The Main Functions of the Financial System
Achievement of Purposes People use the financial system for various reasons, which can be broken down into six main purposes. However, regardless of the purpose, the financial system is more efficient when transactions are performed in liquid markets. 1….
Classifications of Assets and Markets
Assets Securities: includes both debt and equity securities. Securities may be further classified as public or private securities, depending on if they are traded on a public exchange. Currencies: monies issued by national monetary authorities. Contracts: agreements to trade other…
Assets Traded in Organized Markets
Fixed Income Fixed income investments include promises to repay borrowed money and a variety of other instruments with payment schedules. People, companies, and governments create fixed-income instruments when they borrow money. While there is no consensus definition on the exact…
Types of Financial Intermediaries
Financial intermediaries help entities achieve their goals by providing products and services that help connect buyers and sellers. The key financial intermediaries are defined below. Brokers: Agents who fill orders for their clients, helping reduce their client’s transaction costs by…
Positions an Investor Can Take in an Asset
[vsw id=”LFJYcV5EL-w” source=”youtube” width=”611″ height=”344″ autoplay=”no”] A position in an asset describes how much of the asset an investor owns. The investor can either have a long position, meaning the investor owns the asset or has borrowed money to purchase…
Margin Transactions
Leverage Ratio The relation between risk and borrowing can be measured by the leverage ratio. The maximum leverage ratio calculates financial leverage if the trader’s equity position is equal to the initial margin requirement. $$ \text{Leverage ratio} = \frac{ \text{Total…
Execution, Validity, and Clearing Instructions
The bid prices represent the price at which dealers are prepared to buy, while the ask prices, or offer prices, indicate the prices at which they are willing to sell. Ask prices consistently exceed bid prices. Dealers also specify the…
Market Value vs. Intrinsic Value
The market value is the price at which an asset can currently be bought or sold. The intrinsic value/fundamental value is the value placed on it by investors if they had a complete understanding of the asset’s investment characteristics. In…
A Bond’s Price Given a Market Discount Rate
Bond pricing is the application of discounted cash flow analysis. The general approach to bond valuation is to utilize a series of spot rates to reflect the timing of future cash flows. Bond Pricing With a Market Discount Rate For…
Relationships Among a Bond’s Price, Coupon Rate, Maturity, and Market Discount Rate
Price versus Market Discount Rate (Yield-to-maturity) The price of a fixed-rate bond will fluctuate whenever the market discount rate changes. This relationship could be summarized as follows: when the market discount rate increases, the bond’s price decreases (inverse effect); when the…
