Section 3.1 Text
⏹ Purpo and Participants
Firms that issue capital market curities and the investors who buy them have very different motivations currythan they have when they operate in the money market. Firms and individuals u the money market primarily to warehou funds for short periods of time until a more important need or a more productive u for the funds aris. By contrast, firms and individuals u the capital market for long-term investments. The capital markets provide an alternative to investment in ast such as real estate or gold. Meanwhile, the primary reason that individuals and firms choo to borrow long-term funds is to reduce the risk that interest rates will ri before they pay off their debt. This reduction in risk comes at a cost. However, most long-term interest rates are higher than short-term rates due to risk premiums. Despite the need to pay higher interest rates to borrow in the capital markets, the markets remain very active.
The primary issuers of capital market curities are governments and corporations. Howev
er, governments never issue stocks.
Corporations both issue bonds and stocks. One of the most difficult decisions a firm faces can be whether it should finance its growth with debt mor equity. The distribution of a firm’s capital between debt and equity is its capital structure.
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⏹ Trading in the Capital Market
Capital market trading occurs in either the primary market or the condary market. Investment funds, corporations, and individual investors can all purcha curities offered in the primary market, where new issues of stocks and bonds are introduced. When firms ll curities for the first time, the issue is an initial public offering.
The capital markets have well-developed condary market. A condary market is where the sale of previously issued curities takes place, and it is important becau most investors plan to ll long-term bonds before they reach maturity and eventually to ll their holdingsagitated of stocks as well.
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1. Bonds
The capital markets are where curities with original maturities of greater than one year trade. Capital market curities fall into 网站本地化three categories: bonds, stocks, and mortgages. In this ction, we focus on bonds.
Bonds are curities that reprent a debt owed by the issuer to the investor. Bonds obligate the issuer to pay a specified amount at a given date.
Treasury Bonds
The government issues notes and bonds厦门中信 to finance the national debt. The difference between notes and bonds is that notes have an original maturity of 1 to 10 years while bonds have an original maturity of 10 to 30 years. (Recall from last chapter that Treasury bills mature in less than 1 year.)
Government notes and bonds are free of default risk becau the government can always print money to pay off debt if necessary.
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Corporate Bonds
When large corporations need to borrow funds for long periods of time, they may issue bonds. The bond indenture is a contract that states the lender’s rights and privileges and the borrower’s obligations. Any collateral offered as curity to the bondholders will also be described in the indenture.
The degree of risk varies widely among issues becau the risk of default depends on the company’s health, which can be affected by a number of variables. The interest rate on corporate bonds varies with the level of risk. Bonds issued by a company with high credit rating has lower interest rates than tho with poor ratings.
2. Stocks
妈的英语Shares of stock in the firm reprent ownership. A stockholder owns a percentage interest in a firm consistent with the percentage of outstanding stock held. The ownership is in contrast to a bondholder, who holds no ownership interest but is rather a creditor of the firm.
Ownership of stocks gives the stockholder certain rights regarding the firm. One is the right of a residual claimant: Stockholders have a claim on all asts and income left over after all other claimants have been satisfied. If nothing is left over, they get nothing. As noted, however, it is possible to get rich as a stockholder if the firm does well.
Investors can earn a return from stocks in one of two years. Either the price of the stock ris over time, or the firm pays the stockholder dividends. Frequently, investors earn a return from both sources. Stocks are more risky than bonds becau stockholders have a lower priority than bondholders when the firm is in trouble. The returns to investors are less assured becau dividends can be easily changed, and stock price increas are not guaranteed. Despite the risks, it is possible to make a great deal of money by investing in stocks, whereas it is very unlikely by investing in bonds. Another distinction between stocks and bonds is that stocks do not mature.
