Financial Markets and Institutions

Primary and Secondary Markets 

A primary market offers securities to the public for the first time on behalf of groups, government, or organizations that intend to raise capital through equity or debt-based securities. Thus, the issuance of new common stock worth $180 million by Supercorp is a good example of a transaction that takes place in the primary market. Another example of a transaction in the primary market is the issuance of common stock in an IPO worth $30 million by HiTech, Inc. On the other hand, it is in the secondary markets where securities already owned by investors are sold or bought (Stepan, 2016). For instance, the sale of preferred stock worth $10 million by Megaorg can only take place in the secondary market. The purchase of previously issued Supercorp bonds worth $220 million by XYA is another transaction within the secondary market. Additionally, the sale of XYZ common stock valued at $15 million by A. B. Corporation is another example of a transaction within the secondary market. 

Capital and Money Market Securities 

A capital market is structured in such a way that business entities and individuals have the capacity to sell as well as trade equity and debt securities. Example of financial instruments classified under the capital markets comprises of common stock, US treasury bonds, corporate bonds, state and government bonds (Christensen, Hail, & Leuz, 2016). Conversely, money markets are the best place for the exchange of short term funds within the time frame of twelve months or less. Financial instrument associated with the money market consists of mortgages, US treasury bills, Negotiable certificate of deposit, federal funds, and US treasury notes. 

Financial Institutions and the Services they Offer 

There are several types of financial institutions serving different needs. For instance, central banks are tasked with the management and oversight of all banks within a country. Banks are divided into commercial and retail banks with commercial banks catering to the needs of businesses while retail cater for individual needs. Another of the financial institutions is the internet banks which offer similar services as the retail banks only that they use online platforms (Cornett & Saunders, 2003). On the other hand, credit unions that are owned by members serve particular groups of individuals such as military, teachers, or even doctors, among other memberships. The services offered by the credit union are similar to those of retail banks but differ in that they exist for the benefit of their members. 

Nominal Interest Rate on a Security 

Demand and supply will cause an increase in the rates when the demand for money increases or when there is a shortage in the supply of money from lenders. Another factor is inflation that can cause lenders to increase interest rates. This can happen when the purchasing power is reduced, and the value of money is decreased. The Federal Reserve can also influence interest rates by increasing the rates of federal funds to frustrate borrowers or reduce the funds to encourage borrowing when the economy is slow (Constantinides, 1992). On a personal level, low credit scores can attract greater interest rates to offset the risk of loan default while the duration and amount of loan taken can be another factor to influence the rate of interest. Large long term loans attract high-interest rates compared to small short term loans. Lastly, when the lender has an alternative in which to invest the funds meant for a loan can mean higher interest rates. 

Interest Rates 

Structure of interest rates is the correlation between yields of bonds and maturities. The future yield curve of interest rates is the concept of market segmentation that works on the assumption that lenders and borrowers dwell on particular areas of the curve (Cox, Ingersoll Jr, & Ross, 2005). The other concept that defines the yield curve is the liquidity preference that operates on the assumption that shareholders favor short term bonds in comparison to long term bonds. Moreover, the concept of preferred habitat posits that the nature of the curve is a reflection of the anticipation of investors on future interest rates. 

References 

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