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Definaton

FINANCIAL MARKETS AND


INSTITUTIONS

FINANCIAL MARKET
F.M is a market in which financial assets
(securities) such as stocks and bonds
can be purchased or sold.

SURPLUS UNITS (OR INVETORS)


Those participants who receive more
money than they spend.

DEFICIT UNITS

Those participants who spend more


money than they receive.

DEBT SECURITIES

Represent debt (also called credit, or borrowed


funds) incurred by the issuer.

Equity securities
(Also called stocks) represent equity or
ownership in the firm.

PRIMARY MARKETS

Facilitate the issuance of new securities.

Secondary Markets
Facilitate the trading of existing securities,
which allows for a change in the ownership of
the securities.

LIQUIDITY

Is the degree to which securities can easily be


liquidated (sold) without a loss of value.

Note: 1
1) Treasury securities are liquid because they are
frequently issued by the Treasury, and there are
many investors at any point in time who want to
invest in them.

NOTE: 2

2) Securities can be classified as money


market securities, capital markets securities,
or derivative securities.
Money Market Securities
Facilitate the sale of short-term debt securities
by securities by deficit units to surplus units.

TREASURY BILLS

Short-term government securities issued at a


discount from face value and returning the
face amount at maturity.24
Commercial Paper
A short-term unsecured debt instrument used
by corporations to borrow money at rates
lower than bank rates. CP has maturities from
2 - 270 days; unregulated by the SEC.

CERTIFICATES OF DEPOSITS

A certificate issued by a bank to a


person depositing money in an account
for a specified period of time (often six
months, one year, or two years); a
penalty is charged for early withdrawal
from CD accounts.

CAPITAL MARKET SECURITIES

Facilitate the sale of long-term


securities by deficit units to surplus
units. Are commonly issued to finance
the purchase of capital assets such as
buildings, equipment, or machinery.
(Bonds, mortgages, and stocks).

BONDS

Are long-term debt securities issued by


the Treasury, government agencies,
and corporations to finance their
operations. They provide a return to
investors in the form of interest income
(coupon payments).

MORTGAGES

Are long-term debt obligations created to finance


the purchase of real-estate.
Sub Prime Mortgage
Mortgages that are offered to some borrowers who
do not have sufficient income to qualify for prime
mortgages or who are unable to make a down
payment. They also exhibit a higher risk of default,
charging higher interest.

COMMERCIAL MORTGAGES

Are long-term debt obligations created to


finance the purchase of commercial
property.
Mortgage-Backed Securities
Are debt obligations representing claims
on a package of mortgages.

STOCKS

(Also known as equity securities) represent


partial ownership in the corporations that
issue them.

Derivative Securities

Are financial contracts whose values are


derived from the values of underlying assets
(such as debt securities or equity securities).

FOREIGN EXCHANGE MARKET

The exchange of currencies.


Depository institutions
Accept deposits from surplus units and
provide credit to deficit units through
loans and purchases of securities.

FEDERAL FUNDS MARKET

Facilitates the flow of funds between


depository institutions (including banks).
Commercial Banks
Are the most dominant depository institution.
Savings Institutions
Sometimes referred to as thrift institutions.

CREDIT UNIONS

Differ from commercial banks and


savings institutions in that they are
nonprofit, and restrict their business to
members who share a common bond.
i.e, employer, union

FINANCE COMPANIES

Obtain funds by issuing securities and


then lend the funds to individuals and
small businesses.

MUTUAL FUNDS

Sell shares to surplus units and use the funds


received to purchase a portfolio of securities.

Money Market Mutual Funds


a fund that pools money from small savers to
purchase short-term government and corporate
securities

BROKER

Executing securities transactions


between two parties.
Underwrite
Executing securities transactions
between two parties.

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