CHAPTER NO 16
TODAY’S FINANCIAL
MARKETS
AND
INSTITUTIONS
FINANCIAL SYSTEM
Process by which money
flows from savers to users
Financial Institutions
55UsersSavers
Financial markets
BONDS
Money market instruments
Stocks
TYPES OF SECURITIES
MONEY MARKET
INSTRUMENTS
THESE ARE SHORT TERM DEBTS SECURITIES ISSUED BY
GOVERNMENTS, FINANCIAL INSTITUTIONS AND CORPORATION.
.
BONDS
A DEBT INVESTMENT IN WHICH AN INVESTOR LOANS MONEY TO AN ENTITY (CORPORATE OR GOVERNMENTAL) THAT BORROWS THE FUNDS FOR A DEFINED PERIOD OF TIME AT A FIXED INTEREST RATE
TYPES OF BONDSMUNICIPAL BONDSBonds issued by state or It has two types;
Revenue bond(Issues whose proceeds will be
used to pay for a project that will produce revenue)
GENERAL OBLIGATION BOND (BOND WHOSE PROCEEDS ARE TO BE USED TO PAY FOR A
PROJECT THAT WILL NOT PRODUCE ANY REVENUE)
.
CORPORATE BONDTHESE ARE A DIVERSE GROUP AND
OFTEN VARY BASED ON THE COLLATERAL –THE PROPERTY
PLEDGED BY THE BORROWER –THAT BACKS THE BOND
MORTGAGE PASS THROUGH SECURITYThese securities are backed by pool of mortgage loans purchased from lenders such as saving banks.
ISSUER TYPES OF SECURITY
RISK SPECIAL FEATURES
U.S TREASURY (GOVERNMENT BONDS) MATURE IN 10 YEARS OR FEWER FROM DATE OF ISSUE
TREASURY BONDS AND NOTES CARRY VIRTUALLY NO RISK
STATE AND LOCAL GOVERNMENTS(MUNICIPAL BONDS)
GENERAL OBLIGAGTION :ISSSUED BY STATE OR LOCAL GOVERNMENT UNITS WITH TAXING AUTHORITY :BACKED BY THE FULL FAITH AND CREDIT OF THE STATE WHERE ISSUED
REVENUE :ISSUED TO PAY FOR PROJECT S THAT GENERATE REVENUE ,SUCH AS WATER SYSTEMS OR TOLL ROADS;REVENUE FROM PROJECT USED TO PAY PRINCIPAL AND INTEREST.
RISK VARIES ,DEPENDING ON THE FINANCIAL HEALTH OF ISSUER
MOST LARGE MUNICIPAL BOND ISSUES ARE RELATED IN TERMS OF CREDIT RISK(AAA OR AAA IS THE HIGHEST RATING)
INTEREST IS EXEMPT FROM STATE INCOME TAXES
CORPORATIONS SECURED BONDS :BONDS ARE BACKED BY SPECIFIC ASSET S
UNSECURED BONDS (DEBENTURES):BACKED BY THE FINANCIAL HEALTH AND REPUTATION OF THE ISSUER
RISK VARIES DEPENDING ON THE FINANCIAL HEALTH OF THE ISSUER
MOST CORPORATE BOND ISSUES ARE RELATED IN TERMS OF CREDIT RISK (AAA OR AAA IS THE HIGHEST RATING)
INTEREST IS EXEMPT FROM FEDERAL INCOME TAXES AND MAY BE EXEMPT FROM STATE INCOME TAXES
A FEW COOPERATE BONDS ARE CONVERTIBLE INTO SHARES OF COMMON STOCK OF THE ISSUING COMPANY
FINANCIAL INSTITUTIONS MORTAGE PASS THROUGH SECURITIES
GENERALLY VERY LOW RISK THEY PAY MONTHLY INCOME CONSISTING OF BOTH INTEREST AND PRINCIPAL.
QUALITY RATING FOR BOND
One tool bond investor use to asses the bond is its bond ratingTwo factors determines the price of bondIts risk and its interest rate
STANDARD &POOR’S BOND RATING
HIGHEST AAA INVESTMENT GRADE
AA
A
BBB
BB SPECULATIVE GRADE
B
CCC
CC
LOWEST C
STOCK
STOCK
COMMON STOCKBasic form of corporate ownership
PREFERRED STOCKwhose holders receive preference in the payment of dividend
CONVERTIBLE SECURITIESAn investment that can be changed into another form. The most common convertible securities are convertible bonds or convertible preferred stock, which can be changed into equity or common stock.
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