By Shirley U.

Espino
 Finance
O French word “ Finer”
O To end or settle debt
Finance
O Economics- decision making that involves
allocation of money under conditions of
uncertainty
O Commerce- investors allocate their funds
among financial assets to accomplish their
objectives
O Business and Governments-raised funds by
issuing claims against themselves
Finance
O Provides framework for making decisions as
how those funds obtained and then
invested.
 Financial System
O Allows household, companies and the
government who have available funds to
invest these funds in more potentially
productive vehicles that can result in faster
growth in the economy.
Financial S
O Composed of network of inter-related system
of financial markets, intermediaries and
services. The financial system of the country
carries out the essential economic function
that transfers funds from parties that have
available funds to parties that need funds
 Flow of Funds
O Direct Financing- borrower borrow and deal
directly with lenders through selling of
financial instruments
O Indirect Financing- intervention of financial
intermediaries
 Elements of FS
O Lenders and Borrowers( who are the players)
 fund providers and demanders
O Financial Intermediaries (How will the
exchange occur?)
 Special type of financial entity that act as a
3rd party to facilitate the activity
Elements
O Financial Instruments (what will be used)
 Medium of exchange of contractual
obligations of a party.
 (types) Cash or derivative financial
instruments
 In International Financial Reporting
Standards ( financial instruments as a
contract where a party recognize it as an
asset and another is a liability
Elements
O Financial Markets (where it will be traded?)
 Where buyer and supplier of financial
instrument meet.
 Cash financial instrument- money market
 Derivative financial instrument- capital
market
Elements
O Regulatory Environment ( How it is
controlled?)
 It I the governance body to ensure that the
transactions that occur within the financial
systems complies with the laws and
regulations imposed to the actors as well as
the elements that plays within the system
Elements
O Money Creation (What is the value it
creates)
 The money as it was given value out of the
financial transaction because of the
exchange that occurred in the system maybe
converted into another form
Elements
O Price Discovery (how much is created)
 It is the process of determining or valuing
the financial instrument in the market
 Price is driven by the level of risk
Financial Market
O Structures
which funds
flow
O Arenas through
which funds
flow
 FM
O The main economic function of FM I
 Channel to transfer excess funds from
provider to demanders
 It become the mechanism that bridge
surplus and deficit economic units
Major Economic Functions of
FM
O Price Discovery
 Interaction between buyers and sellers in
order to come up with the price of financial
instrument
 Willingness of the seller to sell and buyer to
buy
Economic Functions
O Liquidity
 FM serves as a forum where buyers and
seller meet to facilitate transactions
 Without liquidity, an investor is forced to hold
to financial instrument up until such time
conditions in agreement happen that will
permit the disposal of the instrument
Economic Functions
O Reduction in transaction cost
 Cost incurred of parties to trade financial
instrument
2 Types of Transaction Costs

O Search cost- cost incurred to look for

financial instrument
 Explicit Search cost-
expenses needed to advertise intent to
purchase or sell financial instrument
 Implicit search cost-
include value of time consumed to look for a
counterparty for the transactions
2 Types
O Information costs- related in evaluating
investment characteristics of a financial
instrument.
 Investors spend costs to gather information
about profitability, liquidity , stability and
market value of FI to justify the worthiness
of investment
Functions of Financial
System
O Risk Sharing- risk is the chance that the
value of financial assets will change relative
to what one expects.
 The splitting of wealth into many assets to
reduce risk is known as diversification
 The ability of FS to provide risk sharing
makes savers more willing to buy stocks,
bonds and other financial assets
Functions of
O Liquidity
O Information

O Asymmetric Information- situation in which

one party to an economic transaction has
better information than the other party In
financial transaction borrower has more
information than does the lender
 Problems using Asymmetric
information

O Adverse selection- problem of investors in

distinguishing low-risk borrowers from high
risk borrowers before making an investment
O Moral hazard- problem experience by
investors in verifying that borrowers are
using their funds as intended
 How Financial Intermediaries
reduce adverse selection

O 1. Requiring borrowers to disclose material

information on their financial performance
and position
O 2. Collecting information on firms and selling
that information to investors
O 3. Convincing lender to require borrowers to
pledge some of the assets as collateral
which the lender can claim of the borrower
defaults
How Financial Intermediaries
reduce moral hazard problems

