FINANCIAL MARKETS

(BA FIN101B)
1ST SEM SY 2022-2023
PREPARED BY:
JENNIVIB D. DIAMZON
INSTUCTOR III
 MONEY MARKETS

• products with highly liquid short-term maturities (of less than one year) and are characterized by a high degree of safety and a relatively low
return in interest.
• At wholesale level, the money markets involve large-volume trades between
• institutions and traders.

• At the retail level, they include money market mutual funds bought by
• individual investors and money market accounts opened by bank customers.

• Individuals may also invest in the money markets by buying short-

• term certificates of deposit (CDs),
 Why Is It Called the Money Market?

• The money market refers to the market for highly liquid, very safe, short-
term debt securities. Because of these attributes, they are often seen as cash
equivalents that can be interchangeable for money at short notice.
 Participants

Institutions that participate in the money market include

▪ Banks that lend to one another and to large companies in
the eurocurrency and time deposit markets;
▪ Companies that raise money by selling commercial paper into the market,
which can be bought by other companies or funds; and
▪ Investors who purchase bank CDs as a safe place to park money in the short
term.
 Who Uses the Money Market?

• In the wholesale market, commercial paper is a popular borrowing mechanism

because the interest rates are higher than for bank time deposits or Treasury
bills, and a greater range of maturities is available, from overnight to 270 days.
• The risk of default is significantly higher for commercial paper than for bank or
government instruments.
• Individuals can invest in the money market by buying money market funds,
short-term certificates of deposit (CDs), municipal notes, or Treasury bills.
 Types of Money Market Instruments

Money Market Funds

▪ The wholesale money market is limited to companies and financial institutions that lend
and borrow in amounts ranging from $5 million to well over $1 billion per transaction.
• Mutual funds offer these products to individual investor

Money Market Accounts

• are a type of savings account that pay interest, but some issuers offer account holders
limited rights to occasionally withdraw money or write checks against the account.
• In general, money market accounts offer slightly higher interest rates than standard savings
accounts
 Types of Money Market Instruments
• Certificates of Deposit (CDs)
- Most (CDs) are not strictly money market funds because they are sold with terms of
up to 10 years. However, CDs with terms as short as three months to six months are
available.

• Banker's Acceptances
- is a short-term loan that is guaranteed by a bank.
- Used extensively in foreign trade,
- is like a post-dated check and serves as a guarantee that an importer can pay for
the goods.
- There is a secondary market for buying and selling banker’s acceptances at a
discount.
 Types of Money Market Instruments
• Eurodollars
- are dollar-denominated deposits held in foreign banks, and are thus, not subject to
Federal Reserve regulations.
Money market funds, foreign banks, and large corporations invest in them because
they pay a slightly higher interest rate than U.S. government debt.
• Repurchase Agreement (REPO)
- is part of the overnight lending money market. Treasury bills or other government
securities are sold to another party with an agreement to repurchase them at a set price
on a set date.
 Why Is the Money Market Important?

• The money market is crucial for the smooth functioning of a modern financial
economy.
• It allows savers to lend money to those in need of short-term loans and allocates
capital towards its most productive use.
• These loans, often made overnight or for a matter of days or weeks, are needed by
governments, corporations, and banks in order to meet their near-term obligations
or regulatory requirements.
• it allows those with excess cash on hand to earn interest.
 BOND MARKETS

• A bond is a security in which an investor loans money for a defined

period at a pre-established interest rate.

• Bonds are issued by corporations as well as by municipalities, states,

and sovereign governments to finance projects and operations.

• The bond market sells securities such as notes and bills issued by
• government.

