Financial markets, Appunti di Economia degli Intermediari Finanziari

Scarica Financial markets e più Appunti in PDF di Economia degli Intermediari Finanziari solo su Docsity! INTRODUCTION What is a financial market? They are markets in which funds are transferred from people who have an excess of available funds to people who have a shortage. What is function of financial markets? Financial markets perform the essential economic function of channeling funds from households, firms, and governments that have saved surplus funds to those that have a shortage of funds. Funds flow from lender-savers to borrower-spenders via two routes: In direct finance, borrowers borrow funds directly from lenders in financial markets by selling them securities (also called financial instruments), which are claims on the borrower’s future income or assets. In indirect finance, borrowers borrow funds from lender-savers through the financial intermediaries. Structure of financial markets 1 A firm or an individual can obtain funds in a financial market in two ways. The most common method is to issue a debt instrument, such as a bond or a mortgage, which is a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made. The maturity of a debt instrument is the number of years (term) until that instrument’s expiration date.The second method of raising funds is by issuing equities,such as common stock, which are claims to share in the net income (income after expenses and taxes) and the assets of a business. 2 A primary market is a financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. A secondary market is a financial market in which securities that have been previously issued can be resold. The primary markets for securities are not well known to the public because the selling of securities to initial buyers often takes place behind closed doors. An examples of secondary markets are foreign exchange markets, futures markets, and options markets. Securities brokers and dealers are crucial to a well-functioning secondary market. Brokersare agents of investors who match buyers with sellers of securities; dealers link buyers and sellers by buying and selling securities at stated prices. A corporation acquires new funds only when its securities are first sold in the primary market. Nonetheless, secondary markets serve two important functions. First, they make it easier and quicker to sell these financial instruments to raise cash; that is, they make the financial instruments more liquid. 3 Secondary markets can be organized in two ways. One method is to organize exchanges, where buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades. The other method of organizing a secondary market is to have an over-thecounter (OTC) market, in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices. Because overthe-counter dealers are in computer contact and know the prices set by one another, the OTC market is very competitive and not very different from a market with an organized exchange. 4 Another way of distinguishing between markets is on the basis of the maturity of the securities traded in each market. The money market is a financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded; the capital market is the market in which longerterm debt (generally with original maturity of one year or greater) and equity instruments are traded. Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid. Financial intermediaries Funds also can move from lenders to borrowers by a second route called indirect finance because it involves a financial intermediary that stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other. A financial intermediary does this by borrowing funds from the lender-savers and then using these funds to make loans to borrowerspenders. The process of indirect finance using financial intermediaries, called financial intermediation, is the primary route for moving funds from lenders to borrowers. Indeed, although the media focus much of their attention on securities markets, particularly the stock market, financial intermediaries are a far more important source of financing for corporations than securities markets are. Importance of intermediaries → reduce transaction cost, reduce risk, reduce asymmetric info The presence of transaction costs in financial markets explains, in part, why financial intermediaries and indirect finance play such an important role in financial markets. An additional reason is that in financial markets, one party often does not know enough about the other party to make accurate decisions. This inequality is called asymmetric information. Adverse selection is the problem created by asymmetric information before the transaction occurs. Adverse selection in financial markets occurs when the potential borrowers who are the most likely to produce an undesirable (adverse) outcome—the bad credit risks—are the ones who most actively seek out a loan and are thus most likely to be selected. Because adverse selection makes it more likely that loans might be made to bad credit risks, lenders may decide not to make any loans even though there are good credit risks in the marketplace. → lemon problem Moral hazard is the problem created by asymmetric information afterthe transaction occurs. Moral hazard in financial markets is the risk (hazard) that the borrower might engage in activities that are undesirable (immoral) from the lender’s point of view, because they make it less likely that the loan will be paid back. Because moral hazard lowers the probability that the loan will be repaid, lenders may decide that they would rather not make a loan. With financial intermediaries in the economy, small savers can provide their funds to the financial markets by lending these funds to a trustworthy intermediary. Types of financial intermediaries They fall into three categories: depository institutions (banks), contractual savings institutions, and investment intermediaries. Depository institutions (for simplicity, we refer to these as banks throughout this text) are financial intermediaries that accept deposits from individuals and institutions and make loans. These institutions include commercial banks and the so-called thrift institutions (thrifts): savings and loan associations, mutual savings banks, and credit unions. Contractual Savings Institutions, such as insurance companies and pension funds, are financial intermediaries that acquire funds at periodic intervals on a contractual basis. Investment Intermediaries This category of financial intermediaries