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13 Cards in this Set

  • Front
  • Back
A financial market is a market in which financial assets (securities) such as stocks and bonds can be purchased and sold.
The main participants in financial market transactions are household, businesses and governments that purchase or sell financial assets. provide funds or the parties with excess funds are known as fund suppliers (households for eg) while the parties who require funds or need to obtain funds are known as fund users (corporations).
Primary markets are markets where users of funds (Corporations) raise funds through the issuance of new securities such as stocks and bonds
There are two kinds of offerings in the PM: Public Offering and Private Placement.
Public offering  Offering to public (investors like you and me) at large.
Initial Public Offering AKA IPO  These are a FIRST time offering of shares of a corporation to the public. These firms are relatively new firms that are not very well known to investors.
Instead of a public offering the company might want to sell its shares to institutional investors such as a pension funds this is known as private placement.
Once financial instruments such as stocks are issued in the primary market, they are traded that is bought and sold in the secondary market.
The two major stock exchanges in the US are the NYSE and the NASDAQ.
The most important distinction between the two is that the NYSE is an “Organized” exchange while the NASDAQ is OTC (over the counter).
Note: Primary markets facilitate the issuance of new securities while secondary markets facilitate the trading of existing securities. ALSO primary markets provide funds to the ISSUERS while secondary markets do not.
Advantage of secondary markets provides liquidity to investors. They are great channels for investors to buy and sell securities as they like. We will learn more about the trading process in the secondary market in the future (stock market CH).
When corporations need to issue stocks they are helped by Investment Banks Meryll Lynch/Goldman Sachs.
Investment Banks are Financial Intermediaries that
•Determine the price at which the issue should be offered at
•Buy the shares from the firm
•Sell the shares
Two types of Underwriting:
Firm Commitment Underwriter buys the issue from the company and sells it to public.
How do they make money? Risks?
Best Efforts UW acts as a distribution agent does not incur any risks.
• Money Markets
– markets that trade debt securities with maturities of one year or less. These markets facilitate the flow of short-term funds.

The major types MM instruments are fed funds, CDs, T-bills, Banker’s acceptance , Euro-dollar deposits (see Table 1-2)
• Capital Markets
– markets that trade debt and equity instruments with maturities of more than one year and hence facilitate the flow of long term funds.
Before corporations can issue stocks, they have to register the stock with the SEC
Prospectus is a little booklet that contains all the above information and is meant to warn the investors of the risks involved and the expected return. Securities ACT of 1933-1934 full an fair disclosure of information of securities to actual and potential investors.
Prior to the Reg FD many of the managers worked closely with analysts in the development of their earnings estimates
•“Foreign Xchange” markets deal in trading one currency for another (e.g. dollar for yen)
•The “spot” FX transaction involves the immediate exchange of currencies at the current exchange rate
•The “forward” FX transaction involves the exchange of currencies at a specified date in the future and at a specified exchange rate. Example you can get into a contract of maybe $1.81 = 1 pound. Now you have a hedged position. Even if the pound depreciates hypothetically to $.5 = 1 pound you are saved as you entered into the forward contract.
Financial Institutions:
•Institutions that perform the essential function of channeling funds from those with surplus funds to those with shortages of funds
•Commercial banks
–depository institutions whose major assets are loans and major liabilities are deposits
–depository institutions in the form of savings and loans, credit unions
•Insurance companies
–financial institutions that protect individuals and corporations from adverse events
•Securities firms and investment banks
–financial institutions that underwrite securities and engage in securities brokerage and trading
•Finance companies
–financial institutions that make loans to individuals and businesses
•Mutual Funds
–financial institutions that pool financial resources and invest in diversified portfolios
•Pension Funds
–financial institutions that offer savings plans for retirement
Services performed by FIs
•Monitoring Costs
–aggregation of funds provides greater incentive to collect a firm’s information and monitor actions
•Liquidity and Price Risk
–provide financial claims to savers with superior liquidity and lower price risk
•Transaction Cost Services
–transaction costs are reduced through economies of scale
•Maturity Intermediation
–greater ability to bear risk of mismatching maturities of assets and liabilities
•Denomination Intermediation
–allow small investors to overcome constraints imposed to buying assets imposed by large minimum denomination size
Risks faced by FIs
•Interest Rate Risk
•Foreign Exchange Risk
•Market Risk
•Credit Risk
•Liquidity Risk
•Off-Balance-Sheet Risk
•Technology Risk
•Operational Risk
•Country or Sovereign Risk
•Insolvency Risk