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Capital Market Notes

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US Capital Markets Class 1 Notes

  • Capital markets – individuals, organizations, and businesses that need capital go and sell financial instruments/contracts to investors
  • Derivative – gives someone the option to buy a stock within a certain time at a certain price
  • Federal Fund Rate – the rate at which commercial banks lend to/borrow from each other in order to maintain the cash they are required to keep at any given time
  • Heavily influenced by the Federal Reserve – the organization that supervises banking
  • The Federal Reserve tells banks how much cash each bank should hold
  • The Federal Reserve can make it easier/harder for banks to get more money by setting the FFR and requiring more/less money in the markets
  • The level of money banks keep doesn’t
  • Quantitative easing – the Department of Treasury??
  • In modern times, most central banks are independent from the government
  • Central bank objectives:
  • Economic growth rate
  • Maintain low inflation rates
  • Maintain the value of currency
  • Purchasing power – when inflation goes up, currency automatically loses some of its value (feeds into import/export market)
  • When inflation is high (price increases), the supply of goods that we’re able to buy decreases
  • Inflation consequences:
  • High risk on investors
  • Have to raise the rates of return to convince investors to buy
  • Money printing is rarely new money; typically reprints for damaged bills
  • If too much money is printed the dollar value decreases
  • Money market contracts are less than one year
  • Brokers give us electronic access to markets
  • Venture capitalist markets – a source of new capital for companies
  • Populated by businesses and venture capital firms (invest in startups)
  • Goldman-Sachs – the firm playing a key role in financial markets
  • Mutual funds and hedge funds are the most important investors in capital markets
  • Mutual funds mitigate risk by investing in hundreds of companies instead of only one

Slide Notes:

  • Overview of the Financial System
  • Function

[pic 1]

  • Ninja loans (no income, no job loans) – led to the financial crisis of 2008
  • Loans can be repackaged to be collateral for other contracts
  • Escalated from 2006-08
  • International institutions were affected as well
  • Programs were created to loan money to financial institutions to borrow from the US government and the Fed since banks were afraid to loan to one another
  • TARP: troubled asset relief program
  • Hedge funds sell shares, just as mutual funds, but only those who are “qualified investors” can buy hedge funds
  • Qualified investors:
  • Have a certain # of millions of $$s and/or
  • Make millions of $$s annually
  • Open market committee votes to maintain its target FFR %
  • The SEC regulates investment banks and their behavior (more powerful than the Federal Reserve)
  • Financial Markets
  • Debt and equity markets
  • Primary and secondary markets
  • Exchanges and over-the-counter markets
  • Money and capital markets
  • Eurobond and eurocurrency markets
  • World stock markets
  • Financial Intermediaries
  • A financial intermediary helps transfer funds by borrowing funds from lender-savers and then using these funds to make loans to borrower-spenders
  • Financial intermediaries can substantially reduce transaction costs because they have developed expertise in lowering them and because their large size allows them to take advantage of economies of scale
  • Create and sell assets with risk characteristics that people are comfortable with, and use the funds they acquire to purchase other assets that may have far more risk
  • Can alleviate the problems created by adverse selection and moral hazard since they have developed the expertise to select and monitor assets

[pic 2]

  • Regulation of the US financial system

[pic 3]

  • Nature of regulation includes the most important objective of the agency



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