includes finance companies, mutual funds, and money market mutual funds Regulation of financial system The government regulates financial markets for two main reasons: to increase the information available to investors and to ensure the soundness of the financial system(Limits on Competition, Restrictions on Interest Rates,Deposit InsuranceThe government can insure people’s deposits so that they do not suffer great financial loss if the financial intermediary that holds these deposits should fail) CONSOB, BANCO AMBROSIANO CASE, 3 DIRECTIVES OF UE THERE EXSIST 5 DIFFERENT MARKETS: MONEY MARKET BOND MARKET EQUITY MARKET FOREIGN EXCHANGE DERIVATIVES MONEY MARKET The term money marketis actually a misnomer. Money—currency—is not traded in the money markets. Money market securities have three basic characteristics in common: • They are usually sold in large denominations . • They have low default risk. • They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days. Money market transactions do not take place in any one particular location or building. Instead, traders usually arrange purchases and sales between participants over the phone and complete them electronically. Because of this characteristic, money market securities usually have an active secondary market. This means that after the security has been sold initially, it is relatively easy to find buyers who will purchase it in the future.Another characteristic of the money markets is that they are wholesale markets. This means that most transactions are very large, usually in excess of $1 million. The size of these transactions prevents most individual investors from participating directly in the money markets. Instead, dealers and brokers, operating in the trading rooms of large banks and brokerage houses, bring customers together. La finalità di questa parte di mercato è quella di gestire la liquidità; infatti data la breve durata dei contratti e la presenza di un mercato secondario, l'investitore ha la possibilità di investire temporanee eccedenze di fondi e l'imprenditore può risolvere temporanei fabbisogni con la possibilità di smobilitare a breve termine l'investimento. • The Purpose of the Money Markets The well-developed secondary market for money market instruments makes the money market an ideal place for a firm or financial institution to “warehouse” surplus funds until they are needed. Similarly, the money markets provide a low-cost source of funds to firms, the government, and intermediaries that need a short-term infusion of funds. • 1. Money market securities are short-term instruments with an original maturity of less than one year. These securities include Treasury bills, commercial paper, federal funds, repurchase agreements, negotiable certificates of deposit, banker’s acceptances, and Eurodollars. 2. Money market securities are used to “warehouse” funds until needed. The returns earned on these investments are low due to their low risk and high liquidity. 3. Many participants in the money markets both buy and sell money market securities. The U.S. Treasury, • commercial banks, businesses, and individuals all benefit by having access to low-risk short-term investments. 4. Interest rates on all money market securities tend to follow one another closely over time. Treasury bill returns are the lowest because they are virtually devoid of default risk. Banker’s acceptances and negotiable certificates of deposit are next lowest because they are backed by the creditworthiness of large money center banks. BOND MARKET The three main capital market instruments are bonds, stocks, and mortgages. Bonds represent borrowing by the issuing firm. Stock represents ownership in the issuing firm. Mortgages are long- term loans secured by real property. Only corporations can issue stock. Corporations and governments can issue bonds. In any given year, far more funds are raised with bonds than with stock. Types of Bonds Bonds are securities that represent a debt owed by the issuer to the investor. Bonds obligate the issuer to pay a specified amount at a given date, generally with periodic interest payments. The par, face, or maturity value of the bond is the amount that the issuer must pay at maturity. The coupon rateis the rate of interest that the issuer must pay, and this periodic interest payment is often called the coupon payment. This rate is usually fixed for the duration of the bond and does not fluctuate with market interest rates. If the repayment terms of a bond are not met, the holder of a bond has a claim on the assets of the issuer. Long-term bonds traded in the capital market include long-term government notes and bonds, municipal bonds, and corporate bonds The U.S. Treasury issues notes and bonds to finance the national debt. The difference between a note and a bond is that notes have an original maturity of 1 to 10 years while bonds have an original maturity of 10 to 30 years Federal government notes and bonds are free of default risk because the government can always print money to pay off the debt if necessary.1 This does notmean that these securities are risk-free. investors in Treasury bonds have found themselves earning less than the rate of inflation in some years (see Figure 12.2), most of the time the interest rate on Treasury notes and bonds is above that on money market securities because of interest-rate risk. Municipal bonds are securities issued by local, county, and state governments. The proceeds from these bonds are used to finance public interest projects such as schools, utilities, and transportation systems. Municipal bonds that are issued to pay for essential public projects are exempt from federal taxation. There are two types of municipal bonds: general obligation bonds and revenue bonds Corporate Bonds When large corporations need to borrow funds for long periods of time, they may issue bonds. Most corporate bonds have a face value of $1,000 and pay interest semiannually (twice per year). Most are also callable, meaning that the issuer may redeem the bonds after a specified date. The bond indenture is a contract that states the lender’s rights and privileges and the borrower’s obligations. Any collateral offered as security to the bondholders will also be described in the indenture. TYPES OF CORPORATE BONDS: secured, unsecured, junk → In 1995 J.P. Morgan introduced a new way to insure bonds called the credit default swap (CDS).In its simplest form a CDS provides insurance against default in the principle and interest payments of a credit instrument