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.