Financial Markets and Interest Rates

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Financial Markets and Interest Rates

The primary market is where economic units sell new securities to raise needed funds. Could be an Initial Public Offering (IPO) or issue of new shares of an existing publicly traded company. Investment banks will set a beginning price range for a given security and then oversee its sale directly to investors. Once the initial sale is complete, further trading is conducted on the secondary market, which is where the bulk of exchange trading occurs each day.
The secondary market is where investors trade previously issued securities with each other. Mediators such as mutual funds, banks and insurance companies help to simplify the flow of funds in the financial marketplace. If funds remain idle, this results in lower growth for the economy and higher unemployment and lower profits. The more efficient the market, the easier it is to transfer idle funds to those parties that need the funds.
Common stockholders individually own a portion of the company and can vote on major company decisions. They receive a return on their investment in the form of dividends and/or appreciation in the value of the stock. The other kind of stockholders is preferred stockholders. Preferred stockholders do not generally have voting rights, but have priority in receiving dividends and are paid dividends at a pre-set rate.
Interest rates play a large part in the financial market and come in many different forms for different situations. Nominal Interest Rates are determined by a few factors such as Real Rate of Interest, Expected Inflation, Maturity Risk, Default Risk, and Liquidity Risk. If interest rates rise, lenders may find that their loans are earning rates that are lower than what they could get on new loans. The risk of this occurring is higher for longer maturity loans. Lenders will demand a premium to cover this risk depending on…...

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