Q1: Categorization of transactions into primary and secondary market
Financial transactions can be grouped to have taken place in the primary market or the secondary market. Transactions which take place in the primary market involve selling of bonds and new stocks which usually happen for the first time. Transactions that take place in the secondary market involve securities that are traded when selling of all stocks and bonds has taken place in the primary market (Pilbeam, 2018). The different transactions highlighted in the question can be grouped as:
Primary market: Issuing new common stock as done by Supercorp which issued $180 million of common stock that was new took place in the primary market.
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Primary market: An IPO involves issuing of common stock that was new and occurs in the primary market. The given case involves HiTech issued $30 million for the IPO for common stock.
Secondary market: The transaction of Megaorg selling $10 million of stock that it had initially acquired from HiTech takes place in the secondary market.
Secondary market: Purchase of stock that had been previously issued by Supercorp bonds by XYA Fund amounting to $220 million takes place in the secondary market.
Secondary market: Selling of XYZ common stock by A. B. Corporation amounting to $15 million takes place in the secondary market since the stock had been previously acquired in the primary market and is being sold after acquisition.
Q2: Identification of financial market instruments
Financial markets can also be categorized as capital market securities or money market securities. Money markets are usually used by the government and corporate bodies for borrowing or lending in the short term. Capital markets usually involve equity or stock market and the debt or bond market which are mostly used for long-term assets (James, 2015). The financial instruments listed can be categorized as:
Money market securities : The United States Treasury bills are used by the government.
Capital market securities : The United States Treasury notes can be described as long-term government debts.
Capital market securities: The United States Treasury bonds can be described are long-term government debts.
Capital market securities: Mortgages are personal legal debts over the long-term.
Money market securities: Federal funds are excess reserves used for the short-term.
Money market securities: The Negotiable Certificate of Deposit is purchased by institutional investors amounting to $100,000.
Capital market securities: Common stock are equities issued on the long-term basis.
Capital market securities: Different bonds such as government and state bonds are debt on the long-term.
Capital market securities: Corporate bonds are debt held over the long-term.
Q3: Types of financial institutions and the services they provide.
Central Banks are banks that are usually held liable for the supervision and management of other banks. The Federal Reserve is the central bank of the United States which is responsible for the development, implementation, and enforcement of financial policies.
Retail or commercial banks can be described as bank institutions that deal with other businesses and organizations directly. On the other hand, retail banks mainly work with individuals.
Security firms can be grouped with investment banks, these financial institutions usually provide security brokerage and security trading services. They also provide a market for the trading of securities.
Finance institutions mainly provide loans to business and individuals. They are mostly funded through debt from other bigger financial institutions.
Pension funds are institutions that provide a savings plan for several years. People save when they work and withdraw upon retirement. Pension funds are usually exempted from current taxation as they accumulate.
Insurance companies provide the services of protection for organizations and individuals. They can offer insurance on protect which protect against the damage, loss and theft of property.
Mutual funds provide the services of bringing together resources of individuals and companies and then investing them into diverse portfolios and assets.
Q4: Six factors which determine nominal interest rates on securities
Inflation is defined as the sustained increase the prices of a selected goods and services in the economy over some time.
Real risk-free rate can be defined theoretical rate of return which would exist on an investment in case it was default-free and that there is no inflation was expected.
Default risk can be described the chance that a company or an individual with securities would not be able to make the payment on a certain debt and thus default.
Liquidity risk is defined as the risk which a bank or company with securities may face when it does not meet its short-term obligations (Cornett, 2014). The securities may be sold at a price further from the actual value if sold quickly.
Special provisions dealing funds use are requirements like convertibility and taxability which affect the holder of a security adversely or beneficially.
Term to maturity of a security can be defined as the amount of time taken for a security to be repaid.
Question 5: The concept of term structure of the interest rates
The concept of term structure of interest rates is based on the relationship that exists between bond yields or interest rates and the different terms or maturities. It can also be defined as the yield curve and has a great significance in the economy (Malkiel, 2015).
Term structure of interest rates or the yield curve can be explained through the use of three theories that include:
Unbiased expectations theory: A The theory is used to explain the yield curve based on the expected short-term rate. It is the simplest form and shows that the yield curve indicates the current expectations of the market.
Liquidity premium theory explains that investors usually want to be compensated for interest rates risks that are mostly associated in the long-term. The long-term nature of the interest rates means that there is a higher price volatility.
Market segmentation theory Convincing individual investors and financial investment firms to hold securities with maturities other than which they prefer would need a higher interest rate. This is because individual investors and financial investment firms have specific maturity preferences.
References
Cornett, M. (2014). Finance . McGraw-Hill Higher Education.
James, J. A. (2015). Money and capital markets in postbellum America (Vol. 1436). Princeton University Press.
Malkiel, B. G. (2015). Term structure of interest rates: expectations and behavior patterns . Princeton University Press.
Pilbeam, K. (2018). Finance & financial markets . Macmillan International Higher Education.
