Capital Markets Flashcards
What is a capital market?
A financial market in which longer-term debt and equity instruments are traded
Typically have a maturity of more than one year
What are the features of a capital market?
- Less liquid (longer time to maturity)
- More likely fluctuations in price
- Not as safe as money market investments
Who are capital markets instruments usually held by?
Financial Intermediaries who have little uncertainty about the amounts of funds they will have available in the future
Such as:
- Insurance companies
- Pension funds
What are the Capital market instruments?
- Stocks
- Mortgages and mortgage backed securities
- Corporate bonds
- US government securities
- US government agency securities
- State and local government bonds
- Consumer and bank commercial loans
Capital market instruments
What is a mortgage backed security?
The house/ land is collateral for the lender
If the borrower defaults, the lender can have the house
Capital market instruments
What is a corporate bond?
They are issued by corporations with very strong credit ratings
The corporation sends the holder interest payments twice a year and pays off the face value when the bond matures
What is the bond price and interest rate relationship?
Inverse
(As one increases, the other decreases)
E.g. if interest rates decrease after your purchase of a bond, the value of the bond will rise
Because investors cannot buy a new bond with a coupon rate as high as yours
