金融专业英语课件PartⅠFinancialMark.ppt

1、Part Financial Markets,Chapter 1 Functions of Financial MarketsChapter 2 Money MarketsChapter 3 Capital MarketsChapter 4 Foreign Exchange Markets,Chapter 1Functions of Financial Markets,1.1 Significance The word “finance” signifies capital in monetary form, that is, in the form of funds lent or borr

2、owed, normally for capital purposes, through financial markets or financial institutions. When finance goes international, it is then an international finance. What is a financial market? It is a place where financial transactions take place. Financial markets facilitate the lending of funds from sa

3、vers to those who wish to undertake investments. Those that wish to borrow to finance investment projects sell financial instruments to savers.,When an investor purchases the securities issued by ultimate borrowers (those who use the funds to invest in real assets), capital market operations for equ

4、ities, bonds would fall largely into this category. When an investor chooses to invest in the obligations of financial intermediaries, which in turn lend the funds to those who invest in real assets, they are operations in money market for term deposits and loans, interbank transactions of such natu

5、re. The primary distinction between the two channels is that, in the first case, i.e. direct financing, the investor is faced directly with the credit risk of the issuer, while in the second case, i.e. financing through financial intermediation, a financial institution, such as a bank, interjects it

6、self between users and providers of funds. Any analysis of the sector of money market dominated by financial intermediaries must be very much concerned with these financial institutions themselves (their policies, financial conditions and official regulatory environment) in addition to those factors

7、 governing the suppliers and users of funds. International financial transactions include purchases and sales of foreign currency, securities, gold bullion, and lending and borrowing.,Foreign exchange marker deals with the exchanges of different means of payment. These exchanges are necessary for in

8、ternational capital flows. As the relative values among different currencies (the exchange rates) will fluctuate according to economic and political circumstances of the currencies of the relative countries, international investors or financiers face exchange risks. To this end, foreign exchange mar

9、kets provide services, such as forward transactions and foreign currency futures to eliminate such risks. 1.2 Functions Apart from borrowing from banks, a firm or an individual can obtain funds in a financial market in two ways. The most common method is to issue a debt instrument, such as a bond or

10、 a mortgage, which is a contractual agreement by the borrower to pay the holder of the instrument fixed amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made. The maturity of a debt instrument is short-term if its matu

11、rity is less than a year and long-term if its maturity is ten years or long. Debt instruments with a maturity between one and ten years are said to be intermediate-term.,The second method of raising funds is by issuing equities, such as common stock, which are claim to share in the net income (incom

12、e after expenses and taxes) and the assets of a business. Equities usually earn periodic payment (dividends) and are considered long-term securities because they have no maturity date. A primary market is a financial market in which new issues of a security, such as a bond or a stock, are sold to in

13、itial buyers by the corporation or government agency borrowing the funds. A secondary market is a financial market in which securities that have been previously issued (and are thus secondhand) can be resold. The primary market for securities is not well known to the public because the selling of se

14、curities to initial buyers take place behind doors. An important financial instrument that assists in the initial sale of securities in the primary market is the investment bank. It does this by underwriting securities, that is, it guarantees a price for a corporations securities and then sells them

15、 to the public.,When an individual buys a security in the secondary market, the person who sold the security receives money in exchange for the security, but the corporation that issued the security acquires no new funds. A corporation acquires new funds only when its security are first sold in the

16、primary market. Nonetheless, the secondary market serves two important functions. First, financial instruments are more liquid. The increased liquidity of the instruments makes them more desirable and thus easier for the issuing firm to sell in the primary market. Second, they determine the price of

17、 the security that the issuing firm sells in the primary market. The firms that buy securities in the primary market will pay the issuing corporation no more than the price that they think the secondary market will set for this security. The higher the securitys price in the secondary market, the hi

18、gher the price that the issuing firm will receive for a security in the primary market and hence the greater the amount of capital it can raise. Conditions in the secondary market are therefore the most relevant to corporations issuing securities. It is for this reason that studies dealing with fina

19、ncial market focus the behavior of secondary markets rather than primary markets.,Another way of distinguishing market is on the basis of the maturity of the securities traded in each market. The money market is a financial market in which only short-term debt instruments (maturity of less one year)

20、 are traded; the capital market is the market in which long-term debt (maturity of one year or longer) and equity instruments are traded. Money market securities are usually more widely traded than long-term securities and so they are more liquid. In addition, short-term securities have smaller fluc

