Understand Financial Market Structures of Debt and Equity Markets

 In this article, we will continue the financial investing series with the discussion of financial market structures known as debt and equity markets in macroeconomics.

I. Debt markets

Fund borrowers can utilize debt instruments like bonds, debentures or mortgages. These financial instruments are legal document that require the borrower to pay lender certain amount of interest payment until a maturity date. The maturity date is the date the bonds expire Interest is paid at stated intervals until the maturity date, whereupon the borrower repays the principal.

A debt instrument can be

a)Short term

Instruments require one year or less for repayment

b) Medium term

It can be repaid between one and ten years.

c) Long term.

It is longer than ten years to repayment.

II. Equity markets

The equity market raises funds by the issue of shares that create ownership in the corporation. There are different types of equities markets

1. Primary markets:

Only sell new issues of a security. Brokerage houses act as intermediaries and underwrite the securities by guaranteeing the price by the corporation or government issuing them. Initial Public Offerings (IPOs) are usually pre-sold and not available to the public.

2. Secondary markets:

Resell securities that have already issued through the primary market and

they are sold in open market without a price guarantee by stockbrokers and dealers.

3. Exchange and over-the-counter markets:

this is the stock markets that arrange for buyers and sellers to interact in one physical location.

4. Over the counter markets (OTC markets):

Dealers hold an inventory of securities that they sell over the counter to anyone willing to accept their prices.

III. Money Markets

Money markets trade securities with short maturity dates, usually of one year or less.

1. Government treasury bills (T-bills):

These are debt instruments purchased by corporations, other governments and consumers to finance federal government deficits.

2. Short term government bonds:

These are bonds that have a maturity date of less than three years and carry a fixed interest rate. They are equal in security to a T-Bill.

3. State and municipal short term notes and bonds:

These carry interest rates that are determined by the credit rating of their issuer.

4. Banker acceptances:

These are bank drafts issued by a firm. They have a stated maturity date, usually 30 to 90 days and can, for a fee, be guaranteed by a bank. They are also virtually risk free.

IV. Capital markets

Capital market instruments include the following:

1. Stocks:

These are equity shares in a corporation.

2. Government bonds:

These are long term debt instruments that have specific maturity dates, interest rate and are highly liquid.

3.Savings Bonds:

These are sold directly to the consumer and always maintain their face value and may be cashed at any time.

4. State or provincial Bonds:

These are issued by a state or provincial government.

5. Municipal Bonds:

Issued by local governments and often used to finance specific projects.

6. Corporate Bonds:

These are used to finance short or long term activities. They have a lower credit rating than government bonds, hence a higher interest rate.

7. Warrants:

Warrants are certificates that give an individual the option to buy a stated number of shares at a specified price for a specified period of time.

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