CH 1

Capital markets

markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year substantial risk of capital loss, but higher promised return

Money markets

markets that trade debt securities with maturities of one year or less (e.g., CDs and U.S. Treasury bills) little or no risk of capital loss, but low return

Secondary markets

markets where existing financial instruments are traded among investors (e.g., exchange traded: NYSE and over-the-counter: NASDAQ)

proper capital allocation leads to growth in (3)

-societal wealth -Income -economic opportunity

why study financial markets and insitutions

-they are primary channels to allocate capital in our society

Over the counter derivatives

Forward contracts Forward rate agreements Swaps Securitized loans

Exchange listed derivatives

Many options, futures contracts

How were primary markets affected by the financial crisis?

Primary market issuance declined sharply during the crisis although with low interest rates bond issuance boomed after market uncertainty declined in 2010. Stock issuance remained weaker longer, recovering in 2012 and 2013.

do secondary markets add value to society or are they simply a legalized form of gambling? How does the existence of secondary markets affect primary markets

Secondary markets add liquidity for risky investments and encourage investment in primary markets. Secondary markets also aid in price discovery, providing up to date signals of the ongoing value of firms. These signals also provide benchmarks for corporate performance. It is not true that secondary markets are simply a legalized form of gambling.

Spot FX

the immediate exchange of currencies at current exchange rates

Derivative security

a financial security whose payoff is linked to (i.e., "derived" from) another security or commodity, generally an agreement to exchange a standard quantity of assets at a set price on a specific date in the future, the main purpose of the derivatives markets is to transfer risk between market participants.

Primary markets

markets in which users of funds (e.g., corporations and governments) raise funds by issuing financial instruments (e.g., stocks and bonds)

Financial markets are

one type of structure through which funds flow

Financial markets can be distinguished along two dimensions:

primary versus secondary markets money versus capital markets

Forward FX

the exchange of currencies in the future on a specific date and at a pre-specified exchange rate

FX markets

trading one currency for another (e.g., dollar for yen)