21、tuations in prices than long-term securities, making them the safer investment. As a result, corporations and banks actively use this market to earn interest on surplus funds that they expect to have only temporarily. Capital market securities, such as stocks and long-term bonds, are often held by i

22、ndividuals and financial intermediaries such as insurance companies and pension funds, which have little uncertainty about the amount of funds they will have available in the future.,Chapter 2 Money Markets,2.1 Characteristics Money market instruments, which are discussed in detail later in this cha

23、pter, have three basic characteristics in common: They are usually sold in large denominations. They have low default risk. They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days. The well-developed secondary market for money market

24、 instruments makes the money market an ideal place for a firm or financial institution to “warehouse” surplus funds for short periods of time until they are needed. Similarly, the money market provide a low-cost source of the funds to firms, the government, and intermediaries that need a short-term

25、infusion of funds.,Most investors in the money market who are temporarily warehousing funds are ordinarily not trying to earn unusually high returns on their money market funds. Rather, they use the money market as an interim investment that provides a higher return than holding cash or money in ban

26、ks. They may feel that market conditions are not right to warrant the purchase of additional stock, or they may expect interest rates to rise and hence not want to purchase bonds. Idle cash represents an opportunity cost in terms of lost interest income. The money markets provide means to invest idl

27、e funds and to reduce this opportunity cost. At the same time, the sellers of money market instruments find that the money market provide a low-cost source of temporary funds. Why do corporations and the government sometimes need to get their hands on funds quickly? The primary reason is that cash i

28、nflows and outflows are rarely synchronized. The money market provides an efficient, low-cost way of solving these problems.,2.2 Participants of Money Market 1. The Government In money market, the government is unique because it is always a supplier and demander of money market funds. The U.S. Treas

29、ury is the largest of all money market borrowers worldwide. It issues Treasury bills (often called T-bills) and other securities that are popular with other money market participants. Short-term issues enable the government to raise the maturing issues. 2. The Central Bank The Central Bank is the Tr

30、easurys agent for the distribution of government securities. The central bank holds vast quantities of Treasury securities that it sells if it believes that the money supply should be reduced. Similarly, the central bank purchases Treasury securities if it believes that the money supply should be ex

31、panded. The central banks responsibility for the money supply makes it the single most influential participant in the money market.,3. Commercial Banks Commercial banks hold a larger percentage of government securities than any other group of financial institutions. This is partly because of regulat

32、ions that limit the investment opportunities available to banks. Specifically, banks are prohibited from owning risky securities, such as stocks or corporate bonds. There are no restrictions against holding Treasury securities because of their low risk and high liquidity. Banks are also the major is

33、suer of negotiable certificates of deposit (CDs), bankers acceptances, and repurchase agreements. In addition to money market securities to help manage their own liquidity, many banks trade on behalf of their customers. Not all commercial banks deal for their customers in the secondary money market.

34、 The ones that do are among the largest in the country and are often referred to as money center banks.,4. Businesses Many businesses buy and sell securities in the money market. Such activity is usually limited to major corporations because of the large transactions involved. As discussed earlier,

35、the money market is used extensively by businesses both to warehouse surplus funds and to raise short-term funds. 5. Investment Companies Large diversified brokerage firms are active in money markets. The primary function of these dealers is to “make a market” for money market securities by maintain

36、ing an inventory from which to buy or sell. These firms are very important to the liquidity of the money market because they help ensure that both buyers and sellers can readily market their securities in the primary market as well as in the secondary market.,6. Insurance Companies Property and casu

37、alty insurance companies must maintain liquidity because of their unpredictable need for funds. To meet this demand, the insurance companies sell some of their money market securities to raise cash. As to the life insurance companies, because their obligations are reasonably predictable, large money

38、 market security holdings are unnecessary. However, it is a common practice that an individual can have his/her money invested in the money market through the agent department of banks and investment companies, to earn a higher interest rate than otherwise deposited in the banks. 2.3 Instruments of

39、Money Market Securities with maturities within one year are referred to as money market instruments. A variety of money market instruments are available to meet the diverse needs of market participants.,1. Treasury Bills To financial the national debt, the government issues a variety of debt securit

40、ies. The most widely held liquid security is the Treasury bill, which is commonly issued by the ministry of finance. However, some Treasury bills, like the Treasury bill of the U. S. government, do not actually pay interest. Instead they are issued at a discount from par (their value at maturity). T

41、he investors yield comes from the increase in the value of the security between the time it was purchased and the time it matures. 2. Inter-bank Markets Inter-bank markets are money markets in which short-term funds transferred (loaned or borrowed) between financial institutions, usually for a perio

42、d of one day, that is, they are usually overnight investment. The interest rate for borrowing these funds is close to, but always slightly higher than rate that is available from the central bank. 3. Commercial Paper Commercial paper is a short term debt instrument issued only by well-known, larger

43、and creditworthy corporations.,It is typically unsecured, and the interest rate placed on it reflects the firms level of risk.It is normally issued to provide liquidity or finance a firms investment and accounts receivable. The issuance of commercial paper is an alternative to short-term bank loan.

