LECTURE 1 NOTES

LECTURE 1 NOTES - LECTURE 1 NOTES OVERVIEW OF THE LECTURE...

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LECTURE 1 NOTES OVERVIEW OF THE LECTURE --WHY ARE FINANCIAL INTERMEDIARIES (FI) SPECIAL? --OVERVIEW OF THE FINANCIAL MARKETS: --DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKETS --DIFFERENCES BETWEEN MONEY AND CAPITAL MARKETS --FOREIGN EXCHANGE MARKETS --DERIVATIVE SECURITY MARKETS --FINANCIAL MARKETS REGULATION --OVERVIEW OF FINANCIAL INSTITUTIONS (FI): --DIFFERENT TYPES OF FI AND THEIR FUNCTIONS --WHAT RISKS DO FI FACE? --WHY ARE FI REGULATED? WHY ARE FI SPECIAL?/WHY DO WE STUDY FINANCIAL MARKETS AND INSTITUTIONS? --TO MAKE SOUND INVESTMENT AND FINANCING DECISIONS, WE HAVE TO UNDERSTAND THE FLOW OF FUNDS THROUGHOUT THE ECONOMY. --WE HAVE TO UNDERSTAND THE OPERATIONS AND STRUCTURE OF DOMESTIC AND INTERNATIONAL FINANCIAL MARKETS. --WE HAVE TO UNDERSTAND THE RISKS FACED BY INVESTORS AND SAVERS. --FI PROVIDE WAYS TO CHANNEL FUNDS IN AND OUT OF FINANCIAL MARKETS. DEFINITION: Financial Markets: Arenas/Structures through which funds flow. 1
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DIFFERENCES BETWEEN PRIMARY AND SECONDARY MARKETS PRIMARY MARKETS ARE THOSE MARKETS WHERE CORPORATIONS RAISE FUNDS THROUGH NEW ISSUES OF SECURITIES. EXMP: IPOs or already publicly traded companies when they issue additional equity or debt instruments. --INVESTMENT BANKS (HELP WITH OFFER PRICE, NUMBER OF SECURITIES TO ISSUE, ETC). --PRIVATE PLACEMENTS. --ETHICS ISSUES IN PRIMARY MARKETS: SPINNING, OPTIMISTIC RESEARCH ANNOUNCEMENTS, ETC. SECONDARY MARKETS ARE THOSE MARKETS WHERE FINANCIAL INSTRUMENTS ARE REBOUGHT OR RESOLD. --SECURITIES BROKERS. EXMP: NYSE, AMEX, NASDAQ. --SECONDARY MARKETS ALSO EXIST FOR FINANCIAL INSTRUMENTS BACKED BY OTHER ASSETS (MORTGAGES, ETC). --CORPORATE SECURITY ISSUERS ARE NOT DIRECTLY INVOLVED IN THE TRANSFER OF FUNDS OR INSTRUMENTS IN THE SECONDARY MARKETS. --SECONDARY MARKETS OFFER BUYERS AND SELLERS LIQUIDITY. OTHER MARKETS : OVER THE COUNTER (OTC) MARKETS. 2
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MONEY MARKETS ARE THOSE MARKETS WHERE DEBT SECURITIES WITH MATURITIES OF ONE YEAR OR LESS ARE TRADED. --THESE MARKETS ARE LESS VOLATILE COMPARED TO CAPITAL MARKETS?? --THEY ARE IN GENERAL OTC MARKETS. --SHORT-TERM/TEMPORARY SECURITIES. --LIQUID AND LOW RISK SECURITIES?? EXMPS OF MONEY MARKET INSTRUMENTS: TREASURY BILLS, COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT, EURODOLLARS, REPOS, ETC. (Please see the ‘Market Instruments’ coming up for details.) CAPITAL MARKETS ARE THOSE WHERE EQUITY AND DEBT INSTRUMENTS WITH MATURITIES OF MORE THAN ONE YEAR TRADE. EXMP: NOTES AND BONDS AND STOCKS. --HIGHER CREDIT/BANKRUPTCY RISK AND INTEREST RATE RISK IN THESE MARKETS. EXMPS OF CAPITAL MARKET INSTRUMENTS: TREASURY NOTES AND BONDS, INTERNATIONAL BONDS, MUNICIPAL BONDS, CORPORATE BONDS, MORTGAGES, COMMON STOCKS, PREFERRED STOCKS, ETC. (Please see the ‘Market Instruments’ coming up for details.)
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LECTURE 1 NOTES - LECTURE 1 NOTES OVERVIEW OF THE LECTURE...

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