Financial Markets Chapter 12 Economics

Goals & Objectives 1. Saving & Capital Formation. 2. Financial System & transferring of funds. 3. Non-depository Institutions Role Investment considerations Characteristics of bonds & financial assets views of markets. 7. Stock exchanges & market performance.

Savings and the Financial System 1. Savings: dollars available when people abstain from consumption. 2. Financial System: Saver, investors & financial institutions. 3. Certificate of Deposit: depositors interest bearing loan to a bank 1. Financial assets: bank claims on property & income of borrower. 4. Financial Intermediaries: lends funds from savers to borrowers 5. Credit Unions: Private depositor nonprofit institution. 1. Mutual Funds: company sells stock in itself 2. Pension Funds: income security to retired persons 3. REITS: Real Estate Investment Trust: home construction 4. Finance Companies: High interest loans to consumers on behalf of merchants.

Investment Strategies and Financial Assets 1.The Risk-Return Relationship: 1.Risk: uncertain outcome 2.Simplicity: 3.Consistency: long period of time 4.Investment Objectives: 2.401K ’ s: tax-deferred savings or private pension. IRA: Individual Retirement Account

Risk-Return Relationship

Bonds as Financial Assets 1.Bond Components: long term IOU 1.Coupon: Maturity: Par Value: 2.Bond Prices: 1.Future interest rates, company default. 3.Bond Yields: 1.Annual interest rate divided by purchase price. 2.Credit-worthiness, financial health, not insured, no guarantees to redeem. 3.Default or Bankruptcy.

Bonds: Long & Short Term

Bond Ratings 1.Standard & Poor’s & Moody’s: 1.Rating Factors: 1.Financial health of issuer, ability to make future coupon & principal payments & issuer’s credit history. 2.AAA-D 3.August 2011: U.S. Bonds lowered for 1 st time in history from AAA to AA.

Characteristics of Financial Assets Characteristics of Financial Assets 1.Certificates of Deposit: CD’s: loans to banks. 2.Corporate Bonds: “Junk Bonds” have high par values 3.Municipal Bonds: Safe investments due to tax- increase ability. (Lap-tops for students) 1.Tax-exempt: federal gov’t does not tax interest paid. 4.Government Savings Bonds: risk free, low rate of return 5.Treasury Notes & Bonds: faith in the credit of U.S. is only security year rate of return.

Characteristics of Financial Assets 6.Treasury Bills: Short-term obligation of 13,26, or 52 weeks and a minimum of $1,000. –$9,300 investment for 52 weeks. –$10,000 payment for a $700 return or 7.5% interest 7. Individual Retirement Accounts: long term, tax-sheltered time deposits. –$5,000 for worker and unemployed spouse or $10,000 per year with no income tax deductions. –Government deregulation to encourage savings.

Markets for Financial Assets Capital Markets: loans for more than one year –Long term CD’s & Gov’t Bonds Money Markets: loans for less than one year –Short term CD’s Primary Markets: –Government Savings bonds and IRA ’ s (nontransferable) Secondary Markets: –Traded to create liquidity

Organized Stock Exchanges 1.(NYSE) New York Stock Exchange: 1,400 seats, 2,800+ companies 1.Profitability & size requirements 2.(AMEX) American Sock Exchange: listed stocks; 2 nd largest 3. Regional Exchanges: Chicago, Pacific, Philadelphia, Boston, Memphis. 1.Smaller or newer companies. 4.Global Stock Exchanges: Sydney, Tokyo, Hong Kong, Singapore, Johannesburg, Frankfurt.

Over-the-Counter Markets (OTC’s): electronic marketplace for securities not traded on the exchange 1.(NASDAQ): National Association of Securities Dealers Automated Quotation countries, 4,000 large & small companies more than NYSE & AMEX together.

Measures of Stock Performance 1.Dow-Jones Industrial Average: (DJIA), 30 stocks 2.Standard & Poor’s 500: (S&P 500) representative companies Bull & Bear Markets: Strong and Mean markets

Bull & Bear Markets