44、4. NCDs or CDs A negotiable certificate of deposit is a bank-issued security that documents a deposit and specifies the interest rate and the maturity date. It was firstly issued in 1961 by Citibank. Because a maturity date is specified, a CD is a term security as opposed to a demand deposit. Term s

45、ecurities have a specified maturity date while demand deposits can be withdrawn at any time. A CD is also called a bearer instrument. This means that whoever holds the instrument at maturity receives the principal and interest. The CD can be bought and sold until maturity. 5. Banks Acceptances A ban

46、ks acceptance is an order to pay a specified amount of money to the bearer on a given date. Bankers acceptances have been in use since the twelfth century, and are commonly used for international trade transactions.,Chapter 3 Capital Markets,3.1 Purpose and Participants Firms that issue capital mark

47、et securities and the investors who buy them have very different motivations than they have when they operate in the money market. Firms and individuals use the money market primarily to warehouse funds for short periods of time until a more important need or a more productive use for the funds aris

48、es. By contrast, firms and individuals use the capital market for long-term investments. The capital markets provide an alternative to investment in assets such as real estate or gold. Meanwhile, the primary reason that individuals and firms choose to borrow long-term funds is to reduce the risk tha

49、t interest rates will rise before they pay off their debt. This reduction in risk comes at a cost. However, Most long-term interest rates are higher than short-term rates due to risk premiums. Despite the need to pay higher interest rates to borrow in the capital markets, these markets remain very a

50、ctive.,The primary issuers of capital market securities are governments and corporations. However, governments never issue stocks. Corporations both issue bonds and stocks. One of the most difficult decisions a firm faces can be whether it should finance its growth with debt or equity. The distribut

51、ion of a firms capital between debt and equity is its capital structure. 3.2 Trading in the Capital Market Capital market trading occurs in either the primary market or the secondary market. Investment funds, corporations, and individual investors can all purchase securities offered in the primary m

52、arket, where new issues of stocks and bonds are introduced. When firms sell securities for the first time, the issue is an initial public offering (IPO). The capital markets have well-developed secondary market. A secondary market is where the sale of previously issued securities takes place, and it

53、 is important because most investors plan to sell long-term bonds before they reach maturity and eventually to sell their holdings of stocks as well.,1. Bonds The capital markets are where securities with original maturities of greater than one year trade. Capital market securities fall into three c

54、ategories: bonds, stocks, and mortgages. In this section, we focus on bonds. Bonds are securities that represent a debt owed by the issuer to the investor. Bonds obligate the issuer to pay a specified amount at a given date. Treasury Bonds The government issues notes and bonds to finance the nationa

55、l debt. The difference between notes and bonds is that notes have a original maturity of 1 to 10 years while bonds have a original maturity of 10 to 30 years. (Recall from last chapter that Treasury bills mature in less than 1 year.) Government notes and bonds are free of default risk because the go

56、vernment can always print money to pay off debt if necessary.,Corporate Bonds When large corporations need to borrow funds for long periods of time, they may issue bonds. The bond indenture is a contract that states the lenders rights and privileges and the borrowers obligations. Any collateral offe

57、red as security to the bondholders will also be described in the indenture. The degree of risk varies widely among issues because the risk of default depends on the companys health, which can be affected by a number of variables. The interest rate on corporate bonds varies with the level of risk. Bo

58、nds issued by a company with high credit rating has lower interest rates than those with poor ratings. 2. Stocks Shares of stock in the firm represent ownership. A stockholder owns a percentage interest in a firm consistent with the percentage of outstanding stock held. The ownership is in contrast

59、to a bondholder, who holds no ownership interest but is rather a creditor of the firm.,Investors can earn a return from stocks in one of two years. Either the price of the stock rises over time, or the firm pays the stockholder dividends. Frequently, investors earn a return from both sources. Stocks are more risky than bonds because stockholders have a lower priority than bondholders when the firm is in trouble. The returns to investors are less assured because dividends can be easily changed, and stock price increases are not guaranteed. Despite these risks, it is possible to make a great d