...Financial markets and institution are life blood of any economy. DISCUSS. What are financial markets market An actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money or barter. Markets include mechanisms or means for (1) determining price of the traded item, (2) communicating the price information, (3) facilitating deals and transactions, and (4) effecting distribution. The market for a particular item is made up of existing and potential customers who need it and have the ability and willingness to pay for it. Buyers and sellers of stocks or bonds or futures and options contracts use the financial markets to meet to buy and sell the products through a middleman exchange. What are the financial markets? That's a good question, because financial markets go by many terms, including capital markets, Wall Street, even simply "the markets". Whatever you call them, financial markets are where traders buy and sell stocks, bonds, derivatives, foreign exchange and commodities. These markets are where businesses go to raise cash to grow, companies reduce risks, and investors make money. Types of Financial Markets The Stock Market is a series of exchanges where successful corporations go to raise large amounts of cash to expand. Stocks are shares of ownership of a public corporation that are sold to investors through broker...
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...Since the discount rate controls the amount of money in the reserve it also affects interest rates on loans in the loanable funds market. A lower discount rate means more money supply which also means a lower interest rate. A high discount the rate equals a lower money supply and a higher interest rate. These all control the health of the economy. Interest rates are the prices that are charged or paid for the use of a financial asset (Colander, 2010). Financial assets are key variables in the financial sector and they can consist of either money or credit cards. However, money does not collect interest unless it is from the loanable funds market. In order for money to be considered in the loanable funds market it must be able to return into the loanable funds market for instance, an individual deposits $100 into the bank, the bank then loans $90 which is backed by the Federal Reserve out to anotherSince the discount rate controls the amount of money in the reserve it also affects interest rates on loans in the loanable funds market. A lower discount rate means more money supply which also means a lower interest rate. A high discount the rate equals a lower money supply and a higher interest rate. These all control the health of the economy. Interest rates are the prices that are charged or paid for the use of a financial asset (Colander, 2010). Financial assets are key variables in the financial sector and they can consist of either money or credit cards. However, money does not...
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...thinking LOC: acquire knowledge of financial markets and interest rates 2. A security offering that raises capital for firms is called a(n) a. | primary security offering | b. | secondary security offering | c. | securitization | d. | all of the above | ANS: A PTS: 1 DIF: E REF: 11.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking LOC: acquire knowledge of financial markets and interest rates 3. A bond sold by foreign corporations to U.S. investors is called a(n) a. | Eurobond | b. | foreign bond | c. | Yankee bond | d. | none of the above | ANS: C PTS: 1 DIF: E REF: 11.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking LOC: understand stocks and bonds 4. A bank that helps firms to acquire external capital is called a a. | commercial bank | b. | savings bank | c. | investment bank | d. | credit union | ANS: C PTS: 1 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities NAT: Reflective thinking LOC: acquire knowledge of financial markets and interest rates 5. Which of the following is not considered an advantage of going public? a. | new capital for the company | b. | listed stock for use as compensation | c. | stock price emphasis | d. | personal wealth and liquidity | ANS: C PTS: 1 DIF: M REF: 11.3 The U.S. Market for IPOs NAT:...
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...Chap1 Glossary (See related pages) | | | Central bank | The financial institution that manages the government's finances, controls the availability of money and credit in the economy, and serves as the bank to commercial banks. | | | | European Central Bank (ECB) | The central authority, located in Frankfurt, Germany, which oversees monetary policy in the common currency area. | | | | Federal Reserve System | The central bank responsible for monetary policy in the United States. | | | | Financial institutions | Firms, such as banks and insurance companies, that provide access to the financial markets, both to savers who wish to purchase financial instruments directly and to borrowers who want to issue them; also known as financial intermediaries. | | | | Financial instrument | The written legal obligation of one party to transfer something of value (usually money) to another party at some future date, under certain conditions. | | | | Financial market | The part of the financial system that allows people to buy and sell financial instruments quickly and cheaply. | | | | Financial system | The system that allows people to engage in economic transactions. It is composed of five parts: money, financial instruments, financial markets, financial institutions, and central banks. | | | | Information | A collection of facts. The basis for the third core principle of money and...
