Financial Markets, Instruments, and Market Makers

Capital Market Instruments

• Mortgages
• Loans to purchase
• Single-multiple family residential housing
• Land
• Other real structures
• … land or structures serve as collateral for loan
• Corporate Bonds
• Long-term bonds
• Issued by corporations
• Usually have excellent credit ratings
• Maturities range from 2 – 30 years
• Not as liquid as other securities

Capital Market Instruments

• U.S. Government Securities
• Long-term debt instruments
• Maturities of 2 – 30 years
• Issued by U.S. Treasury to finance deficits of federal government
• U.S. Government Agency Securities
• Long-term bonds issued by various government agencies that support
• Commercial, residential, & agricultural real estate lending
• Student loans

Capital Market Instruments

• State and local government bonds (municipals)
• Long-term instruments issued by state and local governments to finance expenditures on schools, roads, college dorms and the like.
• Revenue bonds - finance specific projects
• General obligation bonds - backed by full faith and credit of issuer

Role of Market Makers

• Function as coordinators who link buyers and sellers of financial instruments.
• Help maintain a smoothly functioning, orderly financial market.
• Receive, process, interpret and disseminate information to potential buyers and sellers.

• Exhibit 3–6
• Market Makers

Market Makers

• Broker arranges trades between
• Buyers
• Sellers
• Dealer
• Arranges trades between buyers and sellers
• Is the principal in transactions
• Purchases and holds securities sold by investors

Why Market Makers Make Markets

• Expected profits
• Mainly from revenue generated by price it charges for conducting a transaction
• Number of transactions engaged in
• Capital gains or losses associated with inventory of securities
• Fee for
• Brokerage fee or commission charge for each transaction
• Function of spread between Bid Price (buy securities) and Asked Price (sell securities) and number of transactions

Market Making and Liquidity

• Transactions costs and liquidity affect portfolio decisions

• Exhibit 3–7
• The Marketing and Subsequent Trading of a Corporate Bond