O Specializing in monitoring borrowers and

developing effective techniques to ensure
that the funds they loan are actually used
for their intended purpose
O Imposing Restrictive covenants
Placing limitations o the uses of funds
borrowed or require the borrower to pay even
before maturity
 How Financial Intermediaries
reduce transaction costs

O Financial intermediaries take advantage of

economies of scale ( reduction of average
cost because of volume of production
O Rely on the advantage of technology
O Rely on sophisticated soft ware
 Types of Financial Market

 Based on the instrument traded

O Money market
Example of money market instrument ( TB, CP
Certificate of dep, Repurchase Agreement,
Bankers Acceptance)

O Capital Market
Equity and debt securities
Types of FM
O Based on Market type
 Primary market
 Secondary market
Primary Markets
O markets in which
users of funds raise
funds through new
issues of financial
instruments, such
as stocks and
bonds
Primary
O Markets in which
corporations raise
funds through
new issues of
securities
Primary
O Non negotiable instrument like mortgage
loans, savings deposits and life policies are
issued only in primary markets and are not
traded to secondary market.
Primary
O Usually, primary markets transactions are
coursed through investment bank which are
financial Instrument that act as
intermediaries between issuing companies
(fund demanders) and potential investors
(fund providers)
Primary
O Investment bank provides advice to
issuers on matter related to price of
securities, transactions costs and
number of securities to be issued
based on their fund needs.
Primary
O Investment bank is responsible to all
aspects to ensure proper execution of
the issuance

O Investment bank also underwrites

securities
Primary
O Underwriting means that the
investment bank guarantee the price
for the securities of the issuing
company and then sells these to the
general public
Primary
O Placement can be
public or Private
O Public (IPO)
O Private
(Institutional
buyer like pension
fund)
Types of Transaction under Primary
Market

O Public offering
Securities are offered to the general public
It is done through issuing prospectus or
placing documents which contains an offer to
the general public to subscribe or purchase
securities at stated price.
Public Offering
O Public offering can either be an offer for
subscription or an offer for sale. If an offer
for subscription, the general public is invited
to subscribe to unissued shares of the
company. If an offer for sale, existing
shareholders invites potential subscribers to
buy option of the shares they own
Public Offering
O Most of the time, an underwriter is
appointed for public offerings. An
underwriter provides an undertaking to
purchase the remaining securities If the
offer will not be fully subscribed by the
public. In exchange of undertaking, a fee is
paid by the issuing company to the
underwriters.
Types of ….
O Private placement ( limited public offer)
This occurs when the issuer looks for a single
investor, an institutional buyer, or a group of
buyers to purchase the whole securities
issuance instead of offering to the general
public
Private placement

O Traditionally securities sold through

private placements tend to be illiquid
because of the very limited party it
was sold
Private placement

O One variation of private placement is

that the underwriter subscribes to all
securities at a certain price and sells
the same securities to a group of
investors at a higher price, the
difference between the two prices is
known as underwriting spread.
Types of ……

O Auction offer securities to the general

public through auction process. It is
usually used for issuance of Treasury
bill, bonds and other securities
offered by the government.
 3 Methods of Auction

O Dutch Auction-
seller begins the sale at higher prices.
From that point the price of securities is
continuously lowered down
3 Methods
O English Auction-
the prospective buyer commences the auction
by submitting the initial bid.

Other buyer interested to purchase submit new

bid to top the previous price. The bidding stop
when no other bidder wants to tap the last bid
price. The last highest price bid become the
price of the securities.
3 Methods
O Descending price sealed auction( first price
sealed auction)
Bidders submit sealed bids to the seller. The
sealed bids are ranked from highest to lowest
price. The number of securities is allotted first
to the highest price bid follows a descending
order. Highest price bids receive full allocation
while lower bids receives allocati0n distributed
pro rata
3 Methods