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...Complexities of the Financial System Brandi Humphrey Professor Joseph Arbeiter Finance 100 January 15, 2014 Financial markets are defined as locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments. There are four types of financial markets and they are; debt securities markets, equity securities markets, derivative securities markets, and foreign exchange markets. Financial markets are also known to facilitate the transferring of previously issued debt and equity securities from existing to new investors. Financial markets are where traders buy and sell stocks, bonds, derivatives, foreign exchange and commodities. U.S. financial markets impact the economy because it can influence prices, whether they increase or decrease. For instance when there is too much money in the real estate market, interest rates plummet. This caused peopled to take out loans, even if they were considered ineligible buyers thus creating unacceptable risks to investors who began selling them to get rid of them. This causes a crash in the real estate market and also leaves the investors high and dry. Finance is one of the most important functions of any business. Companies are financed in one or two ways; debt or equity. The definition of debt is the amount owed or that one is bound to pay to or perform for another and equity is defined as the funds supplied by the owners that represent their residual claim on the firm. Debt financing is a negative...
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...Complexities of the U.S. Financial System Briefly describe one (1) way the U.S. financial markets impact the economy, one (1) way the U.S. financial markets impact businesses, and one (1) way the U.S. financial markets impact individuals. Companies sell stock to raise money. Once a stock begins trading in the secondary market, its change in price has no direct effect on the company that issued it. Regardless of the wavering of the stock price, the issuer would still have the money raised to fund their company. Without a doubt, every company wants to see their stock prices rise. Despite mixed opinions, there is a strong positive relationship between financial market development and economic growth. The markets help to efficiently direct the flow of savings and investment in the economy. Credit-rating agencies are known to be influenced by stock prices, and their decisions have a large effect on the availability of credit to the firm. Regulators, who take actions that affect firm cash flows (most prominently, in the case of banks), follow market prices very close. Business owners with good ideas are constrained by the amount of capital they can raise. Although they can use their own money and borrow from their family and friends, these are limited sources of capital. Eventually, as they desire to grow their companies or reach their potential, they have seek to fund-growth using other people’s money. They can borrow from fellow citizens under a contractual obligation to pay...
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...The Financial Environment: Markets, Institutions, and Interest Rates In addition to these notes, please read chapter 3 and pages 191 through 206 of chapter 5. Problems 5-18 through 5-23 of chapter 5 are related to this topic. Since this part of the course deals with different types of markets, let us start by defining what these markets are. What are markets in general? Markets are transactions where individuals or organizations exchange items. The exchange could be goods for goods, goods for service, or goods and services for money. Whenever you exchange something for another you have a market. Again a market is a transaction, not a physical location. Now, let us look at the different types of markets: Markets for physical assets（财产，有利条件）: These are markets where tangible（有形的） assets, things you can touch are exchanged for money. Markets for financial assets: These are markets where financial assets sold and bought. Financial assets are intangible. Examples of financial assets include stocks （股票，存货）and bonds（债券）. By buying a financial asset you become an owner of a company or a lender to one. Buying a stock makes you one of the owners of a corporations and buying a bond makes you one of the lenders. Money versus capital markets: Money markets are markets where money is borrowed for short time periods, usually less than a year. Here the loans are used mainly to manage cash in a corporation. If a firm has...
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...(a) Introduction Financial derivatives are a financial instrument that value is depend upon or derived from price of underlying items such as commodity, indicator or index. Financial derivatives enable participants involved to trade specific financial risks for example, interest rate risk, foreign exchange risk, equity and commodity price risk and credit risk to other entities who are more willing or better suited to take or manage these risks (International Monetary Fund, n.d.). Even though there are some speculators are aim to earn profit by using the financial derivatives. The main categories of derivatives are forward and futures contracts, options and swaps. They are financial instruments that are mainly used to protect against and manage...
