1、Chapter 2 Financial Instruments, Markets and Intermediaries,Chapter 2: Financial Instruments, Markets and Intermediaries,Part 1: Financial System,Chapter 2: Financial Instruments, Markets and Intermediaries,Chapter 2 Financial Instruments, Markets and Intermediaries,Chapter 2: Financial Instruments,
2、 Markets and Intermediaries,The Financial System,A countrys financial system is the system that allows the transfer of money between savers (and investors) and borrowers 6 components of the financial system: The Lenders 借出方The borrowers 借入方Financial markets 金融市场Financial intermediaries 金融中介机构Financi
3、al market regulators 金融市场管理者Financial instruments 金融产品,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Financial Market Regulators,The Financial System,Financial Markets,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Market Regulators,Financial
4、Market Regulators,Financial Market Regulators,Funds,Financial assets,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Instruments,Financial assets金融资产:an asset that derives value because of a contractual claim基于合同的权益. Stocks股票, bonds债券, bank deposits银行存款, and the like are all e
5、xamples of financial assets. http:/ Financial instruments金融工具:any contract representing a financial asset.used interchangeably with financial assetsFor every nancial instrument, there is a minimum of two parties. The issuer: the party that borrows moneyThe investor: the party that lends money,Chapte
6、r 2: Financial Instruments, Markets and Intermediaries,Financial Instruments,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Instruments,Debt instruments债务工具: also called debts,Borrowed amount +interest,Borrowed amount,issuer needs to repay amount borrowed (principal本金) intere
7、st (利息)amounts paid back are fixed, thus debt instruments are also called fixed income instruments.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Instruments,Equity instruments: 权益工具,dividends,Invested amount,amount of dividends to investor is not fixed.dividends are paid ba
8、sed on earnings and are paid after creditors are paid.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Instruments,Hybrid instruments: 混合工具instruments with attributes of both debt and equity instruments.example: preferred stock 优先股definition：investors in this security are only
9、 entitled to receive a xed contractual amount and payment to investors is only made after obligations to the companys creditors are satisedquestion：what makes preferred stock look like debt and what equity?,Chapter 2 Financial Instruments, Markets and Intermediaries,Chapter 2: Financial Instruments,
10、 Markets and Intermediaries,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Different ways to look at financial markets:,In _ market, nancial instruments are resold among investors. A：Primary B: Secondary Issuers do not raise new capital in the _ market and, therefore,
11、 the issuer of the security does not receive proceeds from the sale. A：Primary B: Secondary In _ market, Trading takes place among investors. A _ market is where companies sell new issues and thus raise new capital in this market.A：Primary B: Secondary When an issuer rst issues a nancial instrument,
12、 it is sold in the _ market.A：Primary B: Secondary,Financial Markets,Types of Financial Markets: （by location),Financial Markets,Also called national market Made up of two parts: domestic and foreign marketDomestic market: where securites issued by domestic issuers (issuer domiciled in the country)
13、are trade.Foreign market: where securities issued by foreign issuers (issuer not domiciled in the country) are sold and traded.,also called the international market, the offshore market At issuance the securities are offered simultaneously to investors in a number of foreign countries.,Chapter 2: Fi
14、nancial Instruments, Markets and Intermediaries,Financial Markets,Types of Financial Markets: (by maturity),Financial Markets,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Money Market Instruments: 1) Treasury Bills: 国债popularly referred to as T-billsare short-term s
15、ecurities issued by the U.S. governmentthey have original maturities of four weeks, three months, or six months.T-bills carry no stated interest rate. Instead, the government sells these securities on a discounted basis. This means that the holder of a T-bill realizes a return by buying these securi
16、ties for less than the maturity value and then receiving the maturity value at maturity.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Money Market Instruments: 2) Commercial paper 商业票据a promissory notea written promise to payissued by a large, creditworthy corporati
17、on. This nancial instrument has an original maturity that typically ranges from one day to 270 days. The issuers of most commercial paper back up the paper with bank lines of credit, which means that a bank is standing by ready to pay the obligation if the issuer is unable to.Commercial paper may be
