Part Ⅰ金融英语wel.pptx

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1、Part Financial MarketsChapter 1 Functions of Financial MarketsChapter 2 Money MarketsChapter 3 Capital MarketsChapter 4 Foreign Exchange MarketsChapter 1Functions of Financial Marketsv1.1 SignificancevThe word“finance”signifies capital in monetary form,that is,in the form of funds lent or borrowed,n

2、ormally for capital purposes,through financial markets or financial institutions.When finance goes international,it is then an international finance.vWhat is a financial market?It is a place where financial transactions take place.Financial markets facilitate the lending of funds from savers to thos

3、e who wish to undertake investments.Those that wish to borrow to finance investment projects sell financial instruments to savers.vWhen an investor purchases the securities issued by ultimate borrowers(those who use the funds to invest in real assets),capital market operations for equities,bonds wou

4、ld fall largely into this category.When an investor chooses to invest in the obligations of financial intermediaries,which in turn lend the funds to those who invest in real assets,they are operations in money market for term deposits and loans,interbank transactions of such nature.The primary disti

5、nction between the two channels is that,in the first case,i.e.direct financing,the investor is faced directly with the credit risk of the issuer,while in the second case,i.e.financing through financial intermediation,a financial institution,such as a bank,interjects itself between users and provider

6、s of funds.Any analysis of the sector of money market dominated by financial intermediaries must be very much concerned with these financial institutions themselves(their policies,financial conditions and official regulatory environment)in addition to those factors governing the suppliers and users

7、of funds.vInternational financial transactions include purchases and sales of foreign currency,securities,gold bullion,and lending and borrowing.vForeign exchange marker deals with the exchanges of different means of payment.These exchanges are necessary for international capital flows.As the relati

8、ve values among different currencies(the exchange rates)will fluctuate according to economic and political circumstances of the currencies of the relative countries,international investors or financiers face exchange risks.To this end,foreign exchange markets provide services,such as forward transac

9、tions and foreign currency futures to eliminate such risks.v1.2 Functions vApart from borrowing from banks,a firm or an individual can obtain funds in a financial market in two ways.The most common method is to issue a debt instrument,such as a bond or a mortgage,which is a contractual agreement by

10、the borrower to pay the holder of the instrument fixed amounts at regular intervals(interest and principal payments)until a specified date(the maturity date),when a final payment is made.The maturity of a debt instrument is short-term if its maturity is less than a year and long-term if its maturity

11、 is ten years or long.Debt instruments with a maturity between one and ten years are said to be intermediate-term.vThe second method of raising funds is by issuing equities,such as common stock,which are claim to share in the net income(income after expenses and taxes)and the assets of a business.Eq

12、uities usually earn periodic payment(dividends)and are considered long-term securities because they have no maturity date.vA primary market is a financial market in which new issues of a security,such as a bond or a stock,are sold to initial buyers by the corporation or government agency borrowing t

13、he funds.A secondary market is a financial market in which securities that have been previously issued(and are thus secondhand)can be resold.vThe primary market for securities is not well known to the public because the selling of securities to initial buyers take place behind doors.An important fin

14、ancial instrument that assists in the initial sale of securities in the primary market is the investment bank.It does this by underwriting securities,that is,it guarantees a price for a corporations securities and then sells them to the public.vWhen an individual buys a security in the secondary mar

15、ket,the person who sold the security receives money in exchange for the security,but the corporation that issued the security acquires no new funds.A corporation acquires new funds only when its security are first sold in the primary market.Nonetheless,the secondary market serves two important funct

16、ions.First,financial instruments are more liquid.The increased liquidity of the instruments makes them more desirable and thus easier for the issuing firm to sell in the primary market.Second,they determine the price of the security that the issuing firm sells in the primary market.The firms that bu

17、y securities in the primary market will pay the issuing corporation no more than the price that they think the secondary market will set for this security.The higher the securitys price in the secondary market,the higher the price that the issuing firm will receive for a security in the primary mark

