Institutions Ch 1

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.

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.

Primary and Secondary Market Transfer of Funds Timeline

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”

Steps to going public

The IPO Process

The SPAC Process

The SPAC Process (Simplified)

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.

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.

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

Money and Capital Market Instruments

Slide

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).

Types of Financial Institutions

Slide

Flow of Funds