Direct finance and Indirect finance

Structure of Financial Markets

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Increase liquidity of financial assets
Determine security prices that help determine the price of securities in primary markets

Exchange – buyers and sellers meet in one central location (e.g., NYSE or Chicago Board of Trade)
Over-the-counter market – transactions take place in multiple locations through dealers

Money markets deal in short-term debt instruments
Capital markets deal in intermediate and longer-term debt and equity instruments

US treasury bills: 1-, 3-, 6-month maturities, discounted; no default risk
Negotiable bank certificates of deposit (NCD): transferable in the secondary markets, large denominations
Commercial paper (CP): issued by large banks or well-known corporations, growing fast, direct finance; largest instrument
Banker’s Acceptances: can be resold in the secondary markets, use abroad in international trade
Repurchase Agreements (repos): treasury bills are used to serve as collateral, <2 weeks
Federal (Fed) funds: overnight loan b/w banks of their deposits at Fed

Stocks: largest instruments, hold by individuals (1/2), pensions, mutual funds, and insurance companies
Mortgages: 3 government agencies, FNMA (Fannie Mae), GNMA (Ginnie Mae), FHLMC (Freddie Mac)
Corporate bonds: convertible or non-convertible
US government securities: issued by US Treasury, most liquid security
US government agency securities: issued by other US gov’t agencies, e.g., FNMA, GNMA…
State and local government bonds: also called municipal bonds, interest-exemption
Consumer and bank commercial loans

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