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CHAPTER 8 BOND MARKETS CHAPTER OBJECTIVES 1. This chapter continues our review of the fixed-income financial markets by analyzing the debt securities of the capital market. This chapter focuses on the debt capital market, its securities, its issuers, and investors. 2. The primary objective of this chapter is to describe the function of major participants in, and financial instruments traded in, the U.S. and international bond markets. 3. Students should note that the secondary market for capital markets instruments allows households, businesses, and other participants to diversify risk and obtain portfolio flexibility. As a result, more funds flow into the capital markets, flow to the most productive uses (allocational efficiency), and as competition increases among financial market dealer/brokers and financial institutions, the savers' returns are higher and the borrowers' costs are lower (operational efficiency) than would otherwise be the case. 4. Students should be familiar with the broad spectrum of financial instruments that comprise the capital markets. The major instruments include Treasury, municipal, and corporate bonds, mortgages (covered in Chapter 9), and preferred and common stocks (covered in Chapter 10). The use of financial guarantees has become very important, as has securitization. 5. Each year money and capital markets move closer to a fully integrated 24-hour international market. Trading of U.S. Treasuries approaches that today. CHANGES FROM THE LAST EDITION 1. All time-sensitive tables and figures have been updated. 2. CHAPTER KEY POINTS 1. Capital markets exist to facilitate the transfer of funds from surplus spending units to deficit spending units. Contrary to the short-term money markets, the capital markets are concerned with the transfer of funds that can be used to finance long-term capital investments. 2. Financial markets operate with varying degrees of efficiency. Allocational efficiency is the extent to which funds flow from saving to the highest productive uses. Operational efficiency is present when there is sufficient competition between market makers (broker/ dealer) and financial institutions. Most students have had some background discussion related to informational efficiency, the extent to which all participants are receiving timely, accurate, complete information. The extent of informational and operational efficiency affects the extent of allocational efficiency. 1
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3. The major capital market instruments covered in this and following chapters are as follows: Debt Equity Securities Securities corporate bonds common stock state and municipal bonds preferred stock government bonds convertible stock federal agency bonds mortgages 4. The secondary market for capital markets securities is important because it allows investors to alter the risk exposure of their portfolios before maturity. During the 1980s Drexel, Burnham and Lambert developed and maintained a secondary market for high-
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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