Financial Markets (Bilingual Teaching)
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Chapter1 Role of Financial Markets
and Institutions
1. Financial Market (Def.):
A market in which financial assets (securities) such as stocks and bonds can be purchased or sold. 2. Broad Classifications of Financial Markets 1) Money versus Capital Markets ? Money:
Short-Term, < 1 Year; High Quality Issuers;
Debt Only; Primary Market Focus; Liquidity Market--Low Returns ? Capital: Long-Term, >1Yr; Range of Issuer Quality; Debt and Equity; Secondary Market Focus;
Financing Investment--Higher Returns 2) Primary versus Secondary Markets
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Financial Markets (Bilingual Teaching)
? PRIMARY: New Issue of Securities;
Exchange of Funds for Financial Claim; Funds for Borrower; An IOU for Lender ? SECONDARY:
Trading Previously Issued Securities; No New Funds for Issuer; Provides Liquidity for Seller
3) Organized versus Over-the-Counter Markets ? Organized: Visible Marketplace; Members Trade; Securities Listed; New York Stock Exchange ? OTC:
Wired Network of Dealers; No Central, Physical Location; All Securities Traded off the Exchanges 3. Securities Traded in Financial Markets 1) Money Market Securities Debt securities only
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Financial Markets (Bilingual Teaching)
2) Capital market securities Debt and equity securities ? Debt Securities:
Debt securities are contractual obligations (IOU) of debtor (borrower) to creditor (lender); Investor receives interest;
Capital gain/loss when sold; Maturity date ? Equity Securities:
Claim with ownership rights and responsibilities; Investor receives dividends if declared; Capital gain/loss when sold; No maturity date—need market to sell 3) Derivative Securities
? Financial contracts whose value is derived from the values of underlying assets
? Used for hedging (risk reduction) and speculation (risk seeking)
4. Types of Financial Institutions
1) Types of Depository Financial Institutions Commercial Banks; Savings Institutions; Credit Unions
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Financial Markets (Bilingual Teaching)
2) Types of Non-depository Financial Institutions Insurance companies; Mutual funds; Pension funds; Securities companies; Finance companies;
3) Role of Non-depository Financial Institutions Focused on capital market;
Longer-term, higher risk intermediation; Less focus on liquidity; Less regulation;
Greater focus on equity investments
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Financial Markets (Bilingual Teaching)
Chapter 2 Determination of Interest
Rates
1. Loanable Funds Theory of Interest Rate Determination
Theory of how the general level of interest rates are determined; Interest rates determined by demand and supply for loanable funds:
1) Demand = borrowers, issuers of securities, deficit spending unit
2) Supply = lenders, financial investors, buyers of securities, surplus spending unit 2. Sectors of the Economy
Assume economy divided into sectors:
1) Household Sector--Usually a net supplier of loanable funds 2) Business Sector—Usually a net demander in growth periods 3) Government Sectors
? States—Borrow for capital projects
? Federal—Borrow for capital projects and deficit spending 4) Foreign Sectors—Net supplier since early 1980’s 3. aggregate demand for loanable funds
1) Households demand loanable funds to finance housing,
automobiles, household items; There is an inverse
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