Capital Market Participants

UNIT

THE CAPITAL AND BOND MARKET

LEARNING OBJECTIVES

After studying this unit, you should be able to:

· define the notion of capital market;

· state the purpose of capital market;

· be aware of the capital market instruments

· distinguish between the primary market and the secondary market for securities

· define the terminology related to capital and bond market;

· outline the main participants of capital market;

· define main types of bonds.

STARTING-UP

Look at the following headlines. What are these articles about? (Use Helpful Vocabulary Box). Comment on the following news.

Eurozone problems weigh heavily on equity capital markets

Geraldine Lambe | 01/02/2012 9:01 am

Belize nears defaulting on bond payment

Threat to withhold coupon casts cloud over restructuring talks

Aug 2012

US pensions buy 30-year bonds

Low borrowing costs drive companies to sell long-term debt

Aug 2012

Debt crisis sends European blue-chips to bonds

Continental groups turn to capital markets as banks restrict lending

Aug 2012

TEXT

Short-term securities that trade in a market we call the money market. Capital markets are for securities with an original maturity that is greater than one year. These securities include bonds, stocks, and mortgages.

Firms and individuals use the money markets primarily to warehouse funds for short periods of time. By contrast, firms and individuals use the capital markets for long-term investments.

Capital Market Participants

The primary issuers of capital market securities are federal and local governments and corporations. The federal government issues long-term notes and bonds to fund the national debt. State and municipal governments also issue long-term notes and bonds to finance capital projects, such as school and prison construction. Governments never issue stock because they cannot sell ownership claims.

Corporations issue both bonds and stock. One of the most difficult decisions a firm faces can be whether it should finance its growth with debt or equity. The distribution of a firm's capital between debt and equity is its capital structure. Corporations may enter the capital markets because they do not have sufficient capital to fund their investment opportunities. Alternatively, firms may choose to enter the capital markets because they want to preserve their capital to protect against unexpected needs. In either case, the availability of efficiently functioning capital markets is crucial to the continued health of the business sector.

The largest purchasers of capital market securities are households. Frequently, individuals and households deposit funds in financial institutions that use the funds to purchase capital market instruments such as bonds or stock.

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