ALOMAR_212_4 1 Financial Market Instruments. ALOMAR_212_42 What are the securities (instruments) traded in the financial market? 1- Money Market Instruments:

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Presentation transcript:

ALOMAR_212_4 1 Financial Market Instruments

ALOMAR_212_42 What are the securities (instruments) traded in the financial market? 1- Money Market Instruments: Money Market: a financial market in which only short-term debt instruments (maturity less than one year) are traded. - Less price fluctuations - Less risky

ALOMAR_212_43 A. U.S. Treasury Bills (T-bills): - Debt instrument of the US government. - Issued in 3-6, 12-months maturities. - No interest to pay, but selling at discount - Highly liquid, safe, no possibility of default.

ALOMAR_212_44 B. Negotiable Bank Certificates of Deposits: CD: a debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays the original purchase price. (Possibility of resold in secondary market, issued by banks).

ALOMAR_212_45 C. Commercial Paper: Short-term debt instruments issued by large banks and corporations. D. Banker’s Acceptance: A bank draft issued by a firm payable at some future date, and guaranteed by the bank. (Hold the amount).

ALOMAR_212_46 E. Repurchase Agreements: Short-term loans (< 2 weeks) in which T-bills are collateral: an asset that the lender receives if the borrower does not pay back the loan: Buy T-bills at 1,000,000 then sell at 1,000,100. F. Federal Funds (FED): Overnight loans between banks of their deposits at the Federal Reserve: to meet Federal deposit requirements.

ALOMAR_212_47 2- Capital Market Instruments Capital Market: a financial market in which debt and equity instruments with maturities of greater than one year. - Wider price fluctuations - Fairly risky investments A. Stocks: equity claims on the net income and assets of a corporation. B. Mortgage: Loans to households or firms to purchase housing, land, or other real structures (collateral). C. Corporate Bonds: Issued by corporations with strong-credit ratings.

ALOMAR_212_48 D. U.S. Government Securities: (bonds) Issued by the U.S. Treasury to finance the deficit of the federal government. The most liquid security in capital market. E. U.S. Government Agency Securities: (bonds) Issued by different government agencies and are guaranteed by the federal government.

ALOMAR_212_49 F. State and Local Government Bonds: Also called municipal bonds. G. Consumer and Bank Commercial Loans: Loans to consumers and businesses made by banks. They are the least liquid instruments in the capital market.

ALOMAR_212_410 Summary of Topics Covered so far: Chapter 1: - Why Study Financial Markets? - Why Study Banking and Financial Institutions? - Why Study Money and Monetary Policy? Chapter 3: What is Money? - Meaning of Money. - Functions of Money. - Evolution of the payment System. - Measuring Money.

ALOMAR_212_411 Summary of Topics Covered so far: Chapter 2: Overview of the Financial System - Functions of the Financial Markets - Structure of the Financial Markets - Function of Financial Intermediaries - Financial Intermediaries - Regulations of the Financial System Review: Financial Market Instruments

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