O Tap Issue
occurs when issuer are open to
received bid for their securities at all
times. Issuers maintain the right to
accept or reject the bid prices based on
how much fund they need
 Features of Primary Market
 It Is Related With New Issues
 It Has No Particular Place
 It Has Various Methods Of Float Capital: Following are
the methods of raising capital in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
 It comes before Secondary Market
Based on Market Type
O Secondary Market
Securities issued in the primary market and
subsequently traded (resold and repurchased)
Transaction in this market occurs thru the help
of securities broker which act as facilitator
between seller and buyer. The original issuer
of the financial instrument is not involved in
the subsequent transactions in the secondary
market
Secondary
O once financial
instruments such
as stocks are
issued in primary
markets, they are
then traded- that is
re-bought and
resold in secondary
markets
Secondary
O Markets that
trade financial
instruments once
they are issued
Secondary
O Buyers of the
secondary market
securities are
economic agents
(consumers,
businesses and
government) with
excess funds
 The secondary market is that market
in which the buying and selling of the
previously issued securities is done.
 The transactions of the secondary
market are generally done through the
medium of stock exchange.
 The chief purpose of the secondary
market is to create liquidity in
securities.
 Functions of Secondary
Markets
O Provides regular information about the value
of security.
O Helps to observe prices of bonds and their
interest rates.
O Offers to investors liquidity for their assets.
O Secondary markets bring together many
interested parties.
O It keeps the cost of transactions low.
 Economic Functions of Secondary
market

O Price discovery-
provides information about prices of the
securities traded which can influence
economic decisions. The higher the price in
the secondary market the higher the price that
the issuing company can set new securities
that they will issue. Higher prices suggest that
issuing company may raise higher amount of
financial capital when they sell new securities
Economic Functions
O Liquidity and reduction of borrowing costs.
Increase liquidity of security improves the
desirability in the eyes of the investors
helping issuing firms to sell new instruments
in the primary market.
Economic Functions
O Support to the primary market-
Price discovery helps in giving information that
can be helpful in (a) setting prices to the new
issuance executed in the primary market (b)
assessing receptiveness of the market for new
securities
Economic Functions
O Implementation of monetary policy-
secondary market allows regulators to trade
securities to influence liquidity and interest
rate set in the financial system
Features of Secondary Market
O It Creates Liquidity
O It Comes After Primary Market
O It Has A Particular Place
O It Encourage New Investments
O Purchases and sales of existing stocks and bonds occur in the
secondary market.
O Transactions in the secondary market do not provide additional
funds to the firm.
O The secondary market increases the liquidity of securities
outstanding and lowers the required returns of investors.
O Composed of organized exchanges like the New York Stock
Exchange and American Stock Exchange plus the over-the-
counter (OTC) market.
Why Secondary Markets Are Important
O Provide liquidity to investors who acquire
securities in the primary market
O Helps issuers raise needed funds in the
primary market since investors want liquidity
O Help determine market pricing for new
issues
Classification of Secondary market
based on market structure

O Order- Driven-
the buyers and sellers propose their price
through their brokers who conveys the bid In
centralized locations (securities will be
awarded to the buyer with the same offer price
as the selling price of the seller)
 Types of orders in Order-driven
market structure

O Market order ( at best order)