18、 either interest bearing or sold on a discounted basis.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Money Market Instruments: 3) Certicates of deposit (CDs) 存款单written promises by a bank to pay a depositor. Negotiable CDs typically have original maturities between
19、one month and one year and have denominations of $100,000 or more. Investors pay face value for negotiable CDs, and receive a xed rate of interest on the CD. On the maturity date, the issuer repays the principal, plus interest.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial M
20、arkets,Money Market Instruments: 4) repurchase agreement: 回购协议the lender will loan a certain amount of funds to an entity in need of funds using financial instruments (such as treasury securities, money market securities and bonds) as collateral (担保物）. Also called a repo because it species that the
21、borrower sells the bonds to the lender in exchange for proceeds and at some specied future date the borrower repurchases the bonds from the lender at a specied price. The specied price, called the repurchase price, is higher than the price at which the bonds are sold because it embodies the interest
22、 cost that the lender is charging the borrower.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Types of Financial Markets: (by maturity),Financial Markets,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Capital market securities: Equity：
23、 Those that represent shares of ownership interest, also called equity, issued by corporations. - Equity includes common stock and preferred stock.Debt： those that represent indebtedness, issued by corporations and by the governments.- Major debt securities: (1) bonds, (2) notes etc.- A note is a de
24、bt security with a maturity at issuance of 10 years or less （2，3 or 5 years terms); pays interest- A bond is a debt security with a maturity greater than 10 years; pays interest(As mentioned before, bills are less than a year and sold at discount),Chapter 2: Financial Instruments, Markets and Interm
25、ediaries,Financial Markets,Financial Markets,Types of Financial Market: (first issue or resell),Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,The Primary MarketWhen an issuer rst issues a nancial instrument, it is sold in the primary market.Companies sell new issues
26、and thus raise new capital in this market.,Chapter 2: Financial Instruments, Markets and Intermediaries,The primary market consists of:a public market 公设市场 a private placement market. 私募市场The Public Market:where securities of a company is offered to the public public offering. 上市The public offering
27、of new issues typically involves the use of an investment bank. The process of investment banks bringing these securities to the public markets is underwriting. private placement 私募Non-public offering.,Financial Markets,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,F
28、inancial Markets,Types of Financial Market: (first issue or resell),Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Secondary Market:A secondary market is one in which nancial instruments are resold among investors. Issuers do not raise new capital in the secondary mar
29、ket and, therefore, the issuer of the security does not receive proceeds from the sale. Trading takes place among investors,Chapter 2: Financial Instruments, Markets and Intermediaries,Secondary Market:We can categorize secondary markets based on the way in which they trade, referred to as market st
30、ructure:order driven market quote driven markethybrid market: a market combines the features of both quote driven and order driven markets. Ex: NYSE and Nasdaq,Financial Markets,Chapter 2: Financial Instruments, Markets and Intermediaries,Secondary Marketorder-driven market: A financial market where
31、 all buyers and sellers display the prices at which they wish to buy or sell a particular security, as well as the amounts of the security. http:/ The biggest advantage of an order driven market is transparency, since all the orders are displayed for investors who wish to access this information. le
32、ss liquid as compared to a quote driven market, since order execution is not guaranteed in an order driven market,Chapter 2: Financial Instruments, Markets and Intermediaries,Secondary Marketquote-driven Market: A quote driven market only displays the bid and ask offers of designated market makers （
33、证券市场制定的买卖中间商）, individual orders (price and quantity) are not displayed.major advantage is the liquidity it presents as the market makers are required to meet their quoted prices either buying or selling. The major drawback it does not show transparency in the market.Market makers provide a bid quot
34、e (to buy) and an ask quote (to sell), and realize revenues from the spread between these two quotes.,Bid 买入价 （=offer price）：the price and quantity the buyer is willing to buy Ask 卖出价：the price and quantity the seller is willing to sell Spread 价差: The difference between the bid and the ask price,Cha
