INSTRUCTOR MANUAL
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 12
Historical Performance of US Markets
Chapter Summary
This chapter examines the composition of three major sectors of the US financial market and
then proceeds to describe the performance of these sectors from the investor’s perspective.
These sectors are 1) the money market, 2) the bond market, and 3) equity markets. Students
may be familiar with some or all of these terms but not with the specifics of the instruments
and how they trade in the market. The sectors are presented one by one. The complexity of the
financial market can be seen by the specialized language used to describe it, and often there is
more than one term used to describe the same market or instrument. Consequently, the key
terms at the end of the chapter are essential to understanding the chapter.
Lecture Outline
12.1 Overview of US Financial Markets
US financial markets are complex, broad, deep, and dynamic. Understanding the structure of
the financial market helps one understand the various instruments traded and their purposes
to issuers and investors. One way to parse financial markets is by the maturity of the
instruments. Most basically, financial markets can be classified by their maturity: short-,
medium-, and long-term instruments. Short-term instruments make up the money market, and
medium- and long-term instruments constitute the capital market. The money market finances
short-term needs, and the capital market, focused on debt and equity, is used to finance
longer-term capital financing needs. The capital market can be divided further between debt
instruments and equity instruments. Initial public offerings (IPOs) or special purpose acquisition
companies (SPACs) are vehicles for raising new equity. Most trading occurs on organized
physical exchanges or over-the-counter virtual markets, which together are called the
secondary market.
LO 1: Identify the various aspects of the US money markets.
What determines a money market instrument is its maturity, which is one year or less.
Commensurate with the short maturity, money market instruments are normally low risk. The
primary issuers are the US government (T-Bills) and private-sector entities (commercial paper),
especially banks (CDs, federal funds).
LO 2: Characterize government and corporate bond markets.
The bond market can be segmented between the US government market (federal, state, and
local) and the corporate market. There are similarities and differences between the two, as
presented in the chapter. It is important for students to recognize the importance of taxes as a
feature of government bonds, particularly from the investors’ perspective. A corporate bond
investor will pay federal, state, and local taxes on the interest received. By contrast, the owner
of a government or municipal bond will pay only some or perhaps none of these taxes on the
03/21/22 2
Instructor’s Manual for Principles of Finance
03/21/22 1
, Instructor’s Manual for Principles of Finance
Chapter 12
Historical Performance of US Markets
Chapter Summary
This chapter examines the composition of three major sectors of the US financial market and
then proceeds to describe the performance of these sectors from the investor’s perspective.
These sectors are 1) the money market, 2) the bond market, and 3) equity markets. Students
may be familiar with some or all of these terms but not with the specifics of the instruments
and how they trade in the market. The sectors are presented one by one. The complexity of the
financial market can be seen by the specialized language used to describe it, and often there is
more than one term used to describe the same market or instrument. Consequently, the key
terms at the end of the chapter are essential to understanding the chapter.
Lecture Outline
12.1 Overview of US Financial Markets
US financial markets are complex, broad, deep, and dynamic. Understanding the structure of
the financial market helps one understand the various instruments traded and their purposes
to issuers and investors. One way to parse financial markets is by the maturity of the
instruments. Most basically, financial markets can be classified by their maturity: short-,
medium-, and long-term instruments. Short-term instruments make up the money market, and
medium- and long-term instruments constitute the capital market. The money market finances
short-term needs, and the capital market, focused on debt and equity, is used to finance
longer-term capital financing needs. The capital market can be divided further between debt
instruments and equity instruments. Initial public offerings (IPOs) or special purpose acquisition
companies (SPACs) are vehicles for raising new equity. Most trading occurs on organized
physical exchanges or over-the-counter virtual markets, which together are called the
secondary market.
LO 1: Identify the various aspects of the US money markets.
What determines a money market instrument is its maturity, which is one year or less.
Commensurate with the short maturity, money market instruments are normally low risk. The
primary issuers are the US government (T-Bills) and private-sector entities (commercial paper),
especially banks (CDs, federal funds).
LO 2: Characterize government and corporate bond markets.
The bond market can be segmented between the US government market (federal, state, and
local) and the corporate market. There are similarities and differences between the two, as
presented in the chapter. It is important for students to recognize the importance of taxes as a
feature of government bonds, particularly from the investors’ perspective. A corporate bond
investor will pay federal, state, and local taxes on the interest received. By contrast, the owner
of a government or municipal bond will pay only some or perhaps none of these taxes on the
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