Financial Markets and Institutions - Lecture 03

all right so today I have planned a lot of things last time we discussed a little bit financial markets financial instruments today we got the long task of actually seeing which are these financial instruments so right amount instruments financial instrument I already explained last time he's the same as financial assets sometimes these are known as in there called paper access paper s and a lot of times in finance especially in investing they just call it paper now repeating from last time we have the opposite of financial asset is called real assets real ass real acid is an acid of its own value real acid is a watch it has its own magic coffee as it's all that gasoline table usually these are things that you can touch you can feel including the shirt of course the most popular for people will be real estate is a major real answer okay car motorcycle will be real massive real assets usually fall into categories they'll fall into the category for realistic and they'll fall in the category of commodities like oil gas copper and so on this is real asset real asset has intrinsic value of its own financial assets do not have a banner of its own a financial asset is going to claim on somebody else now the best definition in the best way to understand man is that it is an asset which is someone else's liability so every financial asset is an asset and at the same time of my ability it is liability for the issuer so far easier it is a liability for the owner it is an asset okay there are many of them I have my other life number one we begin the simplistic easiest everybody that you knows it everybody that you have in your pocket it's called Paran C currency as in being issued by the central bad so currency is a liability of the central bank sometimes in some countries it will be a liability of the government is in the Treasury okay and it is an asset or whoever owns it next one on the table is Treasury bills now notice here in the little table when it says instruments okay which stands for financial instrument they say US Treasury bill it does not have to be us it could be your it could be UK could be Japanese could be for any other country treasurer again all these are financial is iment become a financial instrument issued by the Treasury in this case for the US Treasury Treasury means the government okay so issued by the government and here's the second little part bill for short-term financing so the bill part means for short term finance with a maturity of usually less than one year usually actually if it is more than one it's got a different name let's give it a try number three it's down the road treachery knows Treasury note again financial instrument issued by the Treasury with a maturity between one and ten years so this one is less than a year it comes up the bill is a money market instrument what's still a bit we can call it a bill yeah the one here is a little trickier it's always a trickier next one commercial paper paper is a security issue my companies as a businesses okay so now you begin to notice how I do the definitions I always start a financial instrument let's write it over here financial instruments as a financial asset as a favor asset as in paper is also called security security now let's explain the word security security back in the old days everybody understood when they still use their brains okay and observations everybody understood that paper assets in paper was risky paper asset is a claim on somebody else but claim on somebody else means that it is someone else's promise a financial instrument is simply a promise by someone else to them it is as good as a promise so back in the old days people understood things are either as good as gold meaning hundred percent sure or as good as a promise meaning very risky not sure so bad at all days people understood that the paper is extremely risky business because you gotta trust somebody because it's someone else's promise because somebody could disappear for vanish or die okay anything could happen with a promise okay so back in the old days everybody understood that these financial instruments are very risky so they have to design her name to make people feel better and more confident so they designed a name to be misleading to be security there is nothing secure about security securities are very risky but they call it security except all you've got a security and you think you got a security as in it's secured secures is the same as sure but it's not interested name is just a word that was designed for people to think about something that it's not so commercial paper back to the definition you can say is for security issued by businesses for short-term financing days how many how many days maturity up to 270 days so that we should commercial paper usually they like to do them around us 30 days 60 days 90 days hundred and twenty a hundred and eighty days and 270 next not let's write it out in red Fed Funds funds this is tricky Fed Funds means a low one commercial bank to another commercial bank for the purposes of satisfying minimum reserve requirements now it's even more than that it is a loan deposit the central bank so let's say cuz I'm the only one here easy for you to understand this I'm in the central bank okay you are commercial neck a another commercial bank fee you have with me 1 million deposits on the central bank you got 10 million deposit okay now you need 3 million and you need 3 million the money that you need with me is called required reserve so you need 3 in d3 you have one your short - okay what you have to do is you have to borrow so you borrow from somebody who has more than maybe she needs three she has and she has a service 7 so you will borrow - what you borrow is called