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...International Financial Management Winter semester 2015/16 1. Prologue 1. Prologue 2. Foreign exchange markets 3. Foreign exchange exposure management 4. Financial management of multinational corporations 5. Financial management of multinational corporations 6. Corporate Governance 7. Mergers & Acquisitions 8. Risikomanagement Prof. Dr. Streitferdt: International Financial Management 1 1. Prologue Discounting Calculating present value 0 t=1 t=2 t=3 2,000 t=0 4,500 3,000 t=4 t=5 3,500 6,000 How much would you be willing to pay for this stream of future cash flows, if the interest is at i = 5.65%? Why is the result today’s value of the future cash flows? What are the assumptions of this calculation? Prof. Dr. Streitferdt: International Financial Management 2 1. Prologue Discounting Calculating present value 10/28 10/14 6,000 0 How much would you be willing to pay for this stream of future cash flows, if the two week Euribor is at i = 5.65%? What makes this calculation different from the last slide’s calculation? How many days has a year? Prof. Dr. Streitferdt: International Financial Management 3 1. Prologue Discounting Interests for investments with less than one year maturity Interests are always quoted for one year: A company has in 2012 an overdraft credit of 100,000 € with interests of 6%. The ...
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...Indian Capital Market Nidhi Bothra Payel Jain Vinod Kothari & Company What are Financial markets Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded in and is also called the price discovery process. 1. Organizations that facilitate the trade in financial products. For e.g. Stock exchanges (NYSE, Nasdaq) facilitate the trade in stocks, bonds and warrants. 2. Coming together of buyer and sellers at a common platform to trade financial products is termed as financial markets, i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc. Financial markets may be classified on the basis of • • • • types of claims – debt and equity markets maturity – money market and capital market trade – spot market and delivery market deals in financial claims – primary market and secondary market Indian Financial Market consists of the following markets: • • • Capital Market/ Securities Market o Primary capital market o Secondary capital market Money Market Debt Market Primary capital market- A market where new securities are bought and sold for the first time Types of issues in Primary market • • • • • Initial public offer (IPO) (in case of an unlisted company), Follow-on public offer (FPO), Rights offer such that securities are offered to existing...
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...important financial instruments that play significant role in today’s financial markets. It offers various types of risk protection and allow innovative investment strategies. A derivative is so called derivative because its value is derived from another financial security. According to Oxford dictionary, derivative is defined as something derived or obtained from another, coming from a source; not original. In financial jargon, a derivative security is referred to a financial contract whose value is derived from the value of an underlying asset or simply underlying. This underlying is usually stocks, bonds, foreign currency, or commodities. The derivative buyer or seller does not have to own the underlying security to trade these instruments. Several factors have contributed to massive development in derivative markets since the 1970s. First, the collapse of the Bretton Woods system of fixed exchange rates in 1971 increased the demand for hedging against exchange rate risk. The Chicago Mercantile Exchange allowed trading in currency futures in the following year. Second, the changing of its monetary policy target instrument by the US Federal Reserve (FED) promoted various derivatives markets. The adoption of a target for money growth by the FED in 1979 has led to increased interest-rate volatility of Treasury bonds. That in turn raised the demand for derivatives to hedge against adverse movements in interest rates. Later in 1994 when the US Federal Open Market Committee...
