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liabilities IOUs or debts capital wealth, either financial or physical, that is employed to produce more wealth maturity (of a debt instrument) the number of years unitl that instuments expiration date short term debt instrument maturity is less than a year long term debt instrument maturity is ten years or longer intermediate debt instrument maturity is between one and ten years equities claims to share in the net income and the assets of a business dividends periodic payments that equities make residual claimant must pay all its debt holders before it pays it equity holders primary market a financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds secondary market a financial market in which securities that have been previously issued can be resold investment bank assists in the initial sale of securities in the primary market. guarantees a corporation's and than seels them to the public underwriting guaranteeing a corporation's securities and then selling them to the public brokers agents of investorswho match buyers with sellers of securities dealers link buyers and sellers by buying and selling securities at stated prices liquidity how fast a financial instrument can turn to cash exchanges where buyers and sellers of securities meet in one central location to conduct trades over-the-counter market dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices money market a financial market in which only short term debt instruments are traded capital market the market in which longer term debt and equity instruments are traded money market instruments 1. united states treasury bills 2. negotiable bank certificates of deposit 3.commercial paper 4.repurchase agreements 5.federal funds United States Treasury Bills ST debt instruments 1,3,6 month maturities pay a set amount at maturity but have no interest payments, however, they sell initially at a discount so interest can be made. Negotiable bank certificates of deposit debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the initial price Commercial paper st debt instrument issued by large banks and weel known corporations Repurchase Agreements st loans (usually with a maturity less than two weeks) for which treasury bills serve as collateral. a large corporation lends a bank a certain amount of money in return for treasury bills. if the bank can't pay back the loan than the corporation keeps the treasury bills. federal funds overnight loans between banks of thier deposits at the Federal Reserve. federal funds rate a closely watched barometer of the tightness of credit market conditions in the banking system and the stance of monetary policy capital market instruments debt and equity instruments with maturities of greater than one year. stocks equity claims on the net income and assets of a corporation mortgages loans to household or firms to purchase housing, land, or other real structure. corporate bonds long term bonds issued by corporations with very strong credit ratings. interest payments to the holder twice a year and face value payoff at the end of maturity US government Securities issued to finance the deficits of the federal government us government agency securities long term bonds issued by government agencies such as ginnie mae state and local government bonds/municipal issued by state and local governments to finance expenditures on schools roads and other large programs consumer and bank commercial loans loans to consumers and businesses. mostly by banks but sometimes from finance companies foreign bonds sold in a foreign country and are denominated in that countries currency eurobond a bond denominated in a currency other than that of the country in which it is sold eurocurrencies foreign currencies deposited in banks outside the home country Eurodollars US dollars deposited in foreign banks outside the United States or in foreign branches of US banks financial intermediation the primary route for moving funds from lenders to borrowers transaction costs the time and money spent in carrying out financial transactions economies of scale the reduction in transaction costs per dollar of transactions as the size of transactions increases liquidity services services that make it easier for customers to conduct transactions risk uncertainty about the returns investors will earn on assets risk sharing/asset transformation create and sell assets with risk characteristics that people are comfortable with. then FI's use these assets to purchase other assets that may have far more risk adverse selection (Before transaction)occurs when the potential borrowers who are most likely to produce an undesirable outcome are the ones who most actively seek out a loan and are thus most likely to be selected moral hazard (After transaction) risk that the borrower might engage in activities that are undesirable from the lender's point of view, because they make it less likely that the loan will be paid back. thrift institutions savings and loan associations, mutual savings banks, and credit unions commercial banks financial intermediary that raises funds primarily by issuing checkable deposits, savings deposits, and time deposits savings and loan associations/mutual savings banks obtain funds primarily through savings deposits and time and checkable deposits credit unions small cooperative lending instituions organized around a particular group. obtain funds from deposits called shares and primarily make consumer loans contractual savings institutions obtain funds on periodic intervals on a contractual basis. tend not to worry about liquidity of their assets investment intermediaries includes finance companies, mutual funds,and money market funds finance companies raise funds by issuing commercial paper, stocks, and bonds mutual funds these financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds money market mutual funds all characteristics of mutual funds but offer deposit type accounts. can write checks against the value of shareholding investment banks helps a corporation issue securities by first advising the corporation on what type of securities to issue than helping to sell, or underwrite, the securities by purchasing them fromthe corporation at a predetermined price and then selling them into the market. securities and exchange comission organized exchanges and financial markets requires disclosure of information, restricts insider trading Commodities futures trading Futures market exchanges regulates procedures for trading in futures markets office of the comptroller of the currency Federally chartered commercial banks charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold National credit union administration Federally chartered credit unions charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold State banking and insurance commissions state chartered depository institutions charter and examine the books of state chartered banks and insurance companies, impose restrictions on assets they can hold, and impose restrictions on branching Federal Deposit Insurance Corporation comercial banks, mutual savings banks, savings and loan associations provides insurance of up to 100,000 for each depositor at a bank, examines the books of insured banks, and imposes restrictions on assets they can hold Federal reserve system all depository institutions examines the books of commercial banks that are members of the system, sets reserve requirements for all banks office of thrift supervision savings and loan associations Examines the books of savings and loan associations, imposes restrictions on assets they can hold financial panic widespread collapse of financial intermediaries