Money Markets, Bonds Market, Mortgages - Coursework Example

Finance and Accounting Articles 1 Money Markets: “Money market is a component of financial market where financial instruments with high liquidity and with very short terms of maturity are traded”, This market is widely used by participants who intend to trade in short term lending and borrowing, the securities of money market consist of, govt debt securities whose maturity period is less than one year certificates of deposits (a saving certificate whose bearer is entitled to receive an interest) commercial paper ( an unsecured short term loan issued by a corporation mostly for financing debtors and inventory ) federal funds ( funds deposited with respective reserve bank by commercial banks ) bankers acceptances, which is a short term credit investment created by a non-financial firm and guaranteed by a banks it is very much similar to T-bills and are often used in money market funds Repurchase agreements (a short term borrowing for dealers in govt securities) the dealer sell the govt securities to investors, usually on overnight basis and buy them back in the following day. All of the above are example of instruments of money market, further instruments of money markets are also called cash and cash equivalents but an important measure to differentiate capital market and money market is the maturity period, as in money market the maturity period is normally a year or less, money market is used by different group of people like it range from companies to raise money to investor for parking their investments for short term where this market provide all this for investor and companies to meet their short term requirements, [Neh15] 2 Bonds Market: It is a market where debt securities are issued and traded, the instruments of bond market include govt issued securities (like saving bonds, treasury bills and notes), and corporate debt securities, (like CDs, municipal bonds, preferred stocks, and zero-coupon securities). It is one of mean that move the savings from saver to the issuers or companies who require capital for their ongoing projects or new expansions, this market is presumed to be a market of fixed return, although it appear complex but it is also driven by same risk and return tradeoff as like in stock market, basically bonds market can be divided into three main groupings i.e. issuer, underwriters, and purchaser.[Ste15] The major issuer may include govt, banks, companies who issue bonds or other debt instruments to finance their operations, The underwriter section of bond market primarily consist of investment banks and other financial institutions that help the issuer to sell the bonds in market The final player in this market include any group or any other type of investor including the individual , further govt often purchase debt from other countries if they have the excess money of that other country’s money as a result of trade between them e.g. japan is a major holder of U S govt debts. Further it is worthwhile to mention that income from bonds is fixed but there are different risk factors that are attached to a bond market, which may include inflation risk, interest rate risk, duration risk, call risk, credit risk, liquidity risk, market risk.[MON15] 3 Mortgages: It is conveyance of property for securing repayment of loan, a mortgage loan also refer to mortgage, This form of lending and borrowing is common in corporate sector where if a company need finance for its operation or expansion projects it lend one of its asset to a financial institutes in order to finance these projects then in return they get loan, and after completion of concerned objective they get relieved there asset after paying back there loan amount. Mortgage come in many forms, With a fixed-rate mortgage where interest payment never changes from first payment to the last Adjustable –rate mortgage where interest rate start from a below rate and then it move up as it extend Normally people obtain such type of loan from state owned institutions, where each mortgage has its criteria depending upon the market situation, normally company acquire loans through mortgages where they pledge there asset with a bank or a financial institute in order to obtain loan for their expenses and in that case company have to register these loan as well with registrar of the company, otherwise these loan would not be secured. [Gen15] 4 Offerings: The issuance of new stock for public sale after initial offerings (ipos) by companies in order to finance their projects, all these amounts goes to companies through financial institutes after underwriting agreements, Further a sale of securities where one or more stockholders in a company sell all or major portion of their holdings, the proceed of this offering are paid to the stockholders. This form of secondary offering is a way to increase the outstanding stock and spread market capitalization over a greater number of share, and if this new offerings involve new shares are to be issued then it dilute the shareholding power of existing shareholders who hold these share through IPOs Mostly such an offering occur when owner of business determine to reduce their positioning in company y, this kind of offering is common in year after an IPOs, after completion of lock-up period owners of closely held companies sell their stock to dilute their position gradually, in order to prevent the sharp decrease in share price, that may occur as a result high selling volume, hence this form of offering does not increase the no of share of stock in the market.[Jay15] 5 Options: “A financial derivative that represent a contract sold by an underwriter to the option buyer” however the terminologies used in this form of contracts are call options (to buy at a certain price) and put option (to sell at certain price). In this form of contract the buyer has an option to purchase or sell the given security or asset at agreed upon price within a given time period, options are very much versatile securities different people use it in different ways e.g. traders use them to speculate while hedger use them to reduce the risk of carrying of an asset, It is interesting to note that option buyer and seller have conflicting views about underlying securities if one party expect that market value may rise in future but at the same time other party expect that no it is going to drop in future, which is actually a speculation of future market price, Many trader presume that it is a substitute for stock option with greater leverage and relatively less investment as options can be used to bet on the direction of stock price, but simple differentiated factor is that it stock ownership give you an ownership right in a company while [Joh15]options are just contracts that give you an option to buy or sell at specific price and at a specific date.