18、et and hence the greater the amount of capital it can raise.Conditions in the secondary market are therefore the most relevant to corporations issuing securities.It is for this reason that studies dealing with financial market focus the behavior of secondary markets rather than primary markets.vAnot

19、her way of distinguishing market is on the basis of the maturity of the securities traded in each market.The money market is a financial market in which only short-term debt instruments(maturity of less one year)are traded;the capital market is the market in which long-term debt(maturity of one year

20、 or longer)and equity instruments are traded.Money market securities are usually more widely traded than long-term securities and so they are more liquid.In addition,short-term securities have smaller fluctuations in prices than long-term securities,making them the safer investment.As a result,corpo

21、rations and banks actively use this market to earn interest on surplus funds that they expect to have only temporarily.Capital market securities,such as stocks and long-term bonds,are often held by individuals and financial intermediaries such as insurance companies and pension funds,which have litt

22、le uncertainty about the amount of funds they will have available in the future.Chapter 2 Money Marketsv2.1 CharacteristicsvMoney market instruments,which are discussed in detail later in this chapter,have three basic characteristics in common:vThey are usually sold in large denominations.vThey have

23、 low default risk.vThey mature in one year or less from their original issue date.Most money market instruments mature in less than 120 days.vThe well-developed secondary market for money market instruments makes the money market an ideal place for a firm or financial institution to“warehouse”surplu

24、s funds for short periods of time until they are needed.Similarly,the money market provide a low-cost source of the funds to firms,the government,and intermediaries that need a short-term infusion of funds.vMost investors in the money market who are temporarily warehousing funds are ordinarily not t

25、rying to earn unusually high returns on their money market funds.Rather,they use the money market as an interim investment that provides a higher return than holding cash or money in banks.They may feel that market conditions are not right to warrant the purchase of additional stock,or they may expe

26、ct interest rates to rise and hence not want to purchase bonds.Idle cash represents an opportunity cost in terms of lost interest income.The money markets provide means to invest idle funds and to reduce this opportunity cost.At the same time,the sellers of money market instruments find that the mon

27、ey market provide a low-cost source of temporary funds.vWhy do corporations and the government sometimes need to get their hands on funds quickly?The primary reason is that cash inflows and outflows are rarely synchronized.vThe money market provides an efficient,low-cost way of solving these problem

28、s.v2.2 Participants of Money Marketv1.The GovernmentvIn money market,the government is unique because it is always a supplier and demander of money market funds.The U.S.Treasury is the largest of all money market borrowers worldwide.It issues Treasury bills(often called T-bills)and other securities

29、that are popular with other money market participants.Short-term issues enable the government to raise the maturing issues.v2.The Central BankvThe Central Bank is the Treasurys agent for the distribution of government securities.The central bank holds vast quantities of Treasury securities that it s

30、ells if it believes that the money supply should be reduced.Similarly,the central bank purchases Treasury securities if it believes that the money supply should be expanded.The central banks responsibility for the money supply makes it the single most influential participant in the money market.v3.C

31、ommercial Banks vCommercial banks hold a larger percentage of government securities than any other group of financial institutions.This is partly because of regulations that limit the investment opportunities available to banks.Specifically,banks are prohibited from owning risky securities,such as s

32、tocks or corporate bonds.There are no restrictions against holding Treasury securities because of their low risk and high liquidity.vBanks are also the major issuer of negotiable certificates of deposit(CDs),bankers acceptances,and repurchase agreements.In addition to money market securities to help

33、 manage their own liquidity,many banks trade on behalf of their customers.vNot all commercial banks deal for their customers in the secondary money market.The ones that do are among the largest in the country and are often referred to as money center banks.v4.BusinessesvMany businesses buy and sell

34、securities in the money market.Such activity is usually limited to major corporations because of the large transactions involved.As discussed earlier,the money market is used extensively by businesses both to warehouse surplus funds and to raise short-term funds.v5.Investment CompaniesvLarge diversi

