3. The Federal Reserve controls the monetary base through open market operations and extensions of loans to financial institutions, and has better control over the monetary base than over reserves. Although float and Treasury deposits with the Fed undergo substantial short-run fluctuations, which complicate control of the monetary base, they do not prevent the Fed from accurately controlling it. 4. A single bank can make loans up to the amount of its excess reserves, thereby creating an equal amount of deposits.
Money market is a financial market which deals with lending and borrowing short-term debt instruments which have maturity for less than or equal one year. The lenders are central bank, commercial banks, finance companies and insurance companies. The borrowers are traders, manufacturers, merchants, brokers and government. Generally, money markets exist to
The three elements that are stabilizing in this system are - the usage of gold; the non-interest factor; and the netting system. Since gold by itself has value, it is superior from any other fiat currencies. Even though the price of gold does fluctuate, it does so in a minimal amount, usually by a few percentages up or down. Interest rates exist in an economy as a result of lack of liquidity. In a netting system, no shortage of money will take place which means that lenders could not take advantage of charging high interest rates to people that are in need of loans as is the case in the fiat money system.
Though the market is not entirely free, it is occasionally limited by government intervention. This, however, is normally to promote competition or encourage or dampen demand. In theory, a market economy’s base is on the cornerstones of the principles of supply and demand. In this way, the market is meant to respond to changes in demand for particular goods and services.
According to Michael J. Lea, a primary mortgage market is the traditional model of portfolio lending where all the undertakings necessary for mortgage such as origination, funding, servicing and portfolio risk management are handled by one institution only (2000). The bank or institution may use third-party vendors to handle other tasks such a mortgage insurer, appraisers and credit insurers, but the primary task of the mortgage is accomplished one institution only. The lenders can be banks, contract-saving institutions or mortgage banks (Lea, 2000). On the other hand, a secondary market is a modern unbundled mortgage delivery system whereby the tasks of origination, servicing, funding and risk management are unbundled and performed by several different entities specializing in each task (Lea, 2000). As an example of the above-mentioned entities: originators may be traditional depositaries, mortgage companies/brokers - the firm that originates the loan may not be the one that services it; and in this model of mortgage, there are a wide diversity of investors ranging from depositaries and mutual funds, while the global secondary market may have both domestic and foreign investors (Lea,
Determinants of Capital Structure Collateral value of assets Collateral value of assets is one of the determinants of capital structure. There is a possibility that the stockholders transfer wealth from bondholders. Bondholders feel less vulnerable when an asset is collateralized against the funds (Titman and Wessels, 1988). Firms with a high collateral value of assets find it easy to issue debt. Collateral value of assets may have positive relationship with level of debt.
Distinguish between money market and capital market. A financial market is a market that involved buyers and sellers to trade in financial assests such as bonds, stocks, currencies and so on. Different financial markets serve different types of customers or different parts of the country. There are many components to a financial market, two of the most commonly used are money markets and capital markets. Money markets are the financial markets in which funds are borrowed or loaned for short periods.
Financial market plays a key and great role in the economy of any nation. It contributes in the economic development of country by encouraging capital formation and uplifting economic situation. Financial markets can be defined as the centers or arrangements that provide facilities for buying and selling of financial services. Security market is found within financial market and it is the place where people buy and sell financial instruments which is composed of debt and equity market, money and capital market, primary and secondary market, call and continuous market, spot and derivative market, organized stock exchange and OTC market, open and negotiated market and third and fourth market (Thapa, 2011). Capital market is the market for long term loans and equity capital.
For example, the export of Thai rice and sugar to Malaysia, telecommunication equipment to Vietnam, rice and vehicles including spare parts to the Philippines and electrical equipment, machinery, fruits and vegetables to Indonesia. Malaysia sustained a robust broad based growth in 2003, driven by strong domestic demand and sturdy export performance as a result of the influence of globalization. As stated in Economic Report of Malaysia (n.d), ‘Electrical and electronic continued to be Malaysia’s largest exporter earner, netting receipts amounting to RM194.8 billion (US$51.3 billion) or 50.9 percent of the country’s total export revenue’. As a result, this shows that Malaysia has always supported the idea of globalization within the country. This can be further supported by the statement made by H. E Ambassador Cheah Sam Kip (n.d).