1.
Financial market
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A financial market is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products, in economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term market is used for what are more strictly exchanges, organizations that facilitate the trade in financial securities. This may be a location or an electronic system. Another common use of the term is as a catchall for all the markets in the financial sector, capital markets which to consist of, Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment, derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date, Foreign exchange markets, which facilitate the trading of foreign exchange. Spot market Interbanks market The capital markets may also be divided into primary markets, newly formed securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities, the transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors. Liquidity is an aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value, securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want, Financial markets attract funds from investors and channel them to corporations—they thus allow corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a term basis. Without financial markets, borrowers would have difficulty finding lenders themselves, intermediaries such as banks, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those who have money to save and they can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages, a good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its shares can be bought or sold
2.
Market (economics)
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A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers and it can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society, Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services, Markets can also be worldwide, for example the global diamond trade. National economies can be classified, for example as developed markets or developing markets, in mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services, with or without money, is a transaction, a major topic of debate is how much a given market can be considered to be a free market, that is free from government intervention. However it is not always clear how the allocation of resources can be improved since there is always the possibility of government failure, a market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers and it can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enables the distribution and allocation of resources in a society, Markets allow any trade-able item to be evaluated and priced. A market sometimes emerges more or less spontaneously but is often constructed deliberately by human interaction in order to enable the exchange of rights of services. Markets of varying types can spontaneously arise whenever a party has interest in a good or service that other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. Markets vary in form, scale, location, and types of participants, as well as the types of goods and services traded, nevertheless, violence and they apply the market dynamics to facilitate information aggregation. However, market prices may be distorted by a seller or sellers with monopoly power, such price distortions can have an adverse effect on market participants welfare and reduce the efficiency of market outcomes. Also, the level of organization and negotiating power of buyers and sellers markedly affects the functioning of the market. Markets are a system, and systems have structure, the structure of a well-functioning market is defined by the theory of perfect competition. Market failures are often associated with time-inconsistent preferences, information asymmetries, non-perfectly competitive markets, principal–agent problems, externalities, among the major negative externalities which can occur as a side effect of production and market exchange, are air pollution and environmental degradation. There exists a popular thought, especially among economists, that markets would have a structure of a perfect competition
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Exchange (organized market)
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An exchange, or bourse /bʊərs/, is an organized market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought. The term bourse is derived from the 13th-century inn named Huis ter Beurze in Bruges, Belgium, the building, which was established by Robert van der Buerze as a hostelry, had operated from 1285. Its managers became famous for offering judicious financial advice to the traders and this service became known as the Beurze Purse which is the basis of bourse, meaning an organised place of exchange. Eventually the building became solely a place for trading in commodities, during the 18th century, the façade of the Huis ter Beurze was rebuilt with a wide frontage of pilasters. However, in 1947 it was restored to its medieval appearance. In the twelfth century, foreign exchange dealers in France were responsible for controlling and regulating the debts of agricultural communities on behalf of banks and these were actually the first brokers. They met on the Grand Bridge in Paris, the current Pont au Change and it takes its name from the forex brokers. In the thirteenth century, the Lombard bankers were the first to share state claims in Pisa, Genoa, in 1409, the phenomenon was institutionalized by the creation of the Exchange Bruges. It was quickly followed by others, in Flanders and neighboring countries and it is still in Belgium and the first building designed to house a scholarship was built in Antwerp. The first scholarship organized in France was born in Lyon in 1540, the first documented crash took