35、fied brokerage firms are active in money markets.The primary function of these dealers is to“make a market”for money market securities by maintaining an inventory from which to buy or sell.These firms are very important to the liquidity of the money market because they help ensure that both buyers a

36、nd sellers can readily market their securities in the primary market as well as in the secondary market.v6.Insurance CompaniesvProperty and casualty insurance companies must maintain liquidity because of their unpredictable need for funds.To meet this demand,the insurance companies sell some of thei

37、r money market securities to raise cash.vAs to the life insurance companies,because their obligations are reasonably predictable,large money market security holdings are unnecessary.However,it is a common practice that an individual can have his/her money invested in the money market through the age

38、nt department of banks and investment companies,to earn a higher interest rate than otherwise deposited in the banks.v2.3 Instruments of Money Market vSecurities with maturities within one year are referred to as money market instruments.A variety of money market instruments are available to meet th

39、e diverse needs of market participants.v1.Treasury BillsvTo financial the national debt,the government issues a variety of debt securities.The most widely held liquid security is the Treasury bill,which is commonly issued by the ministry of finance.However,some Treasury bills,like the Treasury bill

40、of the U.S.government,do not actually pay interest.Instead they are issued at a discount from par(their value at maturity).The investors yield comes from the increase in the value of the security between the time it was purchased and the time it matures.v2.Inter-bank MarketsvInter-bank markets are m

41、oney markets in which short-term funds transferred(loaned or borrowed)between financial institutions,usually for a period of one day,that is,they are usually overnight investment.The interest rate for borrowing these funds is close to,but always slightly higher than rate that is available from the c

42、entral bank.v3.Commercial PapervCommercial paper is a short term debt instrument issued only by well-known,larger and creditworthy corporations.vIt is typically unsecured,and the interest rate placed on it reflects the firms level of risk.It is normally issued to provide liquidity or finance a firms

43、 investment and accounts receivable.The issuance of commercial paper is an alternative to short-term bank loan.v4.NCDs or CDsvA negotiable certificate of deposit is a bank-issued security that documents a deposit and specifies the interest rate and the maturity date.It was firstly issued in 1961 by

44、Citibank.Because a maturity date is specified,a CD is a term security as opposed to a demand deposit.Term securities have a specified maturity date while demand deposits can be withdrawn at any time.A CD is also called a bearer instrument.This means that whoever holds the instrument at maturity rece

45、ives the principal and interest.The CD can be bought and sold until maturity.v5.Banks AcceptancesvA banks acceptance is an order to pay a specified amount of money to the bearer on a given date.Bankers acceptances have been in use since the twelfth century,and are commonly used for international tra

46、de transactions.Chapter 3 Capital Marketsv3.1 Purpose and ParticipantsvFirms that issue capital market securities and the investors who buy them have very different motivations than they have when they operate in the money market.Firms and individuals use the money market primarily to warehouse fund

47、s for short periods of time until a more important need or a more productive use for the funds arises.By contrast,firms and individuals use the capital market for long-term investments.The capital markets provide an alternative to investment in assets such as real estate or gold.Meanwhile,the primar

48、y reason that individuals and firms choose to borrow long-term funds is to reduce the risk that interest rates will rise before they pay off their debt.This reduction in risk comes at a cost.However,Most long-term interest rates are higher than short-term rates due to risk premiums.Despite the need

49、to pay higher interest rates to borrow in the capital markets,these markets remain very active.vThe primary issuers of capital market securities are governments and corporations.However,governments never issue stocks.vCorporations both issue bonds and stocks.One of the most difficult decisions a fir

50、m faces can be whether it should finance its growth with debt or equity.The distribution of a firms capital between debt and equity is its capital structure.v3.2 Trading in the Capital MarketvCapital market trading occurs in either the primary market or the secondary market.Investment funds,corporat