33. The global equities market: size, indicators, principles of organization. Глобальный рынок капитала: размер, индикаторы, принципы организации.

A stock market (equity market) is a public entity for the trading of company stock (shares); these are securities listed on a stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $40 trillion at the beginning of October 2008. The total world derivatives market has been estimated at about $800 trillion face or nominal value = 11*GDP global.

Debt capital market + equity market = capital market. These markets are used by the governments and several companies for raising funds for long and short term. The trade in these markets is done through several financial instruments. Financial regulators, such as the U.S. SEC, oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.

Market participants include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). Outside US: FTSE, FSE, TSE etc.

To the largest extent stock market is driven by the incoming sensitive information. This might include various micro- and macroeconomic statistic indicators. However, the primary ones are considered to be the following: GDP, PPP, Interest Rate, Unemployment rate, Inflation rate, etc.

A stock index or stock market index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks (sometimes a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

An index is a mathematical construct, so it may not be invested in directly. But many mutual funds and exchange-traded funds attempt to "track" an index

34. The global debt securities market: types, composition, principles of organization. Глобальный долговой рынок ценных бумаг: типы ценных бумаг, состав, принципы организации.

Debt Capital Market is a market for trading debt securities where business enterprises and governments can raise long-term funds. This includes private placement as well as organized markets and exchanges. The debt capital market trades in such financial instruments which pays interest. There are the bonds and several loans which act as the prime financial instrument of this market. Debt capital market is also known as fixed income market.

Debt capital market + equity market = capital market. These markets are used by the governments and several companies for raising funds for long and short term. Financial regulators, such as the U.S. SEC, oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.

Debt capital is funds supplied by lenders that are part of a firm's capital structure. The borrowers are generally represented by the organizations (banks, companies etc.) or state bodies. The regular interest payments for debt capital represent a cost of doing business and are tax deductible. However, interest payments to bondholders must be met on time and in full.

Most trading of debt instruments occurs over-the-counter, through organized electronic trading networks, and is composed of the primary market (through which debt securities are issued and sold by borrowers to lenders) and the secondary market (through which investors buy and sell previously issued debt securities amongst themselves). Debt market is many times (82 trln $) bigger than the stock market and is vital to the ongoing operation of the public and private sector.

Debt security - any debt instrument that can be bought or sold between two parties and has notional amount (amount borrowed), interest rate and maturity/renewal date. Debt securities include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities.

Bond is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity.

A government bond – bond issued by a national government; corporate – by corporation; municipal - bond issued by a local government, or their agencies (cities, special districts etc.).

Certificate of Deposit - savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from 1m – 5y.

Commercial papers - unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper <270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) with multiple "tranches" that are issued by special purpose entities and collateralized by debt obligations including bonds and loans. The primary advantage was that CDOs offered returns that were sometimes 2-3 percentage points higher than corporate bonds with the same credit rating.

35. The Main Actors of Global Financial Crisis: Collateralized Debt Obligations, Mortgage –Backed Securities, Credit Default Swaps, and Asset-Backed Securities. Главные факторы глобального финансового кризиса: залоговые долговые облигации, ипотечные ценные бумаги, свопы дефолта по кредитам, ценные бумаги с покрытием активами.

(IR fell=>cheap mortgage=good inv’t=>mass acquisition of houses+ CDOs, CDS (thought to be secure inv’t as in case of failure you sell the house). Ps for oil increased=more attractive inv’t => Ps for houses dropped=cost of borrowing>value of house=>no possibility to repay the loan neither to sell the house as there’s no demand.)

An asset-backed security is a security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets.

A mortgage-backed security (MBS) is an asset-backed security that represents a claim on the cash flows from mortgage loans through a securitization. A bank lends a borrower the money to buy a house and collects monthly payments on the loan. This loan and a number of others are sold to a larger bank that packages the loans together into a mortgage-backed security. The larger bank then issues shares of this security, called tranches, to investors who buy them and ultimately collect the dividends in the form of the monthly mortgage payments. There are a variety of underlying mortgage classifications in the pool: Prime mortgages are conforming mortgages with prime borrowers, full documentation (such as verification of income and assets), strong credit scores, etc.; Alt-A mortgages are an ill-defined category, generally prime borrowers but non-conforming in some way, often lower documentation; Subprime mortgages have weaker credit scores, no verification of income or assets, etc.; Jumbo mortgages when the size of the loan is bigger than the "conforming loan amount" as set by Fannie Mae.

The process of securitization is complicated, and is highly dependent on the jurisdiction within which the process is conducted. The basics are: 1) Mortgage loans are purchased from banks and other lenders, and possibly assigned to a special purpose vehicle (SPV); 2) The purchaser or assignee assembles these loans into collections, or "pools"; 3) The purchaser or assignee securitizes the pools by issuing mortgage-backed securities

These tranches can be further repackaged and sold again as other securities, called collateralized debt obligations (CDOs). It is packed on the balance sheet of Special Purpose Vehicle or Entity. With usually 3 types of tranches: senior and mezzanine (highly rated), and junior (the worst, not rated).

Intense competition between mortgage lenders for revenue and market share, and the limited supply of creditworthy borrowers, caused mortgage lenders to relax underwriting standards and originate riskier mortgages to less creditworthy borrowers. As well as easy credit conditions, there is evidence that competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Subprime mortgages remained below 10% of all mortgage originations until 2004, when they spiked to nearly 20% and remained there through the 2005–2006 peak of the United States housing bubble. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today's market than the bank had loaned out originally. The banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst. This is credit crunch.

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.

Critics of the huge credit default swap market have claimed that it has been allowed to become too large without proper regulation and that, because all contracts are privately negotiated, the market has no transparency.