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Financial Markets,
Institutions, and Interest
Rates
What is a market?
A market is a venue where goods and
services are exchanged.
A financial market is a place where
individuals and organizations wanting to
borrow funds are brought together with those
having a surplus of funds.
Financial Markets
Primary
Secondary
Financial Markets
Primary Markets
Savers
Channel funds to
Borrowers
Mortgage bonds
Debenture bonds
Commercial paper
Lines of credit
Equity offerings
Common stock
Preferred stock
Finance for Technical Management - Lecture 2
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What is an IPO?
An initial public offering (IPO) is where a
company issues stock in the public market for the
first time.
Going public enables a companys owners to
raise capital from a wide variety of outside
investors. Once issued, the stock trades in the
secondary market.
Public companies are subject to additional
regulations and reporting requirements.
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commercial banks
thrift institutions
investment companies
pension funds
Insurance companies
finance companies.
Financial Intermediaries
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FINANCIAL MARKETS
Money markets
Short-term securities
Capital markets
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Long-term securities
Market Instruments
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Interest
Interest represents the return or compensation a lender
demands before agreeing to loan money
It is the charge for the privilege of borrowing money.
Whenever people agree to lend money to others, they take
risk as a number of factors might prevent them from taking
all their money back. This risk requires a monetary
compensation that is referred to as interest.
Interest is normally expressed in percentage terms, called
the interest rate. Thus if a person lends Rs.1,000 to another
person, and the return he requires for doing so is Rs.100, we
could say the interest rate charged is 10% (100/1000).
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DETERMINANTS OF INTEREST
The prevailing rate of interest in any situation
is called nominal rate of interest. For example
in the above example the nominal interest rate
is 10%.
The following are the components of nominal
interest rate. The nominal interest rate is
composed of real interest rate plus a number
of premiums.
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DETERMINANTS OF INTEREST
Maturity Risk
Premium
Liquidity Risk
Premium
Maturity Risk
Premium
Inflation
Premium
Liquidity Risk
Premium
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Inflation
Premium
Default Risk
Premium
Real Rate of
Interest
Nominal Risk-Free
Interest Rate
Default Risk
Premium
Risk Premiums
Real Rate of
Interest
=
Yield
Yield
Maturity
Maturity
Flat Yield Curve
Yield
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Maturity