clients relies on the expertise and the integrity
of the broker-dealer to execute deals when the
latter perceives that the current price is
considered best
Types of orders in Order-driven
O Limit order-
orders placed where clients set a price or price
range that may be below /above the existing
price. The broker executes the transactions
when prices go higher (sell) or lower (buy) than
the limit price or range.
Types of orders in Order-driven
O Day orders-
orders placed that only valid until the end of
the business day. all orders not executed at
the end of the day are cancelled and removed
from the system
Types of orders in Order-driven
O Good until cancelled orders-
orders that remains valid for the sustained
period up until the client voluntarily cancels
and remove this from the system.
Classification of Secondary market
based on market structure
O Quote Driven Market (Primary dealer market,
professional market or market-made
market)
In this market, the market maker set a bid
quote ( to buy( and offer to quote (to sell). The
bid quote is lower than offer quote. The
difference between bid and offer quote is
known as spread. Narrow spread signify
liquidity, wide spread indicated that securities
are illiquid
 Primary and Secondary market are
classified based on where the financial
instrument are traded
O Exchange (formalized).
Exchange are centralized trading locations
where financial instruments are purchased or
sold between market participants. All financial
instruments should be listed by the organized
exchange
………. where the financial
instrument are traded
O Over the counter Market (informal)
place where unlisted financial instruments are
allowed to be traded. Dealers stationed at
various locations who have securities on hand
stay ready to sell and buy securities “over the
counter” or any party who approaches them
and is willing to accept their price. OTC market
do not have formalized mechanisms to
regulate transactions
Cont types of FM
O Based on Country’s Perspective
O Internal or national market Financial market
operating in a certain country
Domestic market- issuers are considered
residents in a country
Foreign market-issuers who are not resident of
the country can sell or issue securities . but
they need to comply with Phil securities law.
 Cont types of FM
O Based on the manner of financial
Intermediaries
Broker market- the buyer and seller of
securities are brought together by a broker
and trade occurs at that point. Ownership of
the securities effectively changes on the floor
of exchanges thru the help of a broker.
 Based on the manner
O Dealer market the buyer and seller are not
brought directly by the 3rd party (dealers who
create market by offering to buy/sell
securities at stated ask/bid prices)
respectively
 Secondary Equity Markets
O Stock Exchanges (First Market)
O Major national stock exchanges
O New York, American, Tokyo, and London
O Regional stock exchanges
O Chicago, San Francisco, Boston, Osaka, Nagoya, Dublin

O Over-the-counter market (Second Market)

