Midterm will be split into two exams: 1 hour each
In-class quizzes will be research-based
Textbook notes:
PART 1: WHY STUDY FINANCIAL MARKETS?
- A security (financial instrument) is a claim on the issuer's future income or assets.
- A bond is a debt security that promises to make periodic payments over a specific period of time.
- Debt and bond markets enable corporations and governments to borrow to finance their
activities and determine interest rates.
An interest rate is the cost of borrowing or the price paid for rental funds. (mortgage interest rates, car
loan rates, and bond rates)
- On a personal level, High interest rates discourage consumers from buying and encourage them to
save and earn interest income.
- On a general level, interest rates impact the economy's health because they affect the consumer's
willingness to spend and business investment decisions.
- Different interest rates tend to move in unison, but do often differ substantially. (Three-month
treasury bills tend to fluctuate more and be lower, while Baa corporate bonds are higher on
average)
A common stock represents a share of ownership in a corporation. A security on the earnings and assets
of the corporation.
- The stock market, where people can trade these stocks, is extremely volatile and can either make
a big win or a big loss for traders.
- Black Monday, Oct 19, 1987, was the worst one-day drop in history, with the Dow falling by
22%. It became bullish, but things like the collapse of the high-tech bubble in 2000 or the COVID
pandemic created crashes.
- The price of shares affects the funds raised by selling newly issued stock to finance investment
spending for businesses.
The foreign exchange market is where currency is converted to transfer funds from one country to
another.
- The price of one country’s currency affects or determines the others.
- A change in the exchange rate of currency has a direct effect on consumers because it affects the
cost of imports.
- When the value of the dollar drops, Americans decrease their purchases of foreign goods and
increase their consumption of domestic goods.
- A strong dollar means U.S. goods exported abroad will cost more in foreign countries, and fewer
foreigners will buy them.
Structure of the Financial System
, - Comprises types of private-sector financial institutions like banks, insurance companies, mutual
funds, finance companies, and investment banks, all regulated by the government.
- Companies are lent to by financial intermediaries, such as commercial banks, savings and loan
associations, credit unions, insurance companies, funds, etc.
Financial Crises
- Characterized by sharp declines in asset prices and the failures of many financial and
non-financial firms created by major disruptions in financial markets.
The most important financial institution is the Central Bank, the government agency responsible for the
conduct of monetary policy. (Federal Reserve System (AKA the FEDs), in the US)
- Monetary Policy involves the management of interest rates and the quantity of money (money
supply)
- Banks are institutions that accept deposits and make loans.
CHAPTER 2: OVERVIEW OF THE FINANCIAL SYSTEM
Function of financial markets:
- Channels funds from households, firms, and governments that have surplus funds by spending
less than their income to those that have a shortage of funds because they wish to spend more
than their income. (Lender-savers & borrower-spenders).
- Lender-savers are primarily households, but can sometimes be the other three.
- Borrower-spenders tend to be businesses and the government (FED GOV), but can be households
or foreigners to finance their cars, houses, etc.
- In direct finance, borrowers borrow funds directly from lenders by selling them securities.
(liabilities for the individual or firm that sells them)
, - They allow funds to move from people who lack productive investment opportunities to people
who need them.
- It creates an allocation of capital contributing to higher production and efficiency for the overall
economy.
Debt and Equity Markets
- Debt instruments( bonds or a mortgage) are a contractual agreement by the borrower to pay the
holder a fixed amount at regular intervals until the maturity date.
- The maturity is short-term(>1 yr), long-term(10< yrs), & intermediate-term(1-10 yrs)
- Raising funds is by issuing equities (claims to share in the net income and assets of a business)
- Equities make periodic payments (dividends) to the holders and have no maturity date.
- Owning stock means you own a portion of the firm and can vote on issues important to the firm
and elect its directors
- Residual claimant: the corporation must pay all of its debt holders before equity holders
- Benefit directly from any increases in the corporation’s profitability because of ownership rights.
Debt holders' payments are fixed.
Primary & Secondary Markets
- The primary market is where new issues of a security are sold to initial buyers by the corporation
or government agency borrowing the funds.
- The secondary market is where securities can be resold that have been previously issued. (New
York Stock Exchange & NASDAQ)
- Brokers are agents who match buyers with sellers of securities
- Dealers link buyers and sellers by buying and selling securities at stated prices.
- Corporations acquire no new funds.
- Makes it easier and quicker to sell and raise cash, making it more liquid, and determines the price
of securities in the primary market.
Exchanges and Over-the-Counter Market (Secondary Markets)
- Exchanges are where buyers and sellers of securities meet in one location to conduct trades (New
York and American Stock Exchanges)
- The OTC market is when there are dealers at different locations who have security inventory
ready to buy and sell to anyone willing to accept their prices.
Money & Capital Markets (Based on Securities maturity traded)
- The Money Market is where only short-term debt instruments are traded
- They have smaller fluctuations in prices, making them safer. Corporations and banks use
the market to earn interest on surplus funds owned temporarily.
- The capital Market trades long-term debt and equity instruments (one year or older)
- Held by financial intermediaries (insurance companies & pension funds) that have little
uncertainty about the amount of funds they will have in the future.
