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Finance Market - Coggle Diagram

- - - - They are short-term debt instruments/obligations of the Government issued with maturities of 3, 6, 9, 12 months.
      - Safest (no possibility of default)
      - Discount instrument: have no interest payments
    - - A short-term debt instrument issued by well-known corporations instead of borrowing from bank
      - Maturities: 2 to 270 days
    - - A certificate of deposit (CD) is a debt instrument sold by a bank to depositors that pays annual interest of a given amount and
        at maturity pays back the original purchase price
    - - A contract to sell a financial asset with the understanding that the seller will buy back the asset at a later date, at a higher price
      - The maturities range from very short-term (overnight) to several weeks or months
    - - A bank draft issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps it "accepted"
      - Commonly arise from international trade arrangements
  - - - Stocks are equity claims on the net income and assets of a corporation
      - Individuals hold around half of the value of stocks; the rest is held by pension funds, mutual funds, and insurance companies.
    - - Mortgages are loans to households or firms to purchase land, housing, or other real structures, in which the structure or land itself serves as collateral for the loans
      - Mortgages are provided by financial institutions such as savings and loan associations, mutual savings banks, commercial banks, and insurance companies.
    - - These long-term bonds are issued by corporations with very strong credit ratings
      - The typical corporate bond sends the holder an interest payment twice a year and pays off the face value when the bond matures
      - Convertible bond:
        
        Have the additional feature of allowing the holder to convert them into a specified number of shares of stock at any time up to the maturity date
        
        This feature makes these convertible bonds more desirable to prospective purchasers than bonds without it, and it allows the corporation to reduce its interest payments
      - orporate bonds are not nearly as liquid as other securities
    - - These long-term debt instruments are issued by the state treasury to mobilize money to make up for government budget shortfalls
      - They are commonly traded bonds, they are the most liquid security traded in the capital market
    - - These long-term bonds are issued by various government agencies to finance such items as mortgages, farm loans, or power generating equipment.
    - - State and local bonds (municipal bonds) are long-term debt instruments issued by state and local governments to finance expenditures on large programs
      - An important feature of these bonds is that their interest payments are exempt from federal income tax and generally from state taxes in the issuing state
      - Commercial banks, with their high income tax rates, are the biggest buyers of these securities, owning over half the total
        amount outstanding
      - The next biggest group of holders consists of wealthy individuals in high income-tax brackets, followed by insurance companies
    - - These loans to consumers and businesses are made principally by banks but, in the case of consumer loans, also by finance companies
- - - - Distinguishing between markets is on the basis of the maturity of the securities traded in each market.
      - The money market is a financial market in which only short-term debt instruments (generally those with original maturity terms of less than one year) are traded
      - The capital market is the market in which longer-term debt
        instruments (generally those with original maturity terms of one year or greater) and equity instruments are traded.
      - Compare between Money market
        and Capital Market
        
        Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.
        
        Short-term securities have smaller fluctuations in prices than long-term securities, making them safer investments.
    - - Debt Market
        
        The most common method is through the issuance of a debt instrument, such as a bond or a mortgage
        
        The maturity of a debt instrument is the number of years (term) until that instrument's expiration date.
        
        A debt instrument is short-term if its maturity term is less than a year
        
        long-term if its maturity term is ten years or longer
        
        Debt instruments with a maturity term between one and ten years are said to be intermediate-term.
      - Equity Market
        
        The second method of raising funds is through the issuance of equities, such as common stock
        
        Equities often make periodic payments (dividends) to their holders and are considered long-term securities because they have no maturity date.
      - Compare between Debt Market
        and Equity Market
        
        The main disadvantage of owning a corporation’s equities rather than its debt is the corporation must pay all its debt holders before it pays its equity holders.
        
        The advantage of holding equities is that equity holders benefit directly from any increases in the corporation’s profitability or asset value because equities confer ownership rights on the equity holders.
        
        Debt holders do not share in this benefit, because their dollar payments are fixed.
  - - - A primary market is a financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds.
      - Primary markets deal with the issue of new securities → securities must be underwritten and distributed (usually to institutional investors).
        → Corporations acquire new funds
    - - A secondary market is a financial market in which securities
        that have been previously issued can be resold.
      - Secondary markets deal financial securities that have already been issued → Corporations acquire no new funds → Makes the financial instruments more liquid → make them more desirable → easier to sell in the primary market.
      - Organization
        
        Exchanges
        
        One method is through exchanges, where buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades.
        
        OTC
        
        The other forum for a secondary market is an over-the-counter (OTC) market, in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices.
        
        Because over-the-counter dealers are in contact via computers and know the prices set by one another, the OTC market is very competitive
      - Important Market
        
        Prices on secondary market are an estimate of a company's value
        
        The liquidity provided by secondary markets decreases the cost of capital of the issuers