7 th session
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7 th Session. 3. Certificate of Deposit Issued by a bank to certify that the depositor has deposited a certain sum of money at the bank. Characteristics Large denominations ($100,000, $1M, $10 M) Interest payment Maturity (up to 1 year) Typical Issuer: Commercial bank

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7 th Session

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7 th session

7th Session


7 th session

3. Certificate of Deposit

  • Issued by a bank to certify that the depositor has deposited a certain sum of money at the bank.

  • Characteristics

    • Large denominations ($100,000, $1M, $10 M)

    • Interest payment

    • Maturity (up to 1 year)

    • Typical Issuer: Commercial bank

    • Typical Investor: Institutional Investors

    • Term security

    • Bearer Instrument (holder of instrument is owner and entitled to coupon payment)

    • Negotiable (can be bought and sold in secondary market)


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4. Commercial Paper

  • Issued by well-known corporations for short term financing obligations.

  • Characteristics

    • Typical Investor: Institutional investors

    • Discount Investment

    • Direct Placement

    • Bearer Instrument

    • Unsecured loan

    • Riskiness (investor can gauge possible riskiness by looking at the credit rating of the issuing corporation)


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5. Banker’s Acceptance

  • Short term debt instrument guaranteed for payment by a commercial bank.

  • Bank ‘accepts’ the responsibility to pay.

  • Characteristic

    • Typically arises in International trade where the two companies do not know about each other (located at different geographical areas).


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6. Eurodollar

  • Euro means a ‘foreign country’.

  • Refers to US dollar deposit in a foreign country.

  • Characteristics

    • Maturity

    • Interest payment

  • EuroYen


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7. Repo (Repurchase Agreement)

  • Sale of government securities with an immediate agreement to buy them back on a future date at a specified price.

  • Characteristics

    • Secured loan

    • Time (Overnight – some are long term)


Capital market instruments

Capital Market Instruments

  • T-Bonds and T-Notes

    • Long term debt security

    • Issued by government

      • PIB

    • Maturity: T-Notes (2-10 years) T-Notes (10-30 years)

    • Fixed Interest payment

    • Principal payment upon maturity

    • Government is the borrower

    • Risk (Riskier than T-bills)


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2. Corporate Bonds

  • Long term debt security

  • Issued by corporation

  • Maturity (2-30 years)

  • Fixed interest payment

  • Risk (credibility)

    • AAA rated bond: risk (low) return (low)

    • B rated bond: risk (high) return (high)


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3. Mortgages

  • Loan made to purchase real estate with the real estate serving as collateral for the loan.

    4. Common Stock

  • Share of ownership

  • Dividends

    • Variable


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5. Preferred Stock

  • Hybrid security (characteristics of both bond and stock instruments)

  • Characteristics similar to bond:

    • Fixed dividend payment

    • Paid before common stockholders

  • Characteristics similar to stock:

    • Generally listed on a stock exchange

    • No fixed maturity date


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9th Session


The importance of financial intermediaries in financial markets

The Importance of Financial Intermediaries in Financial Markets

Direct Finance

Transaction Costs

Asymmetric Information cost


1 transaction cost

1. Transaction cost

  • How Transaction cost adversely impacts direct financing transactions?

    • Definition

      • Time and Search costs

      • Legal costs

      • Monitoring and enforcement costs

  • How can a financial intermediary reduce transaction cost?

    • Economies of scale

    • Expertise


2 asymmetric information

2. Asymmetric Information

  • Definition

  • Types

    • Adverse selection

    • Moral Hazard

  • How can a financial intermediary reduce asymmetric information cost?

    • Financial intermediaries, particularly banks, specialize in gathering information about the default risk of borrowers. Among the tools used are credit reports.

    • Commercial banks specialize in monitoring borrowers and have developed effective techniques for ensuring that the funds they loan are actually used for their intended purpose.


Financial intermediaries

Financial Intermediaries

  • Depository institutions

    • Commercial banks

    • Saving and Loan associations

    • Mutual savings banks

    • Credit Unions

  • Contractual saving institutions

    • Life Insurance companies

    • Fire and casualty insurance

    • Pension funds

  • Investment companies

    • Finance companies

    • Mutual funds

    • Money market mutual funds


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10thSession


Ensuring the soundness of financial intermediaries

Ensuring the soundness of Financial Intermediaries

  • Restrictions on entry

    • Federal charter, upright citizens with large amount of funds

  • Disclosure requirements

    • Must make certain information public, book of accounts subjected to regular inspection

  • Restrictions on assets and activities

    • Restriction from holding common stock

  • Deposit insurance

    • Deposit insured by the federal government

  • Limits on competition

    • Limited number of branches

    • Restriction on Interest rates


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