place in 1636 in Holland. The prices of tulip bulbs reaching excessively high levels, known as the Tulip mania, the price collapsed on October 1. In the seventeenth century, the Dutch were the first to use the market to finance companies. The first company to issue stocks and bonds was the Dutch East India Company, the London Stock Exchange started operating and listing shares and bonds in 1688. In 1774, the Paris Stock Exchange, say the courts, in the nineteenth century, the industrial revolution enables rapid development of stock markets, driven by the significant capital requirements for finance industry and transport. Since the computer revolution of the 1970s, we are witnessing the dematerialization of securities traded on the stock exchange, in 1971, the NASDAQ became the primary market quotes computer. In France, the dematerialization was effective from November 5,1984, exchanges bring together brokers and dealers who buy and sell these objects. e. All derivatives, including financial derivatives, are traded at commodity exchanges. This has historical reasons, the first exchanges were stock exchanges, in the 19th century, exchanges were opened to trade forward contracts on commodities
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Security (finance)
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A security is a tradable financial asset. The term commonly refers to any form of instrument. In some jurisdictions the term specifically excludes financial instruments other than equities, in some jurisdictions it includes some instruments that are close to equities and fixed income, e. g. equity warrants. In the United States, a security is a financial asset of any kind. Securities are broadly categorized into, debt securities equity securities derivatives, the company or other entity issuing the security is called the issuer. A countrys regulatory structure determines what qualifies as a security, for example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, non-certificated, region or country Market capitalization State Securities are the traditional way that commercial enterprises raise new capital. These may be an alternative to bank loans depending on their pricing. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants, through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, a government may issue securities too when it needs to increase government debt, investors in securities may be retail, i. e. members of the public investing other than by way of business. The greatest part of investment, in terms of volume, is wholesale, i. e. by financial institutions acting on their own account, important institutional investors include investment banks, insurance companies, pension funds and other managed funds. The traditional economic function of the purchase of securities is investment, debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also control of the business of the issuer. Debt holdings may also offer some measure of control to the if the company is a fledgling start-up or an old giant undergoing restructuring. In these cases, if interest payments are missed, the creditors may take control of the company, the last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called buying on margin, where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A, either at inception or only in default. Collateral arrangements are divided into two categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other investors such as mutual funds are significant collateral takers as well as providers
5.
Bond market
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The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills and its primary goal is to provide long-term funding for public and private expenditures. The bond market has largely dominated by the United States. The bond market is part of the market, with bank loans forming the other main component. The global credit market in aggregate is about 3 times the size of the equity market. Bank loans are not securities under the Securities and Exchange Act, bonds are typically not secured by collateral, and are sold in relatively small denominations of around $1,000 to $10,000. Unlike bank loans, bonds may be held by retail investors, bonds are more frequently traded than loans, although not as often as equity. Nearly all of the daily trading in the U. S. bond market takes place between broker-dealers and large institutions in a decentralized over-the-counter market. However, a number of bonds, primarily corporate ones, are listed on exchanges. Bond trading prices and volumes are reported on FINRAs Trade Reporting and Compliance Engine, an important part of the bond market is the government bond market, because of its size and liquidity. Government bonds are used to compare other bonds to measure credit risk. The yield on government bonds in low risk countries such as the United States or Germany is thought to indicate a rate of default. The primary way to default is to not pay in full or not pay on time, the Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets. In the United States, approximately 10% of the market is held by private individuals, amounts outstanding on the global bond market increased by 2% in the twelve months to March 2012 to nearly $100 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder, the United States was the largest market with 33% of the total followed by Japan. As a proportion of global GDP, the market increased to over 140% in 2011 from 119% in 2008. The considerable growth means that in March 2012 it was larger than the global equity market which had a market capitalisation of around $53 trillion. Growth of the market since the start of the slowdown was largely a result of an increase in issuance by governments
6.
