Chapter 1

Equity securities

(also called stocks) represent equity or ownership in the firm.

Financial Market

A market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in financial markets when one party purchases financial assets previously held by another party.

Savings Institutions

A. Also called thrift institutions and include Savings and Loans (S&Ls) and Savings Banks B. Concentrate on residential mortgage loans

Financial markets vary across the world in terms of:

A. Degree of financial market development B. Volume of funds transferred from surplus to deficit units

Importance of Financial Institutions

A. Households with savings are served by depository institutions. B. Households with deficient funds are served by depository institutions and finance companies. C. Several agencies regulate the various types of financial institutions, and the various regulations may give some financial institutions a comparative advantage over others.

Credit Unions

A. Nonprofit organizations B. Restrict business to CU members with a common bond

Commercial Banks

A. The most dominant type of depository institution B. Transfer deposit funds to deficit units through loans or purchase of debt securities

A. Deposit from households, businesses, and government agencies B. Purchases of government and corporate securities; loans to business and households

Commercial Banks

A. Deposits from credit union members B. Loans to credit union members

Credit Unions

Role of depository institutions

Depository institutions accept deposits from surplus units and provide credit to deficit units through loans and purchases of securities. Include; commercial banks, savings institutions, credit unions.

A. Securities sold to households and businesses B. Loans to households and businesses

Finance Companies

Role of Financial Institutions

Financial institutions are needed to resolve the limitations caused by market imperfections such as limited information regarding the creditworthiness of borrowers.

Typical Structure of a Financial Conglomerate

In recent years, the barriers to entry have been reduced, allowing firms that had specialized in one service to expand more easily into other financial services.

A. Insurance premiums and earnings from investments B. Purchases of long-term government and corporate securities

Insurance Companies

Foreign Exchange Market

International financial transactions normally require the exchange of currencies. The foreign exchange market facilitates this exchange.

Secondary markets facilitate

Liquidity is the degree to which securities can easily be liquidated (sold) without a loss of value. If a security is illiquid, investors may not be able to find a willing buyer for it in the secondary market and may have to sell the security at a large discount just to attract a buyer

Global Consolidation of Financial Institutions

Many financial institutions have expanded internationally to capitalize on their expertise.

A. Shares sold to households, businesses, and government agences B. Purchases of short-term government and corporate securities

Money Market funds

Securities can be classified as

Money Market, Capital Market, Derivative

Money Market Securities

Money markets facilitate the sale of short-term debt securities by deficit units to surplus units. Debt securities that have a maturity of one year or less.

A. Shares sold to households, businesses, and government agencies B. Purchases of long-term government and corporate securities

Mutual Funds

A. Employer/employee contributions B. Purchases of long-term government and corporate securities.

Pension Funds

A. Deposits from households, businesses, and government agencies B. Purchase of government and corporate securities; mortgages and other loans to households, some loans to businesses

Savings Institutions

Debt securities

debt (also called credit, or borrowed funds) incurred by the issuer.

Mortgage-backed securities

debt obligations representing claims on a package of mortgages.

Financial institutions

facilitate the flow of funds from individual surplus units (investors) to deficit units. Also serve as monitors of publicly traded firms. Internet has allowed them to perform their roles more efficiently, lower costs, competition.

Capital Market Securities

facilitate the sale of long-term securities by deficit units to surplus units. Such as Bonds, Mortgages, Mortgage-backed securities, and stocks

Derivative Securities

financial contracts whose values are derived from the values of underlying assets. Such as Speculation, Risk management and hedging.

Primary Markets

is the part of the capital market that deals with issuing of new security finance securities.

Mortgages

long-term debt obligations created to finance the purchase of real estate.

Bonds

long-term debt securities issued by the Treasury, government agencies, and corporations to finance their operations.

Pension funds

manage funds until they are withdrawn for retirement

Role of nondepository institutions

nondepository institutions listing; finance companies, mutual funds, securities firms, insurance companies, pension funds

Finance companies

obtain funds by issuing securities and lend the funds to individuals and small businesses.

Surplus units

participants who receive more money than they spend, such as investors.

Deficit units

participants who spend more money than they receive, such as borrowers.

Securities firms

provide a wide variety of functions in financial markets. (Broker, Underwriter, Dealer, Advisory

Insurance companies

provide insurance policies that reduce the financial burden associated with death, illness, and damage to property. Charge premiums and invest in financial markets.

Impact of Consolidation on Competition

provided more convenience. Individual customers can rely on the financial conglomerate for convenient access to multiple services.

Securities

represent a claim on the issuers; Debt securities, Equity securities

Stocks

represent partial ownership in the corporations that issued them.

Mutual funds

sell shares to surplus units and use the funds received to purchase a portfolio of securities.