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Chapter 1: Why Study Financial Markets and Institutions?

This document provides an overview of financial markets and institutions. It discusses debt markets, also known as bond markets, which allow governments, corporations, and individuals to borrow money to finance activities. Interest rates are determined in these markets and represent the cost of borrowing. Financial markets like bond and stock markets channel funds from savers to investors, promoting economic efficiency. Well-functioning markets are crucial for high economic growth. The stock market enables trading of company ownership, while the foreign exchange market facilitates international currency exchange.

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55 views2 pages

Chapter 1: Why Study Financial Markets and Institutions?

This document provides an overview of financial markets and institutions. It discusses debt markets, also known as bond markets, which allow governments, corporations, and individuals to borrow money to finance activities. Interest rates are determined in these markets and represent the cost of borrowing. Financial markets like bond and stock markets channel funds from savers to investors, promoting economic efficiency. Well-functioning markets are crucial for high economic growth. The stock market enables trading of company ownership, while the foreign exchange market facilitates international currency exchange.

Uploaded by

nic
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 1: Why Study Financial Markets and Institutions?

Debt Markets and Interest Rates


• A security (also called a financial instrument) is a claim on the issuer’s future income or
assets (any financial claim or piece of property that is subject to ownership).
• A bond is a debt security that promises to make payments periodically for a specified
period of time.
• Debt markets, also often referred to generically as the bond market, are especially
important to economic activity because they enable corporations and governments to
borrow in order to finance their activities; the bond market is also where interest rates
are determined.
• Financial markets, such as bond and stock markets, are crucial in our economy.
1. These markets channel funds from savers to investors, thereby promoting economic
efficiency.
2. Market activity affects personal wealth, the behavior of business firms, and economy
as a whole.
Well-functioning financial markets, such as the bond market, stock market, and foreign
exchange market, are key factors in producing high economic growth.

Debt Markets & Interest Rates


• § Debt markets, or bond markets, allow governments, corporations, and individuals to
borrow to finance activities.
• § In this market, borrowers issue a security, called a bond, that promises the timely
payment of interest and principal over some specific time horizon.
• § The interest rate is the cost of borrowing or the price paid for the rental of funds.
• There are many different types of market interest rates, including mortgage rates, car
loan rates, credit card rates, etc.
• § The level of these rates are important. For example, mortgage rates in the early part
of 1983 exceeded 13% vs near 4.5% over the past several years.

The Stock Market


• § The stock market is the market where common stock (or just stock), representing
ownership in a company, are traded.
• § Companies initially sell stock (in the primary market) to raise money. But after that,
the stock is traded among investors (secondary market).
• § Of all the active markets, the stock market receives the most attention from the
media.

The Foreign Exchange Market


• For funds to be transferred from one country to another, they have to be converted
from the currency in the country of origin (say, dollars) into the currency of the country
they are going to (say, euros).
• The foreign exchange market is where international currencies trade and exchange
rates are set.
• Although most people know little about this market, it has a daily volume around $1
trillion!

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