FIN103_CHAPTER 2

• Money markets

  Are made up of short-term, marketable, liquid, low-risk debt securities
• Capital markets


  Include longer-term and riskier securities, divided into four segments: longer-term bond markets, equity markets, and derivative markets for options and futures
• Money Market Securities

  • Treasury Bills
  • Certificate of Deposit
  • Commercial Paper
  • Bankers’ acceptance
  • Eurodollars
  • Repurchase Agreement
  • Federal funds
  • Brokers’ calls
• Money market securities

  • Most are low risk, but not risk-free
  • Money market funds are mutual funds that invest in money market instruments
• Treasury Bills


  • Simplest form of borrowing
  • Government raises money by selling bills to the public
• Certificate of Deposit

  • Banks pay interest and principal to the depositor only at maturity
  • Cannot be withdrawn on demand
• Commercial Paper


  • Short-term unsecured debt
  • Backed by a line of credit
• Bankers’ acceptance


  • An order to a bank by a customer to pay a sum of money at a future date
• Eurodollars


  • Dollar-denominated deposits at foreign banks or foreign branches of American banks
• Repurchase Agreement


  • Short-term, often overnight, sales of securities with an agreement to repurchase them at a slightly higher price
• Federal funds


  • Funds in a bank’s reserve account at the Federal Reserve Bank
• Brokers’ calls


  • Investors may buy stocks on margin and brokers, in turn, may borrow the funds from a bank
• Bond Market


  • Composed of longer-term borrowing or debt instruments than those that trade in the money market
• Bond Market Instruments

  • Treasury notes
  • Treasury bonds
  • Municipal bonds
  • Corporate bonds
  • Mortgage
  • Federal Agency Debt
• Treasury notes and treasury bonds

  • Notes have maturities up to 10 years
  • Bonds have maturities from 10 to 30 years
• Municipal bonds

  • Tax-exempt bonds issued by state and local governments
• Corporate bonds

  • Means by which private firms borrow money directly from the public
  • Can be secured (backed by collateral), unsecured (debentures), or subordinated debentures
• Mortgage


  • Ownership claim in a pool of mortgages or an obligation that is secured by such a pool
  • Includes conforming mortgages and subprime mortgages
• Equity Securities


  • Common Stocks represent ownership shares in a corporation
  • Preferred Stocks have features similar to both equity and debt
• Common Stocks

  • Each share entitles the owner to one vote
  • Corporation controlled by board of directors elected by shareholders
• Preferred Stocks


  • Promise to pay a fixed amount of income each year
  • Do not convey voting power regarding the management of the firm
• Stock Market Listing

  • Dividend yield is the annual dividend payment expressed as a percent of the stock price
  • Capital gains are the amount by which the sale price of a security exceeds the purchase price
  • Price-earnings ratio is the ratio of a stock’s price to its earnings per share
• Derivative Market


  • A claim whose value is directly dependent on or contingent on the value of some underlying assets
  • Includes Call Option, Put Option, and Futures
• Options

  • Right, but not obligation, to buy or sell
  • Option is exercised only when profitable
  • Options must be purchased, with the premium being the price of the option itself
• Futures Contract

  • Obliged to make or take delivery
  • Long position must buy at the futures price, short position must sell at the futures price
  • Futures contracts are entered into without cost