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Financial Markets and Institutions - Essay Example

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Financial Markets and Institutions Role of Financial Markets in Creating Wealth in US Financial investment by individuals and corporate constitutes an important part in wealth creation. Investment is done for future expenditure plans such as to buy real estate, pay for family expenses and also to pay off outstanding loans…
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Financial Markets and Institutions
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Financial Markets and Institutions

Another option available to an investor is the financial markets that help to channel money from an individual having surplus funds to an individual who requires the money. By participating in financial markets the investor will get the opportunity to invest in a broad range of securities ranging from stocks, bonds, and Treasury bills to modern financial instruments such as derivatives. Financial markets helps to create wealth by mobilizing personal savings of investors and arranging suitable invest opportunity. The process in turn contributes in creation of national wealth by encouraging investments and savings (Madura, 2012, pp.4-7). Overview of Securities Treasury Bills The maturity of T-bills is less than a year and is hence instrument of money market and not capital market. These instruments are very similar to zero-coupon bonds and hence do not pay interest prior to maturity. The process of issuing T-bills is through competitive bidding where they are sold to investors at discount and at maturity they are redeemed at the face value of the bond. The appreciation of bond prices in near future provides returns for investment. The maturity of treasury bills varies from 28 days to 364 days and they are sold weekly through single-price auctions. The minimum amount of investment in T-bills has been reduced from $1000 to $100 and the maximum purchase amount is $5 million. Bonds Bond can be defined as the financial instrument through an institution borrows money from different investor for definite period of time with a fixed interest rate. It can be used by corporate, municipalities and government organisations to fund new projects and for further expansion. Interest rate is also known as coupon rate and interest on bonds can be paid semi annually (every six months) and on the date of maturity principal amount of the bond will be paid to the investor with coupon rate. Bond market is also called as a debt market or credit market which is a financial market where new bonds can be issued and trading on existing bonds can be done. It is a long term financial market which includes corporate bonds, notes, bills; US treasury bonds.US bond market is about 44% of global bond market. According to SIFMA (Securities Industry and Financial Market Association) current US bonds market increased from March 2012 to 2013 by 2% to nearly $100 trillion. Currently the yields of US treasuries are varying from 0.05% to 3.89% for 3 months treasuries to 30 year treasuries (Fabozzi, 2007, p.261). Stocks The stock or capital stock of an incorporated business constitutes the equity stake of its owners. It represents the residual assets of company which is due to stockholders after discharging secured and unsecured debt. The stockholder’s equity cannot be withdrawn from company as it is detrimental to creditors of company. The stock of a corporation is partitioned into shares. Additional shares can be authorized by existing shareholders and issued by company. Shares represent a fraction of ownership in business. This ownership of share is documented by issue of stock certificate which a legal document is specifying the amount of share owned by shareholder. Stock in the form of shares can be preferred stock or common stock. Preferred stock differs from common stock in the way that it does not carry voting rights. It is entitled to a certain level of dividend payment ... Read More
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