fancy ok so she will land you to millions of veterans ok usually Fed Funds is a brand new world banking overnight Oh Ellen means a loan with the majority of one-day means along the tomorrow today it must repay tomorrow so that's fair the funds usually serves the purpose of satisfying required minimum reserve mixed repo six reload stands short for repurchase agreement repurchase agreement has two meanings one is the legal meaning by law technically it means that someone borrows money and you give them a securities in return in other words let's say you borrow money from me you will give me your securities I'll keep those securities and has security and when you pay me back I will give you back the securities now technically it is a sale the securities are technically sold and later on really purchases this is the legal definition the economic definition is a secured that was the one party mix alone and provides some securities as a security remember you can provide gold for security you can provide your house for a security from last time when you provide a house for a security we call the Lona mortgage okay you can provide your motorcycle for security you can provide anything value when that particular value would be short-term securities short term low-risk securities in the form of sale and repurchase it's called a repo next one yes yes the repurchased date and price will be all is agreed beforehand usually they'll say a 30-day repo but there is no reason to not to be 15-day report 14 to the 2-week repo could be a seven-day repo could be 60 days it is for always a great meaning pre-agreed exactly how many days in exactly the purchase price back so whatever the sale prices whatever the purchase prices the difference between the sale price in the purchase price is that return remember there is no profit in these operations the return okay so that's the repo next one negotiable certificates negotiable CD certificate of deposit is just that it is a piece of paper like a certificate that you have a deposit with a commercial bank so a CD simply a deposit with a commercial bank okay and that deposit could be potentially bought solve or done a whole bunch of other things now the verb negotiable is a very special meaning it means that again it can be trained there's a exact legal meaning it means that you can transfer the title you can transfer title in other words all the ship can change hands in other words if it's your CD you can transfer on to her non-negotiable CD means title cannot be changed ownership cannot be changed you cannot give it to somebody else and you cannot transfer it you cannot sell it you cannot do anything with it when negotiable means you can transfer ownership to somebody else well if you can transfer ownership this means you can actually sell it and if you can sell it this means you can negotiate the price so negotiable here means the economic meaning is that you can actually negotiate and bargain the price but which you could possibly sell it or you could use it as a security so if you put money in the bank in the form of a deposit you got a certificate of deposit maybe let's say 90 days but you need money tomorrow you can use the CD as a security to borrow from the same bank or from any other day okay so the CD can become negotiate becomes negotiable you can put it with a data bank and that other bank won't give you alone if you pay back the loan they will give you that the negotiable C but if you don't pay that they will keep it or take it they'll take ownership of receipt of the CD to satisfy their long next one ace very tricky very tricky let's put it in right and if you can zoom in a little bit right it stands for money market mutual funds okay first thing to understand and that's the hardest part is that mutual fund is a financial institution its nominees there's a financial okay so the true fund is a financial institution okay it is a fun which invests in money market instruments that's the fund itself so when you have ownership in a money market mutual fund it's like you own a share of the money market mutual it's like you're the owner it's like a share it's a share of ownership and that share of ownership you could it's called greedy you can take back the money you can sell it back to the fund will give you money so money market mutual fund is a financial institution and that financial institution will issue its own shared well that share of the mutual fund of the money market we'll be considerably instruments that's why it's tricky it's tricky because it means two things at the same time it has meaning of a financial institution it has the meaning of an instrument issued by that particular institution so the money market mutual fund is considered to be a short term in for a money market instruments next euro dollars your laws and you know those usually stands usually short for you longer deposit the word euro means in a foreign bank in a foreign country okay back in the old days originally it meant in Europe where dollar deposits were made in British banks in London okay but now you may have not deposited Germany we for you most of you have dollar deposits in Cambodia I got a dollar deposit in my home country of Bulgaria so these are all Eurodollar deposits now you may have a humeral deposit is in a euro currency okay in and out of you know deposits here it's going to be called a hero usually deposit euro meaning in a foreign and euro meaning in the currency it would be called a hero you deposit meaning it's a yen deposit somewhere in the bank outside Japan okay so that's a Europe dollar deposit let's see what they say about it they say up to one year next one commercial credit low and commercial credit loan it's actually very nice we can shorten it just for a commercial loan is a loan