1. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 6 Financial Markets, Instruments, and Market Makers

2. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Principal Money Market Instruments: Amount Outstanding, End of Year (in Billions of Dollars) Type of Instrument196019701980199019982001 c Treasury bills$37$76$200$482$ 691$ 620 Negotiable CDs 0 45 260 NA a NA a NA a Commercial paper b 5 35 99 558 1,173 1,471 Bankers’ acceptances 1 4 32 52 14 7 Repurchase agreements 1 22 102 324 878 1,241 and fed funds Eurodollars 1 20 68 NA a 151 214 a Not available. b Includes commercial paper issued by financial and nonfinancial firms. c As of June 30, 2001. SOURCE: Federal Reserve Flow of Funds Accounts, Z1, 2 nd Quarter 2001 (September 18, 2001).

3. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Money Market InstrumentTypical MaturitiesPrincipal BorrowersSecondary Market Treasury bills3 to 12 monthsU.S. governmentVery active Negotiable CDs1 to 6 monthsDepository institutionsModest activity Commercial paper1 to 270 daysFinancial and business firmsModerately active Bankers’ acceptances90 daysFinancial and business firmsLimited Repurchase agreements1 day, and 2 daysBanks, securities dealers,None, but very to 3 months typical; other owners of securities, active primary 6 months less typical nonfinancial firms, market for short governments maturities Fed fundsChiefly 1 business dayDepository institutionsActive brokers’ market EurodollarsOvernight, 1 week,BanksNone 1 to 6 months, and longer

4. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Bankers’ Acceptances Transaction occurs with a bankers’ acceptance; less risk to the exporter SOURCE: Adapted from Ann-Marie Meulendyke, U.S. Monetary Policy and Financial Markets (New York: Federal Reserve Bank of New York, 1989): 80 IMPORTEREXPORTER Goods Now Cash Later Documents Now BANK EXPORTERIMPORTER INVESTOR Goods Now Cash Later Accepted Time Draft Now Accepted Now Cash Now

5. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Principal Capital Market Instruments: Amount Outstanding, End of Year (in Billions of Dollars) Type of Instrument19601970198019901998 2001 ** Corporate stock$451$906$1,920$3,530$15,438$15,863.6 Mortgages 142 297 965 3,804 5,782 7,250.4 Corporate and foreign bonds 75 167 319 1,704 3,894 5,435.1 U.S. government securities 178 156 394 2,776 3,724 3,234.4 U.S. government agency 10 51 170 426 1,328 4,620.4 securities* Municipal securities 71 144 NA NA 1,464 1,629.3 *Excludes federally sponsored mortgage pools. **As of June 30, 2001. SOURCE: Federal Reserve Flow of Funds Accounts, Z1 (September 18, 2001); Federal Reserve Bulletin, various issues; Banking and Monetary Statistics 1941-1970.

6. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Capital Market InstrumentTypical MaturitiesPrincipal BorrowersSecondary Market Corporate Stock—CorporationsVery active for large corporations Mortgages15 to 30 yearsHome owners and other investorsModerately active Corporate bonds2 to 30 yearsCorporationsActive U.S. government securities Notes2 to 10 yearsU.S. governmentVery active Bonds30 years (currently)U.S. governmentVery active U.S. government agency securitiesUp to 30 yearsU.S. government agencySome activity Municipals2 to 30 yearsState and local governmentsActive

7. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Market Makers Assist in raising funds to finance deficits by marketing a borrower’s new securities in the primary market MARKET MAKERS Stand ready to buy or sell outstanding securities in the secondary market Advise potential buyers and sellers of securities on the course of action likely to minimize costs and maximize returns

8. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Marketing and Subsequent Trading of a Corporate Bond APEI wants to issue bonds to finance investment SSUs and financial intermediaries buy APEI bonds that will mature in 20 years One year later SSUs (or financial intermediaries) decide to sell some of their APEI bonds Salomon sells “used” APEI bonds to another SSU Primary Market Activity Merrill Lynch agrees (for a fee) to design a bond offering and to market (sell) the bonds Secondary Market Activity Salomon Smith Barney makes a market in APEI bonds by buying bonds from SSUs