INTRODUCTION TO FINANCIAL MARKETS AND INSTITUTIONS
Three major financial markets:
Bond markets
Stock markets
Foreign exchange markets
Bond markets involve debt transactions, where borrowers promise to pay a certain interest rate to investors.
The interest rate tends to be lower and more volatile for short-term bonds than for long-term bonds.
Interest rates are higher for corporate bonds with lower ratings (more risk).
The stock market trades ownership claims on corporations.
Stock prices reflect the anticipated value of a firm's future profits as well as the current value of its assets.
Stock prices can fluctuate greatly.
The foreign exchange market trades one country's currency for that of another country.
The exchange rate is the "price" of one currency in terms of another.
A weaker dollar makes U.S. goods cheaper for foreign consumers, and makes imported goods more expensive for American consumers.
Financial institutions (financial intermediaries) transfer funds from those with an excess (savers) to those with a shortage (dissavers).
The major types of financial institutions include banks, thrift institutions (mutual savings banks, savings and loan associations, and credit unions), insurance companies, mutual funds, finance companies, pension funds, & investment banks.
Interest rates are determined by a combination of factors, including the money supply.