Money, Goods and Capital Markets: An Overview

1. Money, Goods and Capital Markets: An Overview Appendix: Definition Prepared by: Sir Jones The Great

2. The Goods Marketand the Money Market • The goods market is the market in which goods and services are exchanged and in which the equilibrium level of output and market price is determined. • The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months.

3. The Capital Market • A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year.

4. The Links Between the capital and the Money Market • Capital markets are for people who are willing to accept more risk and less liquidity in their investments for a possibly higher return than Money markets.

5. The Money Market • Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity • The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments • These instruments are often benchmarked to (i.e. priced by reference to) The Central Bank of The Bahamas prime rate.

6. Common money market instruments • Certificate of deposit - Time deposits, commonly offered to consumers by banks, thrift institutions, and credit unions. • Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. • Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value.

7. Common money market instruments • Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. • Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. • Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.

8. The Capital market The capital market includes the stock market (equity securities) and the bond market (debt) Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

9. Securities • A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (such as banknotes, bonds and debentures) and equity securities, e.g., common stocks • Commercial enterprises have traditionally used securities as a means of raising new capital. Securities may be an attractive option relative to bank loans

10. The Stock Market • A stock market or equity market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded

11. Members of The BISX • BISX has approved five broker-dealer Members to trade listed securities on BISX: • SG Hambros Bank & Trust (Bahamas) Limited • FG Capital Markets Limited • CFAL Securities Ltd • Royal Fidelity Capital Markets • Colonial Pension Services (Bahamas) Limited • These entities actively facilitate trading of the domestic equities listed on BISX

12. The Stock Market • The stocks are listed and traded on stock exchanges which are entities of a corporation specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in The Bahamas is The Bahamas International Securities Exchange (BISX)

13. The Break Downsee: (http://www.bisxbahamas.com/companies.php)

14. Shares , Bonds and Debentures • Issued by a corporation, a debenture is known as a promissory note or bond which is backed by earnings of the firm as well as it’s credit history. The firm basically promises to pay the face value of the debenture as well as the interest. • A share represents ownership in a company. • A bond is primarily a loan and can be seen as a debt which must be repaid

15. Securities traded on the exchange • Only those Public Companies which have been approved by the Stock Exchange Council can have their shares traded on the Stock Exchange. These companies are described as listed or quoted companies • The types of Securities traded on the Stock Exchange include: • Gilt-edge securities Ordinary shares • Debentures Securities issued by local author. • Preference shares Shares on exchange in other countries

16. Functions of The Stock Exchange • It helps the Government and Companies to borrow on a long-term basis. • It influences the way in which savings are invested. • It provides a means for valuing financial assets.(see page 173/4 of the Longman)

17. Primary and Secondary Markets • Primary Markets/ Issue refers to the market for first hand issue. This means the shares are issued/sold by the firm to the holder. Company receive money on this issue • Secondary Markets/Issue refers to the reselling of those shares by the holders of the shares. This is usually done on The Stock Exchange or over the counter. The holder receive money on this issue and surrender ownership of share to purchaser.

18. The purpose of The Stock Exchange • Very little of the money that changes hands on The Stock Exchange finds it’s way back to business. Firms receives money only when the sold securities on the primary/first issue. Nevertheless, The Stock Exchange helps businesses in several ways: • People would not be willing to buy securities in the first place if they could not sell the on/again. • People buy securities because they believe that securities might rise in value. The Stock Exchange publish figures everyday.

19. Stock Exchange terms • Speculation The guessing of the movement of share prices in the future. Speculators buy shares to make a profit. Not for dividends. • Bulls These are speculators who buy shares expecting they will rise in price and can be resold at a profit. • Stags These are speculators who buy new shares, hoping that the price will rise as soon as trading begins on The Stock Exchange • Bears These are speculators who sell shares, believing that they are about to fall in price

20. Why shares rise and fall in value • Shares rise or fall in value because there is a change in either the demand or supply of them. Here are some reasons why demand or supply may chjange: • Changes in company profits • Changes in interest rates • Interference in the supply of goods and services • Rumours • Government policy

21. The yield • The yield depends on the market price of the share • Another name for yield is real return. Dividends are declared on the Nominal or Par value of a share.

22. Calculation of the yield If Tanarj has a $1 share, and the dividend is declared as 5%, Tanarj will receive a $0.05 dividend that year (i.e., 5/100 *$1) The yield or Rate of Return, however, will be dependent on the Current Market price of the share on the Stock Exchange. If the share is being quoted at $2, the yield is the dividend as a percentage of the market price (i.e., Yield = Dividend/Market Price) Yield = $0.05/$2 = 2.5%. The yield is always measured in percentage.

23. The BIG BANG Theory • Research and write short notes on The BIG BANG Theory.

24. Appendix: The IS-LM Diagram • The IS curve shows a negative relationship between the equilibrium value of Y and r. • Each point on the curve represents equilibrium in the goods market for a given value of the interest rate.

25. Appendix: The IS-LM Diagram • The LM curve shows a positive relationship between the equilibrium value of Y and r. • Each point on the curve represents equilibrium in the money market for a given value of aggregate output (income). • The LM curve is upward-sloping because higher income results in higher demand for money and a higher interest rate.

26. Appendix: The IS-LM Diagram • The point at which the IS and the LM curves intersect corresponds to the point at which the goods market and the money market are in equilibrium.

27. Appendix: The IS-LM Diagram • An increase in government spending shifts the IS curve to the right. • This increases the value of both Y and r.

28. Appendix: The IS-LM Diagram • An increase in the money supply shifts the LM curve to the right. • In turn, the value of Y increases and the value of r decreases.

29. Appendix: The IS-LM Diagram • It is easy to use the IS/LM diagram to see how there can be a monetary and fiscal policy mix that leads to a particular outcome. • Here, an increase in the money supply accompanied by an increase in government spending leads to an increase in aggregate output, with no change in the interest rate.