O Stocks not listed on organized exchange
O Third Market
O Fourth Market
 Secondary Market Trading
Systems
O Pure auction market
O Buyers “bid” and sellers “ask”
O Buy and sell orders are matched at a central
location
O Price driven market: trades are made by
determining the highest bid and the lowest
ask
O Dealer market
O Dealers buy shares (at the bid price) and sell
shares (at the ask price) from their own
inventory
O Dealers compete against each other
Call Versus Continuous Markets
O Call markets trade individual stocks at
specified times to gather all orders and
determine a single price to satisfy the most
orders
O Used for opening prices on NYSE if orders
build up overnight or after trading is
suspended
O Continuous markets trade any time the
market is open
Q# 1
O Finance come from French
word “finens” which
means to end and settle a
debt
Q#2
O In indirect financing, the
borrower-spenders borrow
and deal directly with
lenders through selling
financial Instruments
Q#3
O Information symmetry
occurs when one
stockholder to a
transaction holds superior
information than the other
party
Q#4
O Lenders and borrowers
are also known as fund
demanders and fund
providers respectively
Q#5
O All types of financial
markets offer similar
degrees of liquidity
Q#6
O Capital market is the sector
of financial system where
financial instruments that will
mature or be redeemed in
one year or less from
issuance date are traded
Q#7
O Primary market refers to
the market wherein the
securities issued in
primary market are
subsequently traded i.e.
resold and repurchased
Q#8
O In a dealer market, the buyer and
the seller of the securities are
brought together by a broker and
the trade occurs at that point. In
a broker market the buyer and
the seller are not brought directly
together by the third party
 MCQ
O USE UPPER CASE LETTER
O ERASURE IS WRONG
Q#9
O In this route of funds flow, the borrower-
spenders borrow and deal directly with
lenders through selling of financial
instruments
A) Indirect financing
B) Direct financing
C) Indirect funding
D) Direct funding
Q#10
O Which of the following is not a source of
wealth
A) Labor
B) Capital
C) Wages
D) Entrepreneurship
Q#11
O Which of the following is not an element of
the financial system
A) Financial market
B) Financial intermediaries
C) Financial instruments
D) Regulatory compliance
Q#12
O Which of the following is not an economic
function of financial market?
A) Price
B) Liquidity
C) Reduced transaction costs
D) All of the above are economic functions
Q#13
O Which of the following is not a classification
of financial market?
A) Based on instrument traded
B) Based on market type
C) Based on country’s perspective
D) Based on the manner of financial
intermediaries
Q#14
O The sector of financial system where
financial instruments that will mature or
redeemed in one year or less from issuance
date are traded.
A) Current or short term market
B) Debt market
C) Money market
D) Long term market
Q#15
O Public offering can be _________. Which is
not correct.
A) Offer for subscription
B) Offer for sale
C) Acceptance of subscription and
acceptance of sale
D) Both A and B
Q#16
O Securities coursed through_______ gives
comfort to potential investors since _____
are willing to take the risk of guaranteeing
these securities
A) Market maker
B) Underwriter
C) Financial intermediary
D) Guarantor
Q#17
O This is also known as limited public offer
A) Private placement
B) Money market placement
C) Capital market placement
Q#18
O This method occurs when issuers are open
to receive bids for their securities at all
times
A) Tap issue
B) Government bidding
C) Auction
D) Money market placement
Q#19
O This refers to the market wherein the
securities issued in primary market are
subsequently traded
A) Primary market
B) Secondary market
C) Consequent market
D) Trading market
Q#20
O Also called as primary dealer markets,
professional markets or market-made
markets
A) Secondary market
B) Order driven market
C) Quote driven market
D) Auction
 Key to Correction
1. FALSE 9. B 16. B
2. FALSE 10. C 17. A
3. FALSE 11. C 18. A
4. FALSE 12. D 19 B
5. FALSE 13. D 20 C
6. FALSE 14.C
7. FALSE 15. C
8. FALSE
 National Stock Exchanges
O Large number of listed securities
O Listing often seen as a sign of prestige
O Wide geographic dispersion of listed firms
O Diverse clientele of buyers and sellers
O Firms wanting to list must meet listing
requirements
 American Stock Exchange
(AMEX)
O Started by a group who traded unlisted
stocks at the corner of Wall and Hanover
Streets in New York as the Outdoor Curb
Market
O Emphasis on foreign securities
O Doesn’t trade stocks listed on NYSE
O Merged with Nasdaq in 1998, although
operations remain separate
Tokyo Stock Exchange (TSE)
O Largest of the eight exchanges in Japan
O Dominates Japanese market
O Established in 1878 and reorganized in
1943, 1947, and 1949
O Domestic and foreign stocks listed
O Most active 150 stocks are traded on floor,
others by computer
London Stock Exchange (LSE)
O Largest securities market in the United
Kingdom
O Trades listed and unlisted securities
O Largest listing of foreign stocks on any
exchange
O Stocks divided into three groups
O Alpha - 65 most active
O Betas - 500 next most active
O Gamma - bids are indicative only and must
be confirmed
 Regional Exchanges
O Provide secondary markets for stocks not
