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See Figure 1 STRUCTURE OF FINANCIAL MARKETS Debt and Equity Markets maturity: number of years until an instrument’s expiration date short-term: maturity of less than a year long-term: maturity of 10 years or longer intermediate-term: maturity between 1 and 10 years equities: claims to share in the net income (income after expenses and taxes) and the assets of a business; considered long-term securities because they have no maturity date dividends: periodic payments often made by equities to their holders Primary
and Secondary Markets primary market: financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds secondary market: financial market in which securities that have been previously issued can be resold investment bank: financial institution that assists in the initial sale of securities in the primary market underwriting: guaranteeing a price for a corporation’s securities and then selling them to the public brokers: agents of investors who match buyers with sellers of securities dealers: link buyers and sellers by buying and selling securities at stated prices liquid: financial instruments that can be easily and quickly sold to raise cash Exchanges and Over-the Counter Markets exchanges: central location where buyers and sellers of securities (or their agents or brokers) meet to conduct trades over-the-counter (OTC) market: method of organizing a secondary market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices Money and Capital Markets money market: financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded capital market: market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded |
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Money
Market Instruments See Table 1 default: a situation in which the party issuing the debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures currency: paper money or coins Negotiable
Bank Certificates of Deposit Commercial
Paper Banker’s
Acceptances Repurchase
Agreements Federal
(Fed) Funds federal funds rate: interest rate on federal funds loans Capital
Market Instruments See Table 2 Stocks Mortgages Corporate
Bonds States
and Local Government Bonds Consumer
and Bank Commercial Loans |
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International Bond Market, Eurobonds, and
Eurocurrencies foreign bonds: bonds that are sold in a foreign country and are denominated in that country’s currency Eurobond: bond denominated in a currency other than that of the country in which it is sold Eurocurrencies: foreign currency deposited in banks outside the home country Eurodollars: U.S. dollars deposited in foreign banks outside the World Stock Markets |
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financial intermediation: process of indirect finance using financial intermediaries; the primary route for moving funds from lenders to borrowers Transaction Costs transaction costs: time and money spent in carrying out financial transactions economies of scale: reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases liquidity services: services that make it easier for customers to conduct transactions Risk Sharing risk: uncertainty about the returns investors will earn on assets risk sharing: creating and selling assets with risk characteristics that people are comfortable with and then using the funds they acquire by selling these assets to purchase other assets that may have far more risk asset transformation: process of risk sharing diversification: entails investing in a collection of assets whose returns do not always move together, with the results that overall risk is lower than for individual assets Asymmetric Information: Adverse Selection and
Moral Hazard asymmetric information: one party often does not know enough about the other party to make accurate decisions adverse selection: problem created by asymmetric information before the transaction occurs; occurs when the potential borrowers who are the most likely to produce an undesirable (adverse) outcome—the bad credit risks—are the one who most actively seek out a loan and are thus most likely to be selected moral hazard: problem created by asymmetric information after the transaction occurs; risk (hazard) that the borrower might engage in activities that are undesirable (immoral) from the lender’s point of view, because they make it less likely that the loan will be paid back |
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Depository Institutions See Table 3 See Table 4 thrift institutions (thrifts): savings and loan associations, mutual savings banks, and credit unions Commercial
Banks Savings
and Loan Associations (S&Ls) and Mutual Savings
Banks Credit
Unions Contractual Savings Institutions Life
Insurance Companies Fire
and Casualty Insurance Companies Pension
Funds and Government Retirement Funds Investment Intermediaries Finance
Companies Mutual
Funds Money
Market Mutual Funds Investment
Banks |
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See Table 5 Increasing Information Available to Investors Ensuring the Soundness of Financial
Intermediaries financial panic: widespread collapse of financial intermediaries Restrictions
on Entry Disclosure Restrictions
of Assets and Activities Deposit
Insurance Limits
on Competition Restrictions
on Interest Rates Financial
Regulation Abroad |
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Disclaimer: pages.slu.edu is a service of Saint Louis University, Saint Louis University does not control, monitor or guarantee the information contained in these sites. For more information » |