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)