Chapter 4

Financial market structure

4.1 Money markets
 the network of corporations, financial institutions, investors and governments which
deal with the flow of short-term capital.

 money market investors are especially sensitive to risk like market risk,
reinvestment risk, default risk, inflation risk, currency risk and political risk.

Types of instruments
1. Commercial paper
There are two types of Commercial Paper
I. Direct Paper
 large finance companies
 bank-holding companies
II. Dealer (or Industrial) Paper
 non-financial companies
 including public utilities, manufacturers, retailers, wholesalers, etc

2. Treasury bills
 securities with a maturity of one year or less, issued by national governments

Types of treasury bills

 Regular-Series Bills - issued routinely every week or month in competitive auctions.
 Irregular-Series Bills - issued only when the treasury has a special cash need.

3. Repurchase agreement (Repos)

combination of two transactions
I. a securities dealer, such as a bank, sells securities it owns to an investor, agreeing to
repurchase the securities at a specified higher price at a future date.
II. days or months later, the dealer buys back the securities from the investor at higher
price.
4. Bankers’ Acceptance
a. Exporters send goods to a foreign destination and want payment assurance
before sending
b. Bank stamps a time draft from the importer ACCEPTED and obligates the
bank to make good on the payment at a specific time
 4.2 Bond Markets
 Bond contract, agreement, or guarantee.
 a bond represents the issuer’s contractual promise to pay interest and repay principal
according to specified terms.
issue a bond?
 matching revenue and expenses
 promoting inter-generational equity
 Controlling risk
 avoiding short-term financial constraints

The issuers
 National governments bonds backed by the full faith and credit of national
governments are called sovereigns.
 Lower levels of government bonds issued by a government at the sub-national level,
such as a city, a province or a state, are called semi-sovereigns.
 Corporations are issued by a business enterprise- owned by private investors or by a
government.

Types of bonds
Straight bonds
 are the basic fixed-income investment
Callable bonds
 the issuer may reserve the right to call the bonds at particular dates
Putable bonds
 gives the investor the right to sell the bonds back to the issuer at par
value on designated dates.
Perpetual debentures
 irredeemable debentures,
 are bonds that will last forever unless the holder agrees to sell them
back to the issuer.

Zero-coupon bonds
 do not pay periodic interest.
 iissued at less than par value and are redeemed at par value
4.3 Stock Markets