listed on a major exchange
O Listing requirements vary
O Some regional exchanges list issues also
listed on a national exchange
O Regional Exchanges in United States
O Chicago, Boston, Pacific (San Francisco/Los
Angeles), Philadelphia, Cincinnati
 Over-the-Counter (OTC)
Market
O Not a formal organization or a single
location
O Trading in unlisted stocks and listed stocks
(third market)
O Lenient requirements for listing on OTC
O Almost 5,000 issues actively traded on
Nasdaq’s NMS ( National Market System)
O More issues traded, but less dollar trading in
terms of total value than NYSE
 Over-the-Counter (OTC)
Market
O Operations
O Any stock may be traded as long as it has a
willing market maker to act a dealer
O OTC is a negotiated market with investors
potentially dealing directly with dealers
 Over-the-Counter (OTC)
Market
The Nasdaq System
O National Association of Security Dealers
Automated Quotation system
O Dealers may elect to make markets in
stocks
O Average of 8.7 dealers per stock in 2000
O Three levels of quotations available
O Level 1 shows a median representative quote
O Level 2 shows quotes by all market makers
O Level 3 is for OTC market makers to change
their quotes shown
 Third Market
O OTC trading of shares listed on an
exchange
O Mostly well known stocks
O GM, IBM, AT&T, Xerox
O Represents competition between the OTC
market and the organized exchanges
O May be important to investors
particularly when the exchange is closed
or when trading is suspended on the
exchange
 Fourth Market
O Direct trading of securities between two
parties with no broker involved
O Both parties typically large, institutional
investors making large trades
O Savings in transaction costs can be large for
such investors to deal directly with one
another
SECONDARY MARKET TRADING
MECHANICS
O TYPES OF ORDERS
 1-Market Orders
The simplest type of order
is the market order,an
order executed at the
best price available in
the market.If more buy
orders and sell orders
reach market at the
same time,
the price can obtain.Buyers
give priority offering
lower price.
Sellers give offering higher
price.
1-Market Orders
If there are more than
one order at the
same price.The
priority rule is based on
the time of arrival of
the order
 1-Market Orders
The danger of a market
order is that an
adverse move may
take place between
the time the investor
places the order and
the time the order is
executed.
 2-Limit Orders
It designates a price
treshold for the
execution of trade.It is
a conditional order.
A buy limit order
indicates that the
security may be
purchased only at the
designated price or
lower.
 2-Limit Orders
A sell limit order
indicates that the
security may be
sold at the designated
price or higher.
 2-Limit Orders
The danger of limit
order is that it comes
with no guarantee it
will be executed at
all.
The designated price
may not be
obtainable.
 3-Stop Order
Stop order specifies
that the order is not
be executed until the
market moves to a
designated price at
which time it
becomes a market
order
 3-Stop Order
A stop order to buy
specifies that the
order is not to be
executed until the
market rises to a
designated price
3-Stop Order
A stop order to sell
specifies that the
order is not to be
executed until the
market price falls
below a designated
price.
Two dangers of stop order:
1-Security prices
sometimes exhibit
abrupt price
changes.
2-Stop order can be
subject to the
uncertainty of the
execution price
4-Market if Touched Orders
This order becomes a market order if a
designated
price is reached.However,a market-if-touched
order to buy becomes a market order if the
market falls to a given price.
A market-if-touched order to sell beco mes a
market order if the market rise to a specified
price.
 5-Time Specific Order
Orders may be placed to buy or sell
at the open or close of trading for the
day that is time specific orders.
 6-Size Related Orders
For common stock,orders are also classified
by their size.
A round lot is typically 100 shares of a stock.
An odd lot is defined as less than a round lot.
A block trade is defined as an order of 10.000 shares
of a given stock.
 TRADING
LOCATIONS
LONDON INTERNATIONAL STOCK
EXCHANGE
FRANKFURT STOCK EXCHANGE
PARIS BOURSE
TOKYO STOCK EXCHANGE
ISTANBUL STOCK EXCHANGE
Philippines Stock Exchange
Money versus capital markets:
The flow of short-term funds is facilitated
by money markets
The flow of long-term funds is facilitated
by capital markets
 Securities Traded in Financial Markets
O Money market securities:
O Money market securities are debt securities with a
maturity of one year or less
O Characteristics:
O Liquid
O Low expected return
O Low degree of risk
Securities Traded in Financial Markets
O Treasury Bills.
O Certificate of Deposit (CDs).
O Commercial Papers.
O Eurodollar Deposits.
O Banker’s Acceptance.
O Federal Funds.
O Repurchase Agreements.
 Treasury Bills
O Short-term (usually less than one year, typically three months)
maturity promissory note issued by a national (federal)
government as a primary instrument for regulating money
supply and raising funds via open market operations. Issued
through the country's central bank, T-bills commonly pay no
explicit interest but are sold at a discount, their yield being the
difference between the purchase price and the par-
value (also called redemption value).
 Certificate of Deposits

