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Chapter 3 – Outline
Financial Systems
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.
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
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?
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
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
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?
dependency on electricity
dependency on credit
every move can be traced
white collar crime
Money Market Instruments
T- bills
Commercial Paper
Repurchase Agreements
Bankers Acceptances
Capital Markets
Corporate stocks
Residential Mortgages
US Government Notes and Bonds
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
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