Capital Market Notes

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

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• 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

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• Regulation of the US financial system

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