ECON 311 1nd Edition Lecture 2 Outline of Last Lecture I Economics of Financial Markets II Monetary Theory and Policy Outline of Current Lecture I Role of Financial System II Structure of Financial Markets III Money Market Instruments Current Lecture Chapter 2 I Role of Financial System 1 Provides individuals firms and governments the capital to do things to day they couldn t otherwise afford to do at a price 2 Storing Protecting and providing profitable uses for excess capital 3 Insuring against risk 4 Speculation II Structure of Financial Markets 1 Debt and Equity Markets Debt securities promise to repay principal the amount borrowed and interest at specified dates o Debt securities are the primary source of direct finance A debt securities maturity describes the length of time until the final payment is made o Short term less than 1 year till maturity o Intermediate term maturity is between 1 year and 10 years o Long term maturity occurs after 10 years Equity stock Securities represent ownership of a corporation and entitle the stockholder to a firm s earnings and assets 2 Primary or Secondary Markets Primary Markets newly issued debt or equity securities are sold to their initial buyers Secondary Markets previously issued securities are bought and sold 3 Exchanges and Over the Counter Markets Exchanges buying and selling takes place in a centralized location Wall Street Market These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 4 III Over the Counter OTC Markets buying and selling takes place through computerized trading no central location Money and Capital Markets Short term debt securities bonds are traded in money markets Intermediate Term Long Term and Equity securities are traded in Capital Markets Money Market Instruments US Treasury Bills Federal Funds Commercial Paper short term corporate debt Repurchase Agreements Repo o The sale of securities with the simultaneous agreement to repurchase the security at an agreed upon future date and price Repo Example Suppose there s a Hedge Fund that needs 10 million over night and that they own a 10 million treasury bill There is also a Money Market Mutual fund that wants to lend 10 million over night Repo Leg 1 Treasury Bill Repo Leg 2 Balance for Repo Example Treasury Bill Sheet 10 million plus interest Hedge Fund Asset Money Market Mutual Fund Lender of Money Buyer of Collateral 10 million Hedge Fund Borrower of money Seller of collateral Bank Money Market Mutual Fund Liability Asset Liability Asset Reverse Repo Reverse Repo Repo Repo Liability Banks are currently leaving the Repo market because of new regulations on banks Liquidity o Easiness to sell a security o Less liquid means its harder to sell o More liquid mean its easier to sell READ PAGES 23 33 SECTIONS FUNCTIONS OF FINANCIAL MARKETS AND STRUCTURE READ PAGES 37 40 SECTIONS FUNCTION OF FINANCIAL INTERMEDIARIES OF FINANCIAL MARKETS