In-class quizzes will be research-based
Textbook notes:
PART 1: WHY STUDY FINANCIAL MARKETS?
- A security (financial instrument) is a claim on the issuer's future income or assets.
- A bond is a debt security that promises to make periodic payments over a specific period of time.
- Debt and bond markets enable corporations and governments to borrow to finance their
activities and determine interest rates.
An interest rate is the cost of borrowing or the price paid for rental funds. (mortgage interest rates, car
loan rates, and bond rates)
- On a personal level, High interest rates discourage consumers from buying and encourage them to
save and earn interest income.
- On a general level, interest rates impact the economy's health because they affect the consumer's
willingness to spend and business investment decisions.
- Different interest rates tend to move in unison, but do often differ substantially. (Three-month
treasury bills tend to fluctuate more and be lower, while Baa corporate bonds are higher on
average)
A common stock represents a share of ownership in a corporation. A security on the earnings and assets
of the corporation.
- The stock market, where people can trade these stocks, is extremely volatile and can either make
a big win or a big loss for traders.
- Black Monday, Oct 19, 1987, was the worst one-day drop in history, with the Dow falling by
22%. It became bullish, but things like the collapse of the high-tech bubble in 2000 or the COVID
pandemic created crashes.
- The price of shares affects the funds raised by selling newly issued stock to finance investment
spending for businesses.
The foreign exchange market is where currency is converted to transfer funds from one country to
another.
- The price of one country’s currency affects or determines the others.
- A change in the exchange rate of currency has a direct effect on consumers because it affects the
cost of imports.
- When the value of the dollar drops, Americans decrease their purchases of foreign goods and
increase their consumption of domestic goods.
- A strong dollar means U.S. goods exported abroad will cost more in foreign countries, and fewer
foreigners will buy them.
Structure of the Financial System
, - Comprises types of private-sector financial institutions like banks, insurance companies, mutual
funds, finance companies, and investment banks, all regulated by the government.
- Companies are lent to by financial intermediaries, such as commercial banks, savings and loan
associations, credit unions, insurance companies, funds, etc.
Financial Crises
- Characterized by sharp declines in asset prices and the failures of many financial and
non-financial firms created by major disruptions in financial markets.
The most important financial institution is the Central Bank, the government agency responsible for the
conduct of monetary policy. (Federal Reserve System (AKA the FEDs), in the US)
- Monetary Policy involves the management of interest rates and the quantity of money (money
supply)
- Banks are institutions that accept deposits and make loans.
CHAPTER 2: OVERVIEW OF THE FINANCIAL SYSTEM
Function of financial markets:
- Channels funds from households, firms, and governments that have surplus funds by spending
less than their income to those that have a shortage of funds because they wish to spend more
than their income. (Lender-savers & borrower-spenders).
- Lender-savers are primarily households, but can sometimes be the other three.
- Borrower-spenders tend to be businesses and the government (FED GOV), but can be households
or foreigners to finance their cars, houses, etc.
- In direct finance, borrowers borrow funds directly from lenders by selling them securities.
(liabilities for the individual or firm that sells them)
, - They allow funds to move from people who lack productive investment opportunities to people
who need them.
- It creates an allocation of capital contributing to higher production and efficiency for the overall
economy.
Debt and Equity Markets
- Debt instruments( bonds or a mortgage) are a contractual agreement by the borrower to pay the
holder a fixed amount at regular intervals until the maturity date.
- The maturity is short-term(>1 yr), long-term(10< yrs), & intermediate-term(1-10 yrs)
- Raising funds is by issuing equities (claims to share in the net income and assets of a business)
- Equities make periodic payments (dividends) to the holders and have no maturity date.
- Owning stock means you own a portion of the firm and can vote on issues important to the firm
and elect its directors
- Residual claimant: the corporation must pay all of its debt holders before equity holders
- Benefit directly from any increases in the corporation’s profitability because of ownership rights.
Debt holders' payments are fixed.
Primary & Secondary Markets
- The primary market is where new issues of a security are sold to initial buyers by the corporation
or government agency borrowing the funds.
- The secondary market is where securities can be resold that have been previously issued. (New
York Stock Exchange & NASDAQ)
- Brokers are agents who match buyers with sellers of securities
- Dealers link buyers and sellers by buying and selling securities at stated prices.
- Corporations acquire no new funds.
- Makes it easier and quicker to sell and raise cash, making it more liquid, and determines the price
of securities in the primary market.
Exchanges and Over-the-Counter Market (Secondary Markets)
- Exchanges are where buyers and sellers of securities meet in one location to conduct trades (New
York and American Stock Exchanges)
- The OTC market is when there are dealers at different locations who have security inventory
ready to buy and sell to anyone willing to accept their prices.
Money & Capital Markets (Based on Securities maturity traded)
- The Money Market is where only short-term debt instruments are traded
- They have smaller fluctuations in prices, making them safer. Corporations and banks use
the market to earn interest on surplus funds owned temporarily.
- The capital Market trades long-term debt and equity instruments (one year or older)
- Held by financial intermediaries (insurance companies & pension funds) that have little
uncertainty about the amount of funds they will have in the future.
