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Chapter 3 – Outline Financial Systems Terms Maturity Currencies Capital Debt – Bonds – Rate of Return - Bonds: when corporations issue bonds they are borrowing funds. They must pay the principle back with interest. Equity - Stocks are ownership in a corporation. Liquidity Financial Markets a. Physical Assets versus Financial Assets b. Spot Markets – assets that are bought and sold at current prices for immediate delivery c. Future Markets – assets that are bought and sold at a specified price to be delivered at a specified date d. Money Markets – assets that mature in a short period of time – typically less than one year e. Capital Markets – longer term debt and equity purchases f. Mortgage Markets – residential and commercial real estate market g. International Markets – trading across country entail the exchanging of one currency for another- sometimes investors simply buy and sell currencies without and actually goods being purchased h. Primary Market – new capital offerings where monies go from the investor directly to the issuing business. The role of the investment banker is to facilitate the process. Initial Public Offering Primary Market is the market for the issuance of new securities. What is bought and sold? Stocks and bonds Who are the sellers? Businesses Government Who are the buyers? Large businesses and financial institutions Types of Offerings Public Offerings Private Placement SEC governance less regulated, less liquid Primary Market securities are typically sold by Investment Bankers Investment Banking is a segment of the banking kept separated from commercial banking by the Glass-Steagall Act. Investment Bankers provide the service of Consulting Forming a distribution network Bearing the risk They also help to determine the appropriate timing of the issue, the price of the stock, and they help with the legal aspect of issuing new securities. An initial public offering is when a firm offers securities to the public for the first time. i. Secondary Markets- ownership is transferred from one investor to another, no new money is raised NYSE, NASDAQ (National Association of Securities Dealers Automated Quotation System) Money Defined Money is anything that is generally accepted as a means of final payment. Money characteristics Medium of exchange – use it to buy things store of value - consumption decisions over a time horizon unit of account – like pounds, inches… it measures value Things that have been used as money. Life without money. A barter system A cashless society What problems would exist if society did not have cash? freedom dependency on electricity dependency on credit every move can be traced white collar crime Money Market Instruments T- bills CDs Commercial Paper Repurchase Agreements Bankers Acceptances Capital Markets Corporate stocks Bonds Residential Mortgages US Government Notes and Bonds Terms Bull Market Bear Market Financial Institutions Financial Institutions: where those who spend less than they earn make their excess funds available to those who want to spend more than they earn. Savers and borrowers both benefit. Savers earn interest and/or dividends on their investment Borrowers increase their standard of living Banks Lenders and borrowers join together, those with excess funds are united with those in need a funds. Players in the market Suppliers of loanable funds Demanders of loanable funds Commercial Banks, Savings and Loans, Credit Unions Federal Reserve System Primary purpose of the Fed is to maintain price stability; closely behind is their objective to promote full employment and economic growth. How do they pull this off? They influence the supply of money in the economy through their tools: open market operations, reserve ratio, discount rate The Fed raised rates! Too much money, not enough money The role of the stock exchanges. Table of the exchanges on page 48 Pick a company for project on page 50-51. Government Monitoring of the Markets Insider Trading, SEC