ECON 311 1nd Edition Lecture 2 Outline of Last Lecture I. Economics of Financial MarketsII. Monetary Theory and PolicyOutline of Current Lecture I. Role of Financial SystemII. Structure of Financial MarketsIII. Money Market InstrumentsCurrent LectureChapter 2I. Role of Financial System1. Provides individuals, firms, and governments the capital to do things to day they couldn’t otherwise afford to do – at a price2. Storing Protecting and providing profitable uses for excess capital3. Insuring against risk4. SpeculationII. Structure of Financial Markets1. Debt and Equity Markets- Debt securities – promise to repay principal (the amount borrowed) and interest at specified dateso Debt securities are the primary source of “direct finance”- A debt securities’ maturity describes the length of time until the final payment is madeo Short term – less than 1 year till maturityo Intermediate term – maturity is between 1 year and 10 yearso 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 assets2. 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.- Over-the-Counter (OTC) Markets – buying and selling takes place through computerized trading – no central location4. 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 MarketsIII. 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 priceRepo 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.Balance Sheetfor Repo Example:Hedge Fund Bank Money Market Mutual FundAsset Liability Asset Liability Asset Liability+ ReverseRepo+ ReverseRepo+Repo +Repo- Banks are currently leaving the Repo market because of new regulations on banks- Liquidity:o Easiness to sell a securityo Less liquid means its harder to sello More liquid mean its easier to sellREAD PAGES 23-33 SECTIONS FUNCTIONS OF FINANCIAL MARKETS AND STRUCTURE OF FINANCIAL MARKETSREAD PAGES 37-40 SECTIONS FUNCTION OF FINANCIAL INTERMEDIARIESHedge Fund“Borrower of money”“Seller of collateral”Money Market Mutual Fund“Lender of Money”“Buyer of Collateral”Repo Leg 1$10 millionTreasury BillRepo Leg 2Treasury Bill$10 million plus