Institutions Ch 1 (Done)

Financial institutions

encompass a broad range of business operations within the financial services sector including banks, insurance companies, brokerage firms, and investment dealers.

Financial Markets

include any place or system that provides buyers and sellers the means to trade financial instruments, including bonds, equities, the various international currencies, and derivatives. Financial markets facilitate the interaction between those who need capital with those who have capital to invest.

-Connect people who need money to people who have money

Primary Markets

• Markets in which corporations raise funds through new issues of securities.

• IPOs, SPACs

Secondary Markets

Markets that trade financial instruments once they are issued.

-People buy in the ______________, like retail traders

Primary and Secondary Market Transfer of Funds Timeline

Example of IPO

• Company going public: Coinbase wants to go public, but has to go to Goldman Sachs to get them to underwrite, determine the price to buy millions of stocks at what price. Goldman Sachs then sells it to the open market for investors who want to participate in the IPO. 

  • Coinbase - Company going Public

  • Goldman - Underwriter

  • Investors - Participants in IPO

Why corporations go public | Reasons to go public

• Raise funds, access to capital in general 

• Increased liquidity, exit route for existing investors

• Attracting and retaining employees 

• Enhanced visibility, credibility & branding 

IPO

• Initial Public Offering

SPAC

• Special Purpose Acquisition Company

• Also known as “blank check company”

  • (Note): Purpose is to Merge with a private company to allow them to go public faster than IPO

Steps to going public

The IPO Process

The SPAC Process

The SPAC Process (Simplified)

Example of SPAC (Today)

SPAC Private Company New Public Company

(DWAC) + (TMTG) = DJT

Public Private Public

Secondary markets

• A market that trades financial instruments once they are issued.

• Secondary markets exist to provide liquidity and price information to investors. 

  • Liquidity refers to the ease with which an asset can be converted into cash quickly and at fair market value.

• These functions make the primary market more attractive. 

• In addition to stocks and bonds, other financial instruments are also traded on secondary markets such as derivatives and foreign exchange (currencies), etc.

Secondary Markets Examples

Money Markets, Capital Markets, Over-the-counter (OTC) Markets

Money Markets

Markets that trade debt securities or instruments with maturities of one year or less.

Capital Markets

Markets that trade debt (bonds) and equity (stocks) instruments with maturities of more than one year.

Over-the-counter (OTC) Markets

Markets that do not operate in a specific fixed location – rather, transactions occur via telephones, wire transfers, and computer trading.

Money Market Instruments

treasury bills, federal funds, repurchase agreements, commercial paper, negotiable certificates of deposit, banker’s acceptances

Treasury Bills

Short-term obligations issued by the U.S. government

Federal funds

short-term funds transferred between financial institutions usually for no more than one day.

Repurchase agreements

agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a specified date and price

Commercial paper

short-term unsecured promissory notes issued by a company to raise short-term cash

Negotiable certificates of deposit

bank issued time deposits that specify an interest rate and maturity date and are negotiable (i.e. can be sold by the holder to another party)

Banker’s accpetances

time drafts payable to a seller of goods, with payment guaranteed by a bank

Capital Market Instruments

Corporate stock, mortgages, corporate bonds, treasury bonds, state and local government bonds, U.S. government agency bonds, bank and consumer loans

Corporate stock

the fundamental ownership claim in a public corporation.

Mortgages

loans to individuals or businesses to purchase a home, land, or other real property.

Corporate bonds

long-term bonds issued by corporations.

Treasury bonds

long-term bonds issued by the U.S. government.

State and local government bonds

long-term bonds issued by state and local governments.

U.S.government agency bonds

long-term bonds collateralized by a pool of assets and issued by agencies of the U.S. government.

Bank and consumer loans

loans to commercial banks and individuals.

Overview of Financial Institutions

• Financial institutions perform essential functions of channeling funds from those with surplus funds to those with shortages of funds. 

• Examples of financial institutions include banks, credit unions, insurance companies, and investment companies (e.g., mutual fund companies).

Commercial banks

depository institutions whose major assets are loans and whose major liabilities are deposits. Commercial banks' loans are broader in range, including consumer, commercial, and real estate loans, than are those of other depository institutions. Commercial banks' liabilities include more nondeposit sources of funds, such as subordinate notes and debentures, than do those of other depository institutions.

Thrifts

depository institutions in the form of savings associations, savings banks, and credit unions. Thrifts generally perform services similar to commercial banks, but they tend to concentrate their loans in one segment, such as real estate loans or consumer loans.

Insurance companies

financial institutions that protect individuals and corporations (policyholders) from adverse events. Life insurance companies provide protection in the event of untimely death, illness, and retirement. Property casualty insurance protects against personal injury and liability due to accidents, theft, fire, and so on.

Securities firms and investment banks

financial institutions that help firms issue securities and engage in related activities such as securities brokerage and securities trading.

Finance companies

financial intermediaries that make loans to both individuals and businesses. Unlike depository institutions, finance companies do not accept deposits but instead rely on short- and long-term debt for funding.

Investment funds

financial institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of assets.

Pension funds

financial institutions that offer savings plans through which fund participants accumulate savings during their working years before withdrawing them during their retirement years. Funds originally invested and accumulated in pension funds are exempt from current taxation.

Fintechs

institutions that use technology to deliver financial solutions in a manner that competes with traditional financial methods.

Services Benefiting Suppliers of Fund

monitoring costs, liquidity and price risk, transaction cost services, maturity intermediation, denomination intermediation

Monitoring costs

aggregation of funds in an Fl provides greater incentive to collect a firm's information and monitor actions. The relatively large size of the Fl allows this collection of information to be accomplished at a lower average cost (economies of scale).

Liquidity and price risk

Fls provide financial claims to household savers with superior liquidity attributes and with lower price risk.

Transaction cost services

similar to economies of scale in information production costs, an FI's size can result in economies of scale in transaction costs.

Maturity intermediation

Fls can better bear the risk of mismatching the maturities of their assets and liabilities.

Denomination intermediation

Fls such as mutual funds allow small investors to overcome constraints to buying assets imposed by large minimum denomination size.

Services Benefiting the Overall Economy

Money supply transmission, credit allocation, integrational wealth transfers, payment services

Money supply transmission

depository institutions are the conduit through which monetary policy actions impact the rest of the financial system and the economy in general.

Credit allocation

Fls are often viewed as the major, and sometimes only, source of financing for a particular sector of the economy, such as farming and residential real estate.

Intergenerational wealth transfers

Fls, especially life insurance companies and pension funds, provide savers with the ability to transfer wealth from one generation to the next.

Payment services

the efficiency with which depository institutions provide payment services directly benefits the economy.

Flow of Funds