Bond valuation
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Bond valuation is the determination of the fair price of a bond. As with any security or capital investment, the fair value of a bond is the present value of the stream of cash flows it is expected to generate. Hence, the value of a bond is obtained by discounting the bonds expected cash flows to the present using a discount rate. In practice, this discount rate is determined by reference to similar instruments. Various related yield-measures are then calculated for the given price, if the bond includes embedded options, the valuation is more difficult and combines option pricing with discounting. Depending on the type of option, the price as calculated is either added to or subtracted from the price of the straight portion. This total is then the value of the bond, as above, the fair price of a straight bond is usually determined by discounting its expected cash flows at the appropriate discount rate. The formula commonly applied is discussed initially, although this present value relationship reflects the theoretical approach to determining the value of a bond, in practice its price is determined with reference to other, more liquid instruments. The two main approaches here, Relative pricing and Arbitrage-free pricing, are discussed next, where the market price of bond is less than its face value, the bond is selling at a discount. Conversely, if the price of bond is greater than its face value. For this and other relationships between price and yield, see below, under this approach — an extension of the above — the bond will be priced relative to a benchmark, usually a government security, see Relative valuation. Here, the yield to maturity on the bond is determined based on the bonds Credit rating relative to a government security with similar maturity or duration, the better the quality of the bond, the smaller the spread between its required return and the YTM of the benchmark. This required return is used to discount the bond cash flows, replacing i in the formula above. Thus, rather using a single discount rate, one should use multiple discount rates. Here, each cash flow is separately discounted at the rate as a zero-coupon bond corresponding to the coupon date. Under this approach, the price should reflect its arbitrage-free price, as any deviation from this price will be exploited. Here, we apply the rational pricing logic relating to Assets with identical cash flows, in detail, the bonds coupon dates and coupon amounts are known with certainty. Therefore, some multiple of zero-coupon bonds, each corresponding to the bonds coupon dates, thus the bond price today must be equal to the sum of each of its cash flows discounted at the discount rate implied by the value of the corresponding ZCB
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Corporate bond
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A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is applied to longer-term debt instruments, with maturity of at least one year. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper, the term corporate bond is not strictly defined. Sometimes, the term is used to include all bonds except those issued by governments in their own currencies, in this case governments issuing in other currencies will be included. The term sometimes also encompasses bonds issued by supranational organizations, strictly speaking, however, it only applies to those issued by corporations. The bonds of local authorities are not included, Corporate bonds trade in decentralized, dealer-based, over-the-counter markets. In over-the-counter trading dealers act as intermediaries between buyers and sellers, Corporate bonds are sometimes listed on exchanges and ECNs. However, vast majority of trading volume happens over-the-counter, by far the largest market for corporate bonds is in corporate bonds denominated in US Dollars. US Dollar corporate bond market is the oldest, largest, as the term corporate bond is not well defined, the size of the market varies according to who is doing the counting, but it is in the $5 to $6 trillion range. The second largest market is in Euro denominated corporate bonds, other markets tend to be small by comparison and are usually not well developed, with low trading volumes. Many corporations from other issue in either US Dollars or Euros. Foreign corporates issuing bonds in the US Dollar market are called Yankees, Corporate bonds are divided into two main categories High Grade and High Yield according to their credit rating. Bonds rated AAA, AA, A, and BBB are High Grade, while bonds rated BB and this is a significant distinction as High Grade and High Yield bonds are traded by different trading desks and held by different investors. For example, many pension funds and insurance companies are prohibited from holding more than an amount of High Yield bonds. The distinction between High Grade and High Yield is also common to most corporate bond markets, the coupon is usually taxable for the investor. It is tax deductible for the corporation paying it, for US Dollar corporates, the coupon is almost always semi annual, while Euro denominated corporates pay coupon quarterly. In this case the bond, a bond, is sold at a discount. The investor benefits by paying $80, but collecting $100 at maturity, the $20 gain is in lieu of the regular coupon
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Fixed income
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Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a rate once a year. Fixed-income securities can be contrasted with equity securities - often referred to as stocks and shares - that create no obligation to pay dividends or any other form of income. In order for a company to grow its business, it often must raise money - for example, to finance an acquisition, to buy equipment or land, the terms on which investors will finance the company will depend on the risk profile of the company. The company can give up equity by issuing stock, or can promise to pay regular interest, fixed-income securities also trade differently than equities. Whereas equities, such as stock, trade on exchanges or other established trading venues. The term fixed in fixed income refers to both the schedule of payments and the amount. Fixed income securities can be distinguished from inflation-indexed bonds, variable-interest rate notes, in contrast, if a company misses a quarterly dividend to stock shareholders, there is no violation of any payment covenant, and no default. The term fixed income is also applied to an income that does not vary materially over