O Certificates of Deposit (CDs) are common savings products

offered by many banks and credit unions. The key
difference between a regular savings account and a CD is
that early withdrawal from a CD in advance of pre-
specified term leads to penalty fees (which is why they are
sometimes called “time deposits”).
Certificate of Deposits
 Commercial Paper
O in the global financial market, is
an unsecured promissory note with a fixed maturity of
no more than 270 days.
O a money-market security issued (sold) by
large corporations to obtain funds to meet short-
term debt obligations (for example, payroll), and is
backed only by an issuing bank or corporation's promise
to pay the face amount on the maturity date specified on
the note
Commercial Paper
 Commercial Paper
O . Since it is not backed by collateral, only firms with
excellent credit ratings from a recognized credit rating
agency will be able to sell their commercial paper at a
reasonable price. Commercial paper is usually sold at
a discount from face value, and generally carries lower
interest repayment rates than bonds due to the shorter
maturities of commercial paper
 Eurodollar Deposits
O are time deposits denominated in U.S. dollars at banks outside
the United States, and thus are not under the jurisdiction of
the Federal Reserve. Consequently, such deposits are subject
to much less regulation than similar deposits within the U.S..
The term was originally coined for U.S. dollars in European
banks, but it expanded over the years to its present
definition—a U.S. dollar-denominated deposit in Tokyo or
Beijing would be likewise deemed a Eurodollar deposit. There
is no connection with the eurocurrency or the eurozone.
 Bankers Acceptance
O is a promised future payment, or time draft, which is accepted and
guaranteed by a bank and drawn on a deposit at the bank. The
banker's acceptance specifies the amount of money, the date, and
the person to which the payment is due. After acceptance, the draft
becomes an unconditional liability of the bank. But the holder of
the draft can sell (exchange) it for cash at a discount to a buyer
who is willing to wait until the maturity date for the funds in the
deposit.
Bankers Acceptance
 Federal Funds
O are overnight borrowings between banks and other entities to
maintain their bank reserves at the Federal Reserve. Banks
keep reserves at Federal Reserve Banks to meet their reserve
requirements and to clear financial transactions. Transactions
in the federal funds market enable depository institutions with
reserve balances in excess of reserve requirements to lend
reserves to institutions with reserve deficiencies. These loans
are usually made for one day only, that is, "overnight
Federal Funds
 Repurchase Agreement
O also known as a repo, currency repo, RP, or sale and repurchase
agreement, is the sale of securities together with an agreement
for the seller to buy back the securities at a later date. The
repurchase price should be greater than the original sale price,
the difference effectively representing interest, sometimes called
therepo rate. The party that originally buys the securities
effectively acts as a lender. The original seller is effectively
acting as a borrower, using their security as collateral for a
secured cash loan at a fixed rate of interest.
Repurchase Agreement
 Securities Traded in Financial Markets
O Capital Market Securities:
O Capital market securities are those with a maturity of
more than one year
O Bonds and mortgages
O Stocks
O Capital market securities have a higher expected return
and more risk than money market securities
 Securities Traded in Capital Markets
O Treasury Notes and Bonds.
O Municipal Bonds.
O Corporate Bonds.
O Mortgages.
O Commons Stocks.
O Preferred Stocks.
 Treasury Notes
O Medium-term (maturity one to ten years)
fixed interest rate debt security issued by a national
(federal) government and backed by its full faith
and credit. Next to treasury bills (maturity less than
one year), T-notes are the
safest form of marketable investment with
an active secondary market, and usually pay semi-
annual interest
Treasury Notes
 Treasury Bond
O (maturity over 10 years) fixed interest rate debt
security issued by a national (federal) government backed
by its 'full faith and credit.' Next to treasury bills (maturity
less than one year), and treasury notes (maturity one to ten
years) T-bonds are the
safest form of marketable investment. They have
an active secondary market, and usually pay semi-
annual interest.
Treasury Bond
 Municipal Bonds
O a bond issued by a local government, or their
agencies. Many other countries in the world also
issue municipal bonds, sometimes called local
authority bonds or other names. The key defining
feature of this type of bond is that it is issued by a
public-use entity at a lower level of government
than the sovereign
 Corporate Bonds
O a bond issued by a corporation in order to
raise financing for a variety of reasons such
as to on going operations, or to expand
business] The term is usually applied
to longer-term debt instruments,
with maturity of at least one year. Corporate
debt instruments with maturity shorter than
one year are referred to as commercial
paper.
 Mortgages
O A debt instrument, secured by the collateral of specified real
estate property, that the borrower is obliged to pay back with a
predetermined set of payments. Mortgages are used by
individuals and businesses to make large real estate purchases
without paying the entire value of the purchase up front. Over
a period of many years, the borrower repays the loan, plus
interest, until he/she eventually owns the property free and
clear. Mortgages are also known as "liens against property" or
"claims on property." If the borrower stops paying the
mortgage, the bank can foreclose.
 Stocks
O Stocks (equity) are certificates representing
partial ownership in corporations
O Investors may earn a return by receiving
dividends and capital gains
O Stocks have a higher expected return and
higher risk than long-term debt securities
 Money Market Instruments Outstanding, 1990-1999
1400
1200
1000
800
600
400
200
0
1990 1995 1999

Commercial paper Fed Funds and Repo

U.S. T-bills Banker's accept.