Financial SystemFinancial System
Surplus Economic UnitsSurplus Economic Units
Deficit Economic UnitsDeficit Economic Units
SecuritiesSecurities
Documents that represent the right to Documents that represent the right to receive funds in future.receive funds in future.
Holder of security is the bearer. Holder of security is the bearer. Ease the exchange of funds in Ease the exchange of funds in
financial system.financial system. IOU may also state when you are to IOU may also state when you are to
be paid.be paid. Trading of securities is done through Trading of securities is done through
financial intermediaries.financial intermediaries.
Financial IntermediariesFinancial Intermediaries
Investment BankersInvestment Bankers
BrokersBrokers
Dealers Dealers
Investment BankersInvestment Bankers
Help businesses, state and local Help businesses, state and local government to sell their securities to government to sell their securities to
investors.investors.
Underwriting BasisUnderwriting Basis
Best Effort Basis Best Effort Basis
BrokersBrokers
Representative of IBs.Representative of IBs.
Handle orders to buy and sell Handle orders to buy and sell securities.securities.
Commission is provided in lieu of Commission is provided in lieu of their services. their services.
DealersDealers
Make their living by trading of Make their living by trading of securities.securities.
Bid PriceBid Price
Ask/Offer Price.Ask/Offer Price.
Financial MarketsFinancial Markets
Primary MarketPrimary Market When a corporation issues securities, cash When a corporation issues securities, cash
flows from investors to the firm.flows from investors to the firm. Usually an underwriter is involvedUsually an underwriter is involved
Secondary MarketsSecondary Markets Involve the sale of “used” securities from one Involve the sale of “used” securities from one
investor to another.investor to another. Securities may be exchange traded or trade Securities may be exchange traded or trade
over-the-counter in a dealer market.over-the-counter in a dealer market.
Financial MarketsFinancial Markets
Money MarketMoney Market
Capital MarketCapital Market
OTCOTC
Market EfficiencyMarket Efficiency
Securities in Money Securities in Money MarketMarket
Best Place for the parking of surplus Best Place for the parking of surplus funds for the short period of time.funds for the short period of time.
Treasury BillsTreasury Bills Negotiable certificates of depositNegotiable certificates of deposit Commercial PapersCommercial Papers Euro DollarsEuro Dollars Bankers Acceptance Bankers Acceptance
Treasury BillsTreasury Bills
Issued by United States on weekly Issued by United States on weekly basis.basis.
At maturity government pays the At maturity government pays the face value.face value.
Considered as bench mark of safety.Considered as bench mark of safety. Essentially having no risk at all. Essentially having no risk at all.
Negotiable Certificates of Negotiable Certificates of DepositDeposit
Issued by local banks.Issued by local banks. To be paid on certain date along To be paid on certain date along
with interest.with interest. Small denominations are safe Small denominations are safe
investmentsinvestments Large denominations are negotiable Large denominations are negotiable
CDs.CDs.
Commercial PapersCommercial Papers
Short term promissory notes.Short term promissory notes. Issued by large corporation with Issued by large corporation with
strong credit rating.strong credit rating. Unsecured due non existence of Unsecured due non existence of
collateral.collateral. Most of the buyers are large Most of the buyers are large
institution. institution.
Securities In the Capital Securities In the Capital MarketMarket
When organizations want to raise When organizations want to raise money for a long period of time, they money for a long period of time, they
issue capital securities.issue capital securities.
BondsBonds
StocksStocks
BondsBonds
IOU that promises to pay their owner IOU that promises to pay their owner a certain sun of money along with a certain sun of money along with
periodic payments of interest. periodic payments of interest.
Bond Terminology & Bond Terminology & TypesTypes
Face ValueFace ValueThe amount that the bond promises to pay The amount that the bond promises to pay
in future.in future. Maturity DateMaturity Date
The date on which issuer is obligated The date on which issuer is obligated to pay the face valueto pay the face value
Coupon InterestCoupon Interest
The interest payments made to bond The interest payments made to bond owner during the life of the bondowner during the life of the bond
Treasury Notes & BondsTreasury Notes & Bonds
Municipal BondsMunicipal Bonds
Corporate BondsCorporate Bonds
Types Of BondsTypes Of Bonds
MunisMunis General Obligation BondsGeneral Obligation Bonds Revenue BondsRevenue Bonds Investment Grade BondsInvestment Grade Bonds Junk BondsJunk Bonds
Corporate StockCorporate Stock
Shares of ownership interest.Shares of ownership interest. Bearer/Investors are called stock Bearer/Investors are called stock
holders.holders. Money raised from sale of stock Money raised from sale of stock
doesn't ever have to be paid back..doesn't ever have to be paid back.. Common StockCommon Stock Preferred stock Preferred stock
InterestInterest
Interest represents the return or Interest represents the return or compensation a lender demands compensation a lender demands before agreeing to loan money.before agreeing to loan money.
Determinants of Interest Determinants of Interest RateRate
Nominal interest rateNominal interest rate Real rate of interestReal rate of interest Inflation premiumInflation premium Maturity risk premiumMaturity risk premium Liquidity risk premiumLiquidity risk premium Default risk PremiumDefault risk Premium
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