usually or most often made by a commercial bank to a business for commercial purposes now I need to understand what's the meaning of commercial commercial means again yes perfect answer for making money how do we call that kind of money that you make it's called a profit in other words the commercial loans are loans made to businesses for the purpose of profits for the purpose of making profit or generating profit these are what we usually call business loans business it's the same thing now these would be short six months these could be nine months but commercial loans could be two years five years ten years usually it becomes a capital market or long term next one is on the table pay attention you s notes I already covered us note is in Treasury note so treasurer and all you can write equals us know in that particular says the node will have a maturity between one and ten years next mortgages remember mortgage is a loan secured by real estate now it may be commercial mortgage commercial or mortgage will be a loan made to make business for business possess meaning for profit purposes and secured with real estate commercial mortgage may be secured by a factoring okay it may be secured by some sort of equipment like let's say oil refinery gas refinery it could be some kind of a plant that's a car manufacturing plant okay with all the machining equipment building and everything else that's a mortgage it could be mortgage made to households to buy real estate or it could be made to a household to buy anything they wanna buy maybe they can spend it on education on buying a car on paying hospital bills or whatever it's secured by real estate next municipal bonds yes well that's exactly the definition if it's not secured by real estate it is not a mortgage it's something else it could be a commercial loan it could be an unsecured loan it's anything but it cannot be mortgaged the definition is loan secured with market if it's not security good market disorder with with the realistic it's not a market something else okay let's take a look and find out with municipal oh is it municipal okay municipal bonds these will be a bond issue sometimes two or three years for a little bit more on five years but most commonly they're going to be municipal means of local local means in the United States it will be a particular state the state of Ohio municipal means of the city of the county it could be for the United States particularly but may be applying for we could be a school district in other words it is a government institution which is not the main central government so the central government does not relate to the central government could be only to the region okay here is in Thailand you have provinces it could be issued by a particular products it could be issued by a city in the province okay what could be issued by a particular area within the city for example particular area you will be what two o'clock okay so they may issue their own box and use only for the local area okay so that's good next one thirteen core foreign bodies is a bond issued by corporations usually ten years but it could be our let's see what else we've got here thirteen corporate modes I have another one which is not in the little it's called agency bodies agency means that it's not owned by the government but it somehow sponsored by the government it is known in short as G s be spamming for government sponsored entity government sponsored entity I'll provide some examples but government sponsor and the difference have called the US government and many couples around the world I know my Bulgarian government has such an image before farming it's very big in Thailand Thai government it's got a very big agricultural policy where they want to promote agriculture and they promote agriculture by providing special agricultural loans these we call let's write them out one of the many types of walls we call these farming loans farming laws you can say our laws made to farmers but it's not exactly true it is long made for agricultural purposes it doesn't have to be a farmer the question is not who gets the loan you can get along the question is what is the purpose how the money will be used so it is used for agricultural isn't farming usually the borrower could be the farmer but it could be so these are farming world so gia sees may provide number one farming bubble so it's going to be a government sponsored entity now it's kind of like a government bank okay it's supported by the government it's subsidized by the government it is probably created by the government to stimulate the particular business one such business will be farming another much more important in bigger business will be housing is in helping pour into the Lincoln families buy house so the GC will be providing loans to lower to help them buy a house it's one of usually alone that the commercial bank dog wants to make because the loan is too risky someone with relatively low income not a very good job not the very stable job but the god one says okay we want to try to help these people we give him a chance so they'll give him a mortgage for the purposes of their own housing okay now housing can be divided into two major categories one is called residential residential and the other one is called commercial residential has two different meanings residential means a place where people live and sleep okay and here residential has the second meaning a place which will be owned by the people as their main residence in other words the government will subsidize and help you only if you're buying the wrong house for you to live in okay the other one is commercial commercial means either for business purposes or investment purposes where you buy the house but you don't live in it you rent it out or income