• The bond market also is called the debt, credit, or fixed-income market.
 Bond Segments
• primary market referred to as the "new issues" market in which transactions
strictly occur directly between the bond issuers and the bond buyers.
➢ the primary market yields the creation of brand-new debt securities
that have not previously been offered to the public.
• secondary market, securities that have already been sold in the primary market
are then bought and sold at later dates.
➢Investors can purchase these bonds from a broker, who acts as an intermediary
between the buying and selling parties.
➢These secondary market issues may be packaged in the form of pension funds,
mutual funds, and life insurance policies and many other product structures.
 Types of Bond Markets
• Corporate Bonds
Companies issue corporate bonds to raise money for financing current operations,
expanding product lines, or opening up new manufacturing facilities.
Corporate bonds are longer-term debt instruments that provide a maturity of at least
one year.
Government Bonds

▪Issued by the national government

• Also called sovereign bonds
• pays out the face value listed on the bond
certificate, on the agreed maturity date,
while also issuing periodic interest payments
• attractive to conservative investors
• considered the least risky type of bonds
 Municipal Bonds
• commonly known as "muni" bonds—are locally issued by states, cities, special-
purpose districts, public utility districts, school districts, publicly-owned airports
and seaports, and other government-owned entities who seek to raise cash to
fund various projects.
 Mortgage-Backed Security

• An MBS is a type of asset-backed security that represents the amount of

interest in a pool of mortgage loans. For example, assume an investment
bank buys mortgages from a mortgage broker, which lent property owners
money. The investment bank has thus become a lender to these property
owners and their mortgage payments go to the bank.
 Mortgage-Backed Bonds (MBS)
• MBS issues, which consist of pooled mortgages on real estate properties, are
locked in by the pledge of particular collateralized assets.
• The investor who buys a mortgage-backed security is essentially lending money
to homebuyers through their lenders. These typically pay monthly interest.
 Key Players in the Bond Market
• Bond Issuers
- sell bonds or other debt instruments to fund the operations of their organizations. This
area of the market is mostly made up of governments, banks, and corporations.
• Bond Underwriters
The underwriting segment of the bond market is traditionally made up of investment
banks and other financial institutions that help the issuer to sell the bonds in the market.
• Bond Purchasers
The final players in the market are those who buy the debt that is being issued in the
market.
They basically include every group mentioned as well as any other type of investor,
including the individual. Bondholders essentially become creditors, or lenders, to the
issuer.
• primary mortgage market is the market where borrowers can obtain a mortgage
loan from a primary lender.
Banks, mortgage brokers, mortgage bankers, and credit unions are all primary
lenders and are part of the primary mortgage market.

• secondary mortgage market, which is a market where investors can buy and sell
previously-issued mortgage loans.
A mortgage can be sold to another lender or service company, which processes the
payments for the loan. The new lender or service provider earns money from fees
and interest on the mortgage.
 Primary Mortgage Market vs. Secondary Mortgage
Market

• The primary market is made up of primary lenders. Primary lenders typically

keep the loans they originate as part of their portfolio and service them for
the life of the loan. However, the bank that made the mortgage loan can sell
the loan in the secondary mortgage market, which is a market where
investors can buy and sell previously-issued mortgage loans. A mortgage can
be sold to another lender or service company, which processes the payments
for the loan. The new lender or service provider earns money from fees and
interest on the mortgage.
 Types of Mortgage market players

1.The mortgage originator

2.The aggregator
3.The securities dealer
4.The investor
• The Mortgage Originator
The mortgage originator is the first company involved in the secondary mortgage market.
Mortgage originators consist of retail banks, mortgage bankers, and mortgage brokers.
• Aggregators purchase newly originated mortgages from smaller originators and, along
with their own originations, form pools of mortgages that they either securitize into
private-label mortgage-backed securities (by working with Wall Street firms) or form
agency mortgage-bbacked securities (by working through GSEs).
• The Securities Dealers
After an MBS has been formed (and sometimes before it is formed, depending upon the
type of the MBS), it is sold to a securities dealer.
• The Investors
Investors are the end users of mortgages. Foreign governments, pension funds, insurance
companies, banks, GSEs, and hedge funds are all big investors in mortgages. MBS,
CMOs, ABSs, and CDOs offer investors a wide range of potential yields based on
varying credit quality and interest rate risks.