Financial Intermediaries & Financial Markets

Financial Intermediaries & financial markets – Bonds & Stock Exam

These chapters discuss Financial Intermediaries & financial markets, financial inter-mediation, primary and secondary markets.

Services financial intermediaries offer

1) denomination divisibility 2) liquidity inter mediation – asset transformer 3) maturity inter mediation 4) economies of scale 5) diversification 6) record keeping 7) risk management 8) lower costs o monitoring costs o liquidity costs o price risk

disintermediation

occurs when inflation rates are high but bank interest rates are stagnant (usually due to government control), and the bank depositors can get better returns by investing in mutual funds or in securities. When interest rates start to rise, the investors turn again into depositors and reintermediation occurs.

financial intermediation

The process performed by banks of taking in funds from a depositor and then lending them out to a borrower. The banking business thrives on the financial intermediation abilities of financial institutions that allow them to lend out money at relatively high rates of interest while receiving money on deposit at relatively low rates of interest.

primary market

markets in which corporations raise funds through new issues of securities

secondary markets

markets that trade financial instruments once they are issues

money markets

markets that trade debt securities or instruments with maturities of less than one year also known as over the counter markets (OTC)

capital markets

markets that trade debt and equity instruments with maturities of more than one year

foreign exchange markets

markets in which cash flows from the sale of products or assets denominated in a foreign currency are transacted

what secondary markets offer

for investors, provides the opportunity to trade securities at their market value quickly as well as to purchase securities with varying risk return liquidity

Money market insturments

Treasury bills federal funds repurchase agreements commercial paper negotiable certificate of deposit bankers acceptance

surplus- savings unit

Savings exceeds expenditures and investments. This person is know as a net lender

Deficit-savings unit

expenditures or investments exceeds savings. This is known a a net debtorA person can be a saver and be a DSU because one’s savings are less than desired investmens

Broker

financial middle men who link link buyers and sellers in the money marketThree groups of brokers and dealers: 1) primary government security dealers 2) money and security brokers 3) brokers and dealers who act as middlemen linking buyers and sellers

Capital market instruments

corporate stock mortgages corporate bonds treasury bonds state and local government bonds us. government agencies bank and consumer loans

Treasury bill

short term obligations issued by the U.S government only security to have no default risk

Federal funds short-term funds transferred between financial institutions usually for no more than one day

repurchase agreements

agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a specified date and price

commercial paper

short-term unsecured promissory notes issued by a company to raise short-term cash

negotiable certificate of deposit

bank-issued time deposit that specifies and interest rate and maturity date and is negotiable

bankers acceptance

time draft payable to a seller of goods, with payment guaranteed by a banks

corporate stock

ownership claim in a public corporation

Mortgages

loans to individuals or businesses to purchase a home, land, or other real property

corporate bonds

long-term bonds issued by corporations

treasury bonds

long-term bonds issued by the government

state and local gov. bonds

long term bonds issued by state and local gov.

bank and consumer loans

loans to commercial banks and individuals

Types of financial institutions

1) commercial banks 2) thrifts 3) insurance companies 4) securities firms and investment banks 5) finance companies 6) mutual funds 7) hedge funds 8) pension funds

factors that effect the supply curve of loanable funds to shift

1) wealth 2) risk 3) near term spending needs 4) monetary policy objectives 4) economic conditions

factors that cause demand curve for loanable funds to shift

1) utility derived from assets purchased with borrowed funds 2) restrictiveness of non price conditions on borrowed funds 3) economic conditions

determinants of interest rates

1) inflation 2) real interest rate 3) defualt risk 4) liquidity risk 5) special provisions 6) term to maturity

Dealer

Technically, a broker is only an agent who executes orders on behalf of clients, whereas a dealer acts as a principal and trades for his or her own account. Because most brokerages act as both brokers and principals, the term broker-dealer is commonly used to describe them. dealers are know as the “market maker and are willing to buy and sell securities most dealers buy in the primary market and sell in the secondary market

Investment banker

they are the underwriters of securities buy stock from IPO and sell them to the public in the secondary market An investment banker may not accept deposits or make commercial loans. Investment bankers are the people who do the grunt work for IPOs and bond issues.