[Joh15] 6 Commercial Banks: A financial institution that provide services like accepting deposits and giving out loans to its customers, further they deal in providing mortgage lending, and other basic investment products like saving accounts and certificates of deposits, safe keepings, and different types of accounts for its customers like simple account and profit and loss account. Now the question arises that how banks make money then it is simple that they accept deposits from public and then these deposits are lend to investors, where the bank earn net interest income i.e. rate difference which it charge to investor and pay to depositor, further there is long range of products and services that commercial banks provide to its customers, that may vary from bank to bank but enlarge major services are same. The role of commercial banks is very much important in an economy because it is the only source that provide finance to private capital investment in the country, further banks are regulated by state owned regulation and laws that how it should provide services,[Mar15] 7 Mutual Funds: In mutual funds, a pool of is funds are raised for investment in securities like stocks, bonds, money market instruments and other similar assets, Mutual funds are managed by highly professionals who invest the capital raised by mutual funds in order to raise income for owners of fund, usually termed as unit holder of trust or mutual fund, units/share of mutual funds are issued that can be purchased or redeemed at net asset value per share, One of the advantage of this funds is that it provide access to small investor to equity, bonds, and other securities where return on capital employed is good for both individual investor and fund as well, There are different types of mutual funds and risk involve in them is also different and one simple method to guess the return is the risk factor means higher the risk higher would be the return and lower the risk then lower would be the return, however there are three types of mutual funds, Equity funds(share) Fixed income funds(bonds) Money market funds Overall all mutual funds are variation of these three asset classes[Bus15] 8 Insurance: It is a policy in which an individual or an entity receive financial protection against losses from an insurance company, In this form of business insurance companies pool capital for investment from pooling the risks of its clients, and then invest these amounts in some rewarding businesses from where their income is due However different insurance companies offer different policies like life insurance, health insurance, fire insurance, car insurance, education insurance, and much more, all these policies provide a better risk management and wealth preservation tool to either individual investor or an entity As insurance companies pool resources from large number of clients so it is not hard for insurance companies to pay premium to their customers, because it uses statistical analysis to project that what would be their expected losses with in a given class further they know that all individual will suffer losses at the same time e.g. most people have auto insurance but only few people suffer accidents. In this form of business risk is the key factor which is exploited by insurance companies, by take the risk of its client at a value and then reward them with financial interest or helping them out in related unfavorable situations.[Dea15] 9 Value/Risk: It is a technique for assessing the value at risk, and quantify its impact, with in a company or investment portfolio, basically it is a risk management technique or a proactive management of risk, where its likelihood is assessed and plan of action is designed to overcome with minimal impact on company. This risk factor is measured in three variables i.e. The quantitative factor, means the amount of loss Its likelihood, means probability of its occurrence Its timing For example in assessing bad debts this form of approach is used where the company make an estimate of its possible bad debts, means if a company after aging estimate that its doubtful debts are 5% of debtor’s amount which is $100 million then it means that $5 million amount is at risk. In managing the market risk there are different objectives that may include, Protecting the firm from financial distress Improving the performance of profit center Evaluating the extent of exposure related to given profit center[Dar15] 10 Role of financial Market & Institution: A market is a place where buyer and seller come close and where prices are determined by the active market forces that is demand and supply, same is the financial market with distinction of its highly sophistication and tight regulation, and further commodity traded in this market is also different that include, equities, bonds, currencies and derivatives, This type of market can be found in almost every economy but may differ by the volume of trade, Following are the different types of financial market, Capital market( where securities of different companies are traded and both individual and institutional investor are involved it further include stock market and bond market) Money market( it is a part of financial market where securities of short term and short maturity are traded) Cash or spot market( where transection are on the spot both payment and delivery of goods is on the spot, this market is not beneficial for inexperienced individuals) Derivative market (as the name indicate its value is derived from other asset common example are forward, future, options, and swaps etc.) Forex and interbank market( where currencies are traded among institutions) As for as role of these institutions are concerned then obviously they play a significant role development of the economy as it facilitate the circulation of money in the economy from saver to investor that a much need for developing economies. [Sta15] References Neh15: , (Singhi), Ste15: , (Levitt), MON15: , (INSTRUMENTS), Gen15: , (Knowledge), Jay15: , (Ritter), Joh15: , (Hull), Joh15: , (Hull), Mar15: , (Marcia M. Cornett a), Bus15: , (Business Club), Dea15: , („), Dar15: , (An Overview of Value at Risk), Sta15: , (Fischer1), Read More