Financial Markets, Intermediaries, and Fixed Income Assets
Posted on May 13, 2026 in Finance
Markets, Intermediaries & Financing Instruments
Money Markets vs. Capital Markets
| Feature | Money Market | Capital Market |
|---|
| Maturity | < 1 year | > 1 year |
| Instruments | Promissory notes, treasury bills, credit lines, commercial discounts | Bonds, stocks, fixed-term loans |
| Purpose | Finance working capital | Finance fixed asset investments & expansion |
| Liquidity | High | Lower |
| Credit Risk | Relatively low | Higher |
The 3 Channels of Market Operation
- Organised institutions: NYSE, regional exchanges, regulated markets
- OTC market: Brokers and agents buying/selling off-exchange
- Direct transactions: Individual transactions with commercial banks
Financial Intermediaries: Primary Functions
| Intermediary | Primary Function | Business Model |
|---|
| Commercial banks | Accept sight deposits, provide loans | Interest margin |
| Savings banks | Receive savings, invest in long-term mortgages | Mortgage margin |
| Finance companies | Loans to firms and individuals | Financing interest |
| Life insurance companies | Risk protection + savings component | Insurance premiums |
| Pension funds | Collect contributions, pay retirement | Investment returns |
| Mutual investment funds | Sell shares, buy diversified securities | Management fees |
| Investment banks | Buy new securities issues, resell to investors | Placement commissions |
| Hedge funds & VC | Invest in value appreciation operations | Appreciation returns |
Debt Classification
- Short-term debt (<1 year): Credit lines, promissory notes, accounts payable, commercial discounts (finances working capital).
- Long-term debt (>1 year): Fixed-term bank loans, bond issuances, financial leasing (finances fixed asset investments).
- Working capital: Current Assets − Current Liabilities.
- Key distinction: Short-term debt creates immediate payment pressure; long-term debt synchronizes better with operational cash flows.
Risks of Debt Structure
- Over-indebtedness: Debt spiral leading to technical insolvency. Solutions: refinancing, cost reduction, debt-to-equity conversion, asset divestiture.
- Maturity mismatch (liquidity risk): Short-term liabilities exceed refinancing capacity. Ratio = Short-term Liabilities / (Liquid Assets + Annual Operating Cash Flow). Ratio > 1 indicates high risk.
- Interest rate risk: Variable-rate debt; if rates rise, financial expenses increase, coverage ratios worsen.
- Credit risk: Direct default, prolonged delays, or excessive concentration in few customers.
Self-Financing (Internal Financing)
- Enrichment self-financing: Legal, statutory, voluntary, and special contingency reserves, retained earnings, and hidden reserves (increases net worth).
- Maintenance self-financing: Provisions (for potential risks) and allowances (for certain losses) (maintains capital integrity).
- Advantages: Corporate autonomy, no explicit financial burden, improves solvency ratios, always available, ideal for SMEs.
- Disadvantages: Retains earnings that could be paid as dividends, limits high-return investments, reduces stock returns and market value.
Optimal Financing by Business Lifecycle
| Phase | Optimal Source |
|---|
| Start-up (0–2 years) | Venture Capital + total earnings reinvestment |
| Growth (2–5 years) | Bank debt + retained earnings |
| Mature (5+ years) | Market debt (bonds) + massive self-financing |
| Late Maturity | Increasing dividends + WACC optimization |
Fixed Income Assets
Basel III Capital Requirements
Total minimum capital: 8% of RWA (Risk-Weighted Assets). Implementation completed by 2025.
- CET1 (Core Tier 1): Common equity and reserves.
- Tier 1 Total (T1): Includes preferred stock and hybrid bonds.
| Tier | Instrument | Minimum % RWA |
|---|
| CET1 | Common equity, reserves, retained earnings | 7% (4.5% + 2.5% buffer) |
| AT1 | Hybrid instruments (CoCos) | 1.5% |
| Tier 2 | Subordinated debt (min. 5yr maturity) | 2% |
CoCos (Contingent Convertible Bonds)
- Nature: Hybrid issuance with debt-like characteristics; pays interest but counts as capital.
- Coupon: Can be cancelled by the issuer at any time (non-cumulative).
- Conversion: Converted into shares when CET1 ratio falls below a trigger threshold.
- Behavior: Highly correlated with equity; behaves more like stocks than bonds in stress.
Preferred Stock Types
| Type | Key Characteristic |
|---|
| Cumulative | Unpaid dividends accumulate |
| Non-cumulative | Unpaid dividends are lost (AT1) |
| Perpetual | No maturity date |
| Convertible | Exchangeable for ordinary shares |
| Putable | Investor can request early redemption |
Bail-in, MREL, and Resolution
- Bail-in: Creditors absorb losses before public resources are used.
- MREL: Minimum requirement for own funds and eligible liabilities.
- Seniority Cascade: CET1 → AT1 → Tier 2 → SNP → Senior Preferred.
Securitization Structure
- Flow: Originator sells asset portfolio to an SPV; SPV issues bonds to market in tranches.
- Credit Enhancement: Waterfall structure (Senior, Mezzanine, Equity/First-Loss).
- Internal Mechanisms: Subordination, reserve funds, and over-issuance.
Green Bonds
Funds used exclusively for projects aligned with the 4 Green Bond Principles (GBP): Use of Proceeds, Project Evaluation, Fund Management, and Reporting.