time. This can include income derived from investments such as bonds. Governments issue government bonds in their own currency and sovereign bonds in foreign currencies, local governments issue municipal bonds to finance themselves. Debt issued by government-backed agencies is called an agency bond, companies can issue a corporate bond or obtain money from a bank through a corporate loan. Preferred stocks share some of the characteristics of fixed interest bonds, securitized bank lending can be structured into other types of fixed income products such as ABS – asset-backed securities which can be traded on exchanges just like corporate and government bonds. Some of the used in connection with these investments is, The issuer is the entity who borrows the money by issuing the bond. The principal of a bond – also known as maturity value, face value, the coupon is the annual interest that the issuer must pay, expressed as a percentage of the principal. The maturity is the end of the bond, the date that the issuer must return the principal, the issue is another term for the bond itself. The indenture, in cases, is the contract that states all of the terms of the bond. Investors in fixed-income securities are typically looking for a constant and secure return on their investment, for example, a retired person might like to receive a regular dependable payment to live on like gratuity, but not consume principal
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Government bond
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A government bond is a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date. Government bonds are denominated in the countrys own currency. Government bonds are referred to as sovereign bonds. If a government or sovereign is close to default on its debt the media often refer to this as a debt crisis. The terms on which a government can sell bonds depend on how creditworthy the market considers it to be, international credit rating agencies will provide ratings for the bonds, but market participants will make up their own minds about this. The first general government bonds were issued in the Netherlands in 1517, because the Netherlands did not exist at that time, the bonds issued by the city of Amsterdam are considered their predecessor which later merged into Netherlands government bonds. The average interest rate at that time fluctuated around 20%, the first ever bond issued by a national government was issued by the Bank of England in 1694 to raise money to fund a war against France. It was in the form of a tontine, later, governments in Europe started issuing perpetual bonds to fund wars and other government spending. The use of perpetual bonds ceased in the 20th century, a Government bond in a countrys own currency is strictly speaking a risk-free bond, because the government can if necessary create additional currency in order to redeem the bond at maturity. There have however been instances where a government has chosen to default on its domestic currency debt, currency risk is the risk that the value of the currency a bond pays out will decline compared to the holders reference currency. A bond paying in a currency that does not have a history of keeping its value may not be a deal even if a high interest rate is offered. Inflation risk is the risk that the value of the currency a bond pays out will decline over time, investors expect some amount of inflation, so the risk is that the inflation rate will be higher than expected. Many governments issue inflation-indexed bonds, which protect investors against inflation risk by linking both interest payments and maturity payments to a consumer prices index. If a central bank purchases a government security, such as a bond or treasury bill, it increases the money supply, in the UK, government bonds are called gilts. Older issues have names such as Treasury Stock and newer issues are called Treasury Gilt, inflation-indexed gilts are called Index-linked gilts
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High-yield debt
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In finance, a high-yield bond is a bond that is rated below investment grade. These bonds have a risk of default or other adverse credit events. Sometimes the company can provide new bonds as a part of yield which can only be redeemed after its expiry or maturity. Interest rate risk refers to the risk of the value of a bond changing due to changes in the structure or level of interest rates or credit spreads or risk premiums. A credit rating agency attempts to describe the risk with a rating such as AAA. In North America, the five agencies are Standard & Poors, Moodys, Fitch Ratings, Dominion Bond Rating Service. Bonds in other countries may be rated by US rating agencies or by credit rating agencies. Rating scales vary, the most popular scale uses ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, Bonds rated BBB− and higher are called investment grade bonds. Bonds rated lower than investment grade on their date of issue are called speculative grade bonds, the lower-rated debt typically offers a higher yield, making speculative bonds attractive investment vehicles for certain types of portfolios and strategies. Many pension funds and other investors, however, are prohibited in their by-laws from investing in bonds which have ratings below a particular level, as a result, the lower-rated securities have a different investor base than investment-grade bonds. The value of bonds is affected to a higher degree than investment grade bonds by the possibility of default. These bonds are called fallen angels, the investment banker Michael Milken realized that fallen angels had regularly been valued less than what they were worth. His time with speculative grade bonds started with his investment in these, only later did he and other investment bankers at Drexel Burnham Lambert, followed by those of competing firms, begin organizing the issue of bonds that were speculative grade from the start. Speculative grade bonds thus became ubiquitous in the 1980s as a mechanism in mergers. In a leveraged buyout an acquirer would issue speculative grade bonds to pay for an acquisition. In 2005, over 80% of the amount of high-yield debt issued by U. S. companies went toward corporate purposes rather than acquisitions or buyouts. The corporate bond market has been developing in line with the trend of capital market. High-yield bonds can also be repackaged into collateralized debt obligations, thereby raising the credit rating of the senior tranches above the rating of the original debt
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