35、pter 2: Financial Instruments, Markets and Intermediaries,Secondary Market:We can also classify secondary markets in terms of:organized exchanges over-the-counter markets.,Chapter 2: Financial Instruments, Markets and Intermediaries,Secondary Market:Organized Exchanges 有组织的证券交易所 :central trading loc
36、ations where nancial instruments trade. The nancial instruments traded on the exchange must be listed (accepted for trading) by the organized exchange. In the case of common stock, the major organized exchange is the New York Stock Exchange (NYSE). In the United States, the SEC (Securities and Excha
37、nge Commission) must approve the market to qualify it as an exchange.,Chapter 2: Financial Instruments, Markets and Intermediaries,Secondary Market:over-the-counter market (OTC market) 场外市场；柜台市场no centralized physical locationmarket participants trade with one another through various communication m
38、odes such as the telephone, email and proprietary electronic trading systems. is where unlisted nancial instruments trade. For common stock, there are listed and unlisted stocks. most bonds (although some are listed), Loans and foreign exchange are traded in OTC markets. In an OTC market, dealers ac
39、t as market makers by quoting prices at which they will buy and sell a security or currency. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was effected. OTC markets are therefore less transparent than exchanges and
40、are also subject to fewer regulations.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Market,Financial Markets,Type of financial market: (by transaction time),Chapter 2: Financial Instruments, Markets and Intermediaries,Cash Market: Also called the “spot market”Immediate tran
41、saction of financial instrumentsDerivative Market：derivatives are contracts that specify a transaction that will happen in the future.the values of a derivative derive from it underlying asset.the underlying asset can be stocks, bonds, commodities, currencies etc.,Financial Markets,Chapter 2: Financ
42、ial Instruments, Markets and Intermediaries,Financial Markets,Why do we need financial markets?,3 major economic functions,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Why do we need financial markets?1) Price discovery: the interactions of buyers and sellers in a n
43、ancial market determine the price of the traded asset.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Why do we need financial markets?2) Liquidity: Financial markets provide a forum for investors to sell a nancial instrument and therefore offer investors liquidity. L
44、iquidity is the presence of buyers and sellers ready to trade. The more the number of buyers and sellers, the higher the liquidity.,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial Markets,Why do we need financial markets?3) Reduced transaction costs: Costs associated with tran
45、sacting are: search costs and information costs.Search costs in turn fall into two categories: explicit costs and implicit costs.Explicit costs include expenses to advertise ones intention to sell or purchase a nancial instrument. Implicit costs include the value of time spent in locating a counterp
46、artyInformation costs are costs associated with assessing a nancial instruments investment attributes.,Chapter 2: Financial Instruments, Markets and Intermediaries,Chapter 2 Financial Instruments, Markets and Intermediaries,Chapter 2: Financial Instruments, Markets and Intermediaries,Financial inter
47、mediaries include：depository institutions 存款机构 e.g. commercial banksinvestment banks 投资银行insurance companies non-deposit nance companies 非存款金融公司regulated investment companies 受监管的投资公司 e.g. mutual fund,Financial Intermediaries,Chapter 2: Financial Instruments, Markets and Intermediaries,Example 1: A
48、Commercial Bank 商业银行A commercial bank is a type of depository institution. Everyone knows that a bank accepts deposits from individuals, corporations, and governments. These depositors are the lenders to the commercial bank. The funds received by the commercial bank become the liability of the comme
49、rcial bank. In turn, as explained later, a bank lends these funds by either making loans or buying securities. The loans and securities become the assets of the commercial bank.,Financial Intermediaries,Chapter 2: Financial Instruments, Markets and Intermediaries,Example 2: A Mutual Fund 共同基金A mutua
50、l fund is one type of regulated investment company. A mutual fund accepts funds from investors who in exchange receive mutual fund shares. In turn, the mutual fund invests those funds in a portfolio of nancial instruments. The mutual fund shares represent an equity interest in the portfolio of nancial instruments and the nancial instruments are the assets of the mutual fund.,
