Modern Financial Systems: Theory and Applications

CHAPTER 11

Securities, Bond, and Mortgage Markets

This chapter begins by summarizing the economic differences among markets, particularly differences in capabilities. The chapter then applies the ideas of capability differences to the money, equity, bond, and mortgage markets. The money markets discussion emphasizes the common attributes of money market instruments, and the market’s consequently integrated nature. In comparison to the money market, equity markets exhibit a much greater range of governance capabilities and a correspondingly greater range of deal attributes. These ranges are illustrated by discussions of raising capital, the effects of institutional trading, program trading, and some market anomalies. The bond market discussion examines differences between stocks and bonds, determinants of interest rate spreads, trading in high yield bonds, and the use of restrictive covenants. The mortgage markets’ discussion emphasizes the markets’ importance and functions, with particular emphasis on securitization and trading the instruments created thereby.

ECONOMIC DIFFERENCES AMONG MARKETS

Chapter 5 maintained that from a resource allocation point of view the economically significant capabilities of markets include the degree of liquidity they exhibit, the degree to which the instruments traded are standardized, and the degree of homogeneity in market agents’ trading information. Chapter 10 pointed out that markets range from being highly active and liquid to relatively ...