you that is a business for commercial purposes okay well the government's will usually stimulate all the residential houses they say we don't want rich people who have six houses right renting out five two by six more houses that's not our goal for this you got commercially we want to have that poor family they have their own - low incomes maybe one is a young teacher that I want is a nurse and I'm a lot of money they don't have a good credit they just got married they just got a baby and they need a place of their own so this is residential housing governments will stimulate residential house okay so these institutions we call agencies and short for government sponsors entity and government sponsored entity will be lending institutions there will be like backs they're not the bank of Bank is a financial institution which makes commercials these will be making other words not necessarily commercial not necessarily for him it's gonna make it long we help farmers it's gonna help but make most to help young families by their own little apartment or house so these are not commercial loans it is not the bank but it will go what we call the lending institution it will make loans in this case not next yes question not necessarily not necessarily a farming law may be backed by real estate as a debugger cultural and it may be backed only by the crop of the land okay now residential would usually usually be backed by the apartment or the house so in this particular case they will be making what is called the agency mortgage agent mortgage is a mortgage made by an agency for the purchase of a house but the agency self will issue an agency so the agency will have assets and liabilities they will finance themselves by issuing agency bonds that's the liability and then they will be investing in residential mortgages for agency loans the short answer is if interest rates will be usually low they will be very low a lot of times they will be below the market rate because it's the government's policy to help these people by giving them cheaper agency bonds will be considered implicitly guaranteed by the government so the agencies themselves will be effectively but subsidized by the government so the agencies themselves will be benefitting by the guarantee of the government so the agency bonds will be also on a pillow market back it's below market interest rate okay that's the whole purpose the whole purpose is to provide a government form of subsidy in the subsidies below market interest rate on bonds and then below market interest rate on residential origins in all farming law next leases lease or losses could be presidential ways I just have to three weeks ago signed a residential lease lease is a fixed term contract fixed term could be three-month contract six-month contract most commonly 12-month contract but they may be longer term places for a car it may be a five-year lease so it's a contract for a specified period of time to make specific valence almost always monthly payments so now sometimes the beast could be just calling for annual okay he leases it then she signs a lease a five-year lease in the lease for farming leases specifies period but my dad will receive payments here but if it's residential meaning a place where actually a little bit in okay it's gonna be monthly lease favored don't confuse least with lease payment the lease will be twelve months but the payment will be usually usually okay so Early's is a contract it's an agreement the lease itself can serve as a security you can sell the lace and whoever gets the lease will continue to receive the payments okay that's at least usually you will also have now remember there is a are mean these it could be raising them and it could be commercial commercial could be lease for office you want to rent the office okay but commercial would be lease for but truck your lease droplets it for five years it could be a lease for a taxi taxi commercial so usually commercial leases will be either for offices or for some very expensive equipment so it could be an equipment lease or an office place so commercial in this film release again it doesn't matter what the car is used for what matters again remember we never say what's the use in what's the focus always said is that it is a fixed period of time where an asset will be used or rented okay and you have usually monthly payments where they use it for fun okay for medical purposes for commercial purposes for pharmacy doesn't matter what the purposes the questions who said the fixed period of time does it require you to do monthly rental payments is it asset return at the end of the period that's it it doesn't matter what are you drive it's for fun or for a taxi okay two more and then we take a break well your hole studded prefers is a stock meaning a share of ownership in a company which is preferred to next one is called common stock preferred is preferred to the dividend dividend is the payment made to a stockholder so preferred stock will always pay the dividend to the preferred stock calmer first before dividend is paid to the common a different way of saying is that the common stock holder cannot get a dividend bigger than the preferred he sorry to not get a dividend that this first in other was the preferred gets the dividend first if there is money left then the common stock order to get it second correct you will get it laughs all right well this is a quick well not very short it's an hour long survey all the king's students you'll need to know and understand well these instruments in the first quiz coming what two weeks or so are we asking for three adults

Channel: Krassimir Petrov

Views: 22,427

Rating: 4.9227052 out of 5

Keywords:

Id: n1o9YUmPTFc

Length: 48min 35sec (2915 seconds)

Published: Wed Mar 09 2016