saver

someone who’s income exceeds expenditures and investments. A net lender

Financial asset

An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets.

indirect lending

transfer of funds between suppliers and users of funds through financial intermediaries

financial intermediaries

Asset transformers Depository institutions 1) Commercial bank 2)savings and loans 3)credit unions Finance company Insurance companies Investment companies

Primary security

Securities issued in the primary market Securities issued in an IPO Securities are first issued to the public usually through investment banks

Secondary security

Traded securities after issuance into the market secondary securities are traded securities after initial issuance. Market price of stock is regulated in the secondary market

how do secondary markets help facilitate capital formation

A term used to describe net capital accumulation during an accounting period. Capital formation refers to net additions of capital stock such as equipment, buildings and other intermediate goods. A nation uses capital stock in combination with labour to provide services and produce goods; an increase in this capital stock is known as capital formation. The use of secondary markets helps firms use SSU’s to supply DSU’s and help economic growth. Financial intermediaries help the flow of capital to increase capital formation. For example banks use SSU’s money to make loans to companies so they can buy more equipment or factories, which in turn forms capital.

commercial banks

A financial institution that provides services such as a accepting deposits and giving business loans.

thrifts

Thrift Banks tend to be community-focused, and smaller than retail and commercial banks. While the main lines of business continue to be loan origination and savings deposits, many thrifts offer checking accounts and other basic banking services. The thrift banking system was created in an attempt to transition mortgage loan origination away from insurance companies and into banking institutions, as early mortgages were often set up as interest-only loans that often couldn’t be repaid when balloon payments came due.

insurance companies

financial institutions that protect individuals and corporations from adverse events

investment banks

financial institution that help firms issue securities and engage in related activities such as brokerage and securities trading

finance companies

financial intermediaries that do not take deposits but make loans to individuals and businesses.

mutual funds

financial institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of assets

hedge funds

financial institutions that pool funds from limited number of wealthy individuals and other investors and invest these funds on there behalf.

pension funds

financial institutions that offer savings plans through which fund participants accumulate savings during there working years before withdrawing them their retirement years.

financial intermediaries benefit suppliers of funds

1) monitoring costs 2) liquidity and price risk 3) transaction cost services 4) maturity intermediation 5) denomination intermediation

financial intermediaries benefit the economy as a whole

1) money supply transmission 2) credit allocation 3) inter generational wealth transfers 4) payment services

asset transformers

financial claims issued by and FI that are more attractive to investors than are the claims issued directly by corporations

economies of scale

the concept that cost reduction in trading and other transaction services resulting from increased efficiency when FIs perform these services

Risk associated with investing

1) default risk 2) foreign exchange risk 3) liquidity risk 4) interest rate risk 5) market price risk 6) insolvency risk 7) technology risk 8) inflation risk

determinate s of money market securities

1) large denominations 2) low default risk 3) maturity of one year or less

bond equivalent yield

the quoted nominal yield on a security

discount yield differs from the true rate of return how?

1) the base price used is the face value of the T-Bill not the purchase price 2) a 360 day year is used rather than a 365 day

revers repurchase agreement

an agreement involving the purchase of securities by one party from another with a promise to sell them back at a given date in the future

bonds

long-term debt obligations issued by corporations and government units. proceeds are used to raise funds to support long-term operations of the issuer

STRIP

a treasury security in which the periodic interest payment is separated from the final principal payment

firm commitment underwriting

the issue of securities by an investment bank in which the investment bank guarantees the issuer a price for newly issued securities by buying the whole issue at a fixed price from the issuer.

best-efforts offering

the issue of securities in which the investment bank does not guarantee a price to the issuer and acts more as a placing agent on a fee basis related to it success in placing the issue

private placement

a security issue placed with one or a few large buyers

bearer bonds

bonds with coupons attached to the bond. bond holder presents coupons to issuer to receive payments

registered bond

coupon payments are wired to registered owner

term bonds

entire bond matures on a single date

serial bond

bond matures on a series of dates

mortgage bonds

bonds issued to finance specific projects, which are pledged as collateral for the bond issue