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...Assignment 1: Complexities of the US Financial System Describe how the US financial markets impact the economy, businesses, and individuals. US financial markets play an important role in contributing to the health and efficiency of the economy, businesses, and individuals. (Spiegel, 2002) Because there is a strong relationship between the health of the economy and financial market development and economic growth, even a slight dip in the financial markets can radically effect how the economy, businesses, and individuals respond. (Ask Dr Econ, 2005) Financial markets “facilitate the raising of capital in the capital markets, the transfer of risk in the derivatives market, price discovery, global transactions with integration of financial markets, the transfer of liquidity in the money markets, and international trade in the current markets.” (Financial Markets, 2013) When the financial markets are doing well, “firm-level, industry-level, and cross-country studies all suggest that the level of financial development exerts a large, positive impact on economic growth.” (MIT, 2001) When financial markets are not doing well, interest rates on loans will increase and access to credit decreases. Interest rates are higher because of the risk that banks feel are involved. In times of high risk, interest rates go up. It is a way for banks to limit their losses and make as much money back – just in case a default occurs. So those businesses that are able to get credit are finding...
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...Derivatives and Hedging Over recent years, the volatility in the financial markets has increased due to substantial changes domestically and internationally. This has given rise to increased financial price risks faced by both domestic and multi-national companies. Financial Derivatives are widely used by corporations to adjust to exposure to currency risk, interest rate risks, commodity price risks, and security holdings risk. Largely, companies are currently exposed to risks caused by unexpected movements in exchange rates and interest rates. Companies with a growing global presence are especially exposed to a wide range of financial risks, in particular foreign exchange risks and interest rate risk. Although, financial risks are the center of business operations of financial service firms, but they also impact the risk exposure of non-financial corporations. The management and supervision of these risks has become vital for the existence of companies in today’s unpredictable financial markets. The major financial risks that most firms are exposed to are interest rate risk, currency rate risk, commodity price risk, and security holdings risk. Interest rate risk is a very common type of risk, and result from a discrepancy in the sensitivity of a firms assets and liabilities to interest rate movements. On the other hand, currency risk exposure is virtually encountered by all firms, even if their exposure is not from a transaction or a translation risk. Many firms are...
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...Chapter 6: Understanding Financial Markets and Institutions Financial Markets * Manage flow of funds * Two major market dimensions: _________ versus _____________ markets ________ versus __________ markets * Primary Markets * Used by corporations and governments * Used to issue _______ financial instruments * Stocks * Bonds * Primary Market Transfer of Funds * Demanders of funds __________________ * Initial suppliers of funds _____________ * Secondary Markets * Benefit investors and __________ * Securities traded _______ issue * Provide ____________ and diversification benefits for investors * Security _____________ information for issuers * Secondary Market Transfer of Funds involves: * Financial ______________ * Securities ___________ * Other suppliers of ________ * Money Markets vs. Capital Markets * Money markets trade _______ securities or instruments with maturities of one year or _____ * Capital markets trade _________ and long- term _______ with maturities __________ than one year * Other Markets * Foreign Exchange Markets * Trade ____________ for immediate delivery (spot) or for some future delivery * Subject to foreign exchange risk due to currency ______________ * Derivatives * Highly _______________ financial securities linked to underlying...
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...Chapter 5 The Financial Environment: Markets, Institutions, and Interest Rates ANSWERS TO END-OF-CHAPTER QUESTIONS 5-1 a. A money market is a financial market for debt securities with maturities of less than one year (short-term). The New York money market is the world’s largest. Capital markets are the financial markets for long-term debt and corporate stocks. The New York Stock Exchange is an example of a capital market. b. Primary markets are the markets in which newly issued securities are sold for the first time. Secondary markets are where securities are resold after initial issue in the primary market. The New York Stock Exchange is a secondary market. c. In private markets, transactions are worked out directly between two parties and structured in any manner that appeals to them. Bank loans and private placements of debt with insurance companies are examples of private market transactions. In public markets, standardized contracts are traded on organized exchanges. Securities that are issued in public markets, such as common stock and corporate bonds, are ultimately held by a large number of individuals. Private market securities are more tailor-made but less liquid, whereas public market securities are more liquid but subject to greater standardization. d. Derivatives are claims whose value depends on what happens to the value of some other asset. Futures and options are two important types of derivatives...
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