7/29/2019 In the Financial Market There Are Four General Classifications of Securities

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In the financial market there are four general classifications of securities, they are

money markets, bonds, equities, and derivatives. All of which have been affected by

the financial crisis and economic events derived of recent years.

The money market is a subsector of the debt market which consists of very short-

term debt securities that are highly marketable. Certificates of Deposit or CDs as wecall it, is a type of money market instrument. It is a time deposit with a bank where

the bank pays interest and principal to the depositor at the end of the fixed term.

The bond market is composed of longer-term borrowing or debt instruments; this

market includes Treasury notes and bonds, corporate bonds, municipal bonds,

mortgage securities, and federal agency debt. The mortgage backed securities or

pass throughs allow the mortgage originator to service the loan, collecting principal

and interest payments, and passing payments along to the mortgage purchase;

hence thepass through name. Investors interested in this form of bond market

instrument can buy and sell securitized mortgages like any other bond.

Equity securities, better known as commons stocks, represent ownership shares in a

corporation. Common stocks have two important characteristics as an investment;

its residual claim and limited liability features. The residual claim feature allows

shareholders to receive residuals as cash dividends or reinvest it in the business in

order to increase the shares value. Limited liability protects shareholders as they

are not personally liable for the firms obligations.

Derivative markets features futures and options. Futures and options provide

payoffs that are dependent upon values of other assets. In discussing options, there

are two types; call and put options. Call options allows its holder the right to

purchase an asset for a specified price, on or before a specified expiration date,while put options are its exact opposite.

Over the last several years, the four segments of securities and the values of their

security instruments have all been affected by the financial crisis and economic

events. In particular, the subprime mortgage crisis has affected these segments

either directly or indirectly. As mortgage delinquencies began to rise while

mortgage backed securities began to decline and lost most of their value. Large

investment banks trading in mortgage backed securities saw a loss in earnings;

such as Lehman Brothers. With the housing bubble bursting, the economy began to

crumble, interest rates would fluctuate and inflation occurs, affecting each segment.

The stock market also began to crash and affected the value of stocks and equitysecurities. As of late, though not what it once was the economy has been on the rise

with banks making record profits and the government earning money from its

bailouts; as stated in the latest Time magazine article. However, the article also

advises that precautions need to be taken and that five years after the market

crashed, it can very well happen all over again as banks are now larger than before

and finance has become a greater percentage of the U.S. economy.

7/29/2019 In the Financial Market There Are Four General Classifications of Securities

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I would like to present to you the article titled, Wall Street Gets A Taste Of The

Next Financial Crash by Panos Mourdoukoutas. This article relates to what we are

learning this week in class as it pertains to not only the stock market, common

stocks, commodities, but also to other securities such as Treasury bonds. Thisarticle discusses how assets during the 2008 financial crisis would decline

simultaneously across the board in almost every asset category and that is why the

2008 financial crisis was so severe. Normally when the economy is stable, different

assets climb and decline in different directions; however, during the span of 2001-

2007, stocks, commodities, and T-bonds unconventionally rallied in the same

direction and to date they continue to move in the same path. Should we continue

to see such shared movement, we can expect another market crash in the near

future.

The following article, What Is a Mortgage-Backed Security? by Chris Wilson on

Slate.com is an interesting article Ive stumbled upon, as it not only explains what a

mortgage-backed security is, but how mortgage-backed securities essentially

destroyed securities firm Bear Stearns. Mortgage-backed securities are similar to

bonds, they are instruments of securities issued by the government and

corporations that promise to pay fixed amounts of interest for a defined period of

time, as described in the article. They are generally a safe investment when the

housing market is well and interest rates are low, however, when the nation went

into a mortgage-default crisis, firms such as Bear Stearns began to see their

revenues fall. Bear Stearns being a firm which heavily concentrated on such

securities was forced to write down the value of their mortgage-backed securities;the firm was eventually taken over by JPMorgan Chase at a lowly $2 per share.

http://www.forbes.com/sites/panosmourdoukoutas/2013/06/11/wall-street-gets-a-taste-of-the-next-financial-crash/http://www.forbes.com/sites/panosmourdoukoutas/2013/06/11/wall-street-gets-a-taste-of-the-next-financial-crash/http://www.slate.com/articles/news_and_politics/explainer/2008/03/what_is_a_mortgagebacked_security.htmlhttp://www.forbes.com/sites/panosmourdoukoutas/2013/06/11/wall-street-gets-a-taste-of-the-next-financial-crash/http://www.forbes.com/sites/panosmourdoukoutas/2013/06/11/wall-street-gets-a-taste-of-the-next-financial-crash/http://www.slate.com/articles/news_and_politics/explainer/2008/03/what_is_a_mortgagebacked_security.html