocurrencies – deposits of foreign currency with foreign banks (e.g., Eurodollars are deposits of U.S. dollars with foreign banks)
now larger than U.S. corporate bond market
World Stock Markets
U.S. stock markets are no longer always the largest: Japan sometimes larger