week 5 Flashcards
- Link borrowers and lenders
- Determine interest rates, stock pricesm bond prices, etc
Financial Markets
- A promise by the bond-issuer to pay some specified amounts in the future exchange for payment (the bond price)
Bonds
- Legal rights of ownershup in an incorporated firm
- Promise the sholder a share of the corporte profits (dividends)
Stocks (equities)
Financial markets major sectors
- Net borrower of funds; competes with the goverment sector
- Principal sector that invests in real assets (capital goods)
- Generate income from creation of real goods and services
Corporate Sector
- Net borrower of funds competes with corporate sector
- Provides feature of default-risk free securities because of goverment’s power to tax
- Interest payment generated from taxes
Goverment Sector
- Generates the largest proportion of savings.
- Ultimate source of capital/funds
Household sector
- Imbalance between saving &investment can be offset with other countries
- Represents capital between countries: comprises the offshore capital market
- Creates cross border flows in foreign currencies
Offshore Sector
Used by government and corporate entities to borrow and lend in the short term. The assets are held for one year or less.
Money Market
Used for long-term securities that have a direct or indirect impact on the capital. The assets have maturities of greater than one year.
Capital Market
it brings buyers and sellers together to trade in financial assets
Financial Markets
To make a market, at least— parties are needed to complete a trade
two parties
to make markets competitive, — – —parties are needed
Three or more parties
are individual traders, big institutional and commercial investors, intermediaries who buy when others are selling and sell when others are buying, and professional traders to ensure trading is liquid and efficient
Investors in the financial markets
Who are the market participant groups?
Sometimes called retail investors, individual traders can buy single stocks and bonds, as well asmutual fundsandexchange-traded funds(ETFs)—pooled investments made up of a diverse mix ofstocks, bonds, and/or other assets
Individuals
Who are the market participant groups?
comes to markets to trade. Examples are individual farmers looking tohedgeor sell crops to companies that mine metal or pump crude oil.
Producers of goods, services, or raw materials
Who are the market participant groups?
portfolio managers of mutual funds and ETFs that many of us hold in our retirement savings accounts are buying and selling these fund
Fund managers
Who are the market participant groups?
trade on behalf of retail and institutional clients, make loans, issue debt for clients, exchange currencies, and engage in a host of other activities
Banks
Who are the market participant groups?
invest the premiums they receive from customers and generally line it up with the asset that best reflects thetype of insurance policythey sell. (Ex. premiums from a life insurance policy would be invested in a long-term asset.)
Insurers
Who are the market participant groups?
Large charities and university —— invest their assets in markets to generate long-term investment income to support their goals
Endowments
Who are the market participant groups?
The fund managers invest in markets on behalf of their retirees to ensure they can pay benefits over the long run.
Pension funds
Who are the market participant groups?
are limited partnerships and can invest in both public and private securities using a range of strategies.
Hedge funds
- Any debt instrument with future cash flows that are contractually defined and can be pre-determined
- Gives the security holder title to a known future income stream; can be priced by discounting all future cash flows back to a present value
Fixed Income Security (Bonds)
- Provide efficient transparent, and orderly venue for companis to raise capital
- Funds raised used for expansion, whichm then results in increased economic activity and job creation
- Higher transparency and corporate governance lead to improved tax payments, better management
Venue for raising capital
- broader participation in growth of local companies
- Improved savings rate trough increased financial literacy
- Increase in spending power resulting to higher consumption and economic activity
wealth creation
