Write Your Answers To The Following Questions Classification

Write Your Answers To The Following Questionsclassify The Following T

Write your answers to the following questions: classify the following transactions as taking place in either the primary or secondary market: IBM issues $200 million of new common stock. The new company issues $50 million of common stock in an IPO. IBM sells $5 million of GM preferred stock out of its marketable securities portfolio. The Magellan Fund buys $100 million of previously issued IBM bonds. Prudential Insurance Co. sells $10 million of GM common stock.

Classify the following financial instruments as money market securities or capital market securities: Bankers acceptances, commercial paper, common stock, corporate bonds, mortgages, negotiable certificates of deposit, repurchase agreements, U.S. Treasury bills, U.S. Treasury notes, federal funds.

Paper For Above instruction

Introduction

Financial markets are vital components of the global economy, facilitating the transfer of funds and the allocation of resources across various financial instruments and transactions. Understanding the distinctions between primary and secondary markets, as well as the classification of financial instruments into money market and capital market securities, is fundamental for participants and regulators in these markets. This paper aims to categorize specific financial transactions and instruments accurately, providing clarity on their characteristics and roles within the financial ecosystem.

Classification of Transactions: Primary vs. Secondary Markets

The primary market serves as the platform where new securities are issued directly by corporations, governments, or other entities to investors, typically through initial public offerings (IPOs) or new bond issues. Conversely, the secondary market involves the buying and selling of existing securities among investors after they have been initially issued.

1. IBM issues $200 million of new common stock

This transaction takes place in the primary market because IBM is issuing new shares directly to investors for the first time, raising capital for the company.

2. The new company issues $50 million of common stock in an IPO

An IPO is a quintessential primary market transaction, where the company offers new shares to the public for the first time to raise capital.

3. IBM sells $5 million of GM preferred stock out of its marketable securities portfolio

This sale occurs in the secondary market, as IBM is selling previously issued preferred stock from its holdings rather than issuing new securities.

4. The Magellan Fund buys $100 million of previously issued IBM bonds

This is a secondary market transaction, focusing on the trading of existing bonds between investors, with no new issuance involved.

5. Prudential Insurance Co. sells $10 million of GM common stock

This sale is in the secondary market, as the insurance company is selling shares that it previously held, not issuing new shares.

Classification of Financial Instruments: Money Market vs. Capital Market Securities

Financial instruments are also categorized based on the maturity period and risk profile into money market securities or capital market securities. Money market securities are short-term, highly liquid instruments, primarily used for borrowing and lending short-term funds. Capital market securities are long-term investments, including stocks and bonds, used to raise or allocate capital over a longer horizon.

1. Bankers Acceptances

Money market security, used as a short-term time draft guaranteed by a bank to facilitate international trade.

2. Commercial Paper

Money market security, short-term unsecured debt issued by corporations for financing receivables and inventories.

3. Common Stock

Capital market security, representing ownership in a corporation and entitling shareholders to dividends and voting rights.

4. Corporate Bonds

Capital market security, long-term debt instruments issued by corporations to raise capital.

5. Mortgages

Capital market security, long-term loans secured by real estate properties.

6. Negotiable Certificates of Deposit (NCDs)

Money market security, short-term, large-denomination time deposits that are negotiable.

7. Repurchase Agreements (Repos)

Money market security, short-term borrowing where one party sells securities with an agreement to repurchase them later, usually within a few days.

8. U.S. Treasury Bills (T-Bills)

Money market security, short-term government debt with maturities of one year or less.

9. U.S. Treasury Notes

Capital market security, long-term government debt securities with maturities of 2–10 years.

10. Federal Funds

Money market security, short-term funds transferred between banks, usually for overnight borrowing.

Conclusion

Accurate classification of transactions and financial instruments enhances market clarity and guides investment decisions. Primary markets are vital for initial capital formation through new securities issuance, while secondary markets facilitate liquidity and price discovery for existing securities. Money market instruments provide short-term funding options, whereas capital market instruments are oriented toward long-term investment and financing needs. Understanding these distinctions ensures efficient functioning of financial systems and informed participation by investors and regulators alike.

References

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  • United States Department of the Treasury. (2022). Treasury Securities. Retrieved from https://home.treasury.gov/
  • International Monetary Fund. (2021). Global Financial Stability Report. IMF Publications.

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