Question

Prompt: Our course has covered financial markets, instruments and institutions and their roles in the economy and financial management. Write a paper that discusses financial markets, the instruments used in those markets and the institutions involved in the markets. Discuss the biblical passages that apply to financial institutions. Include the roles of money, investments and risk. Include a discussion about borrowing and the biblical principles involved in borrowing.

Requirements: 3,500 words minimum

Answer 1

Financial market is a broad concept which shows and describe any marketplace where trading is done of securities like bonds, Currencies, and derivatives, etc. Some of the financial market is small with the little of the activity.

The market may not indicate the true intrinsic value of the stock due to the macroeconomic forces like taxes, etc. The price of the securities is set by the market to show the appropriate transparency of the value of the securities.

Market is a place where huge numbers of buyers and sellers and come together to buy and sell the shares which are traded on the publicly companies. The new issue of the shares are offered to the investors in the primary market. Any of the stock securities are traded on the secondary market.

There are various types of Financial market they are as follows:

1.Over-the-Counter Markets:

over the counter is the example of the secondary market. In this type of market the stock exchange is between the buyer and the seller of the securities.Companies who trade on the counter are usually smaller companies as they require less rules and regulation to be traded on.

OTC markets are essentially used to exchange securities, monetary standards, subsidiaries and organized items. They can likewise be utilized to exchange values, with models, for example, the OTCQX, OTCQB, and OTC Pink commercial center's (before hand the OTC Bulletin Board and Pink Sheets) in the U.S. Merchant sellers that work in the U.S. OTC markets are controlled by the Financial Industry Regulatory Authority (FINRA).

OTC markets are ordinarily bifurcated into the client showcase – where sellers exchange with their customers, for example, partnerships and foundations – and the interdealer advertise, where vendors exchange with one another. The value a seller statements to a customer might just vary from the value cited to another vendor, and the offer ask spread may likewise be more extensive on account of the previous than in the last mentioned

While OTC markets capacity well during typical occasions, there is an extra hazard, called a counter-party chance, that one gathering in the exchange will default preceding the culmination of the exchange and additionally won't make the present and future installments expected of them by the agreement. Absence of straightforwardness can likewise make an endless loop create during times of budgetary worry, just like the case during the 2007-08 worldwide credit emergency.

Home loan supported protections and different subordinates, for example, CDOs and CMOs, which were exchanged exclusively in the OTC markets, couldn't be estimated dependably as liquidity completely evaporated without purchasers. This brought about an expanding number of vendors pulling back from their market-production capacities, worsening the liquidity issue and causing an overall credit crunch. Among the administrative activities embraced in the result of the emergency to determine this issue was the utilization of clearinghouses for post-exchange preparing of OTC exchanges.

2.Financial Markets for Bonds

Bond is a type of security in which the investors borrow the amount of money for a certain period of time with some fixed rate of interest. Bonds are not only issued by the companies but also by the government from around the world. The bond market sells securities such as notes and bills issued from the United States Treasury.

The security market is extensively sectioned into two distinct storehouses: the essential market and the optional market. The essential market is as often as possible alluded to as the "new issues" showcase in which exchanges carefully happen legitimately between the security guarantors and the security purchasers. Generally, the essential market yields the production of shiny new obligation protections that have not recently been offered to people in general.

In the auxiliary market, protections that have just been sold in the essential market are then purchased and sold at later dates. Speculators can buy these bonds from a representative, who goes about as a go between the purchasing and selling parties. These optional market issues might be bundled as annuity reserves, common assets, and life coverage polices—among numerous other item structures

3.Money Markets

Money market is one of the portion of the financial market that trades the high liquidity with the shot time of duration. The main motive of the money market is to Lend the money for a year with short duration. The money market trades the certificates of deposit, bankers acceptance, certain bills, notes and commercial paper.

The currency market has retail stores. Your nearby bank is one retail store, and the U.S. government's Treasury Direct site is another. Your specialist is one more source.

Be that as it may, most currency showcase exchanges are discount, which means they are for huge sections and occur between money related organizations and organizations as opposed to people.

A portion of those discount exchanges in the long run advance under the control of customers as segments of currency showcase shared assets and different ventures.

The U.S. government issues Treasury charges in the currency advertise, with developments that range from a couple of days to one year. Essential vendors get them in huge sums legitimately from the administration to exchange between themselves or to offer to singular financial specialists. Singular speculators can get them straightforwardly from the legislature through its Treasury Direct site or through a bank or a representative. State, district, and civil governments likewise issue momentary notes.

In the discount advertise, business paper is a prominent acquiring system on the grounds that the loan costs are higher than for bank time stores or Treasury bills, and a more noteworthy scope of developments is accessible, from medium-term to 270 days. Notwithstanding, the danger of default is essentially higher for business paper than for bank or government instruments.

4.Derivatives Market

Derivative market is the market which trades securities that drive its value from the underlying assets. The value of the contract is decided from the market price of the underlying asset. The derivatives markets trade forward, Future, options, swaps and contracts-for-difference.

Subsidiaries can be utilized to fence a position, guess on the directional development of a basic resource, or offer influence to property. Their worth originates from the variances of the estimations of the basic resource.

Initially, subsidiaries were utilized to guarantee adjusted trade rates for products exchanged universally. With the varying estimations of national monetary standards, universal merchants required a framework to represent contrasts. Today, subordinates depend on a wide assortment of exchanges and have a lot more employments. There are even subsidiaries dependent on climate information, for example, the measure of downpour or the quantity of bright days in a district.

For instance, envision an European speculator, whose venture records are altogether named in euros (EUR). This financial specialist buys portions of a U.S. organization through a U.S. trade utilizing U.S. dollars (USD). Presently the speculator is presented to swapping scale chance while holding that stock. Swapping scale chance the danger that the estimation of the euro will increment in connection to the USD. In the event that the estimation of the euro rises, any benefits the financial specialist acknowledges after selling the stock become less significant when they are changed over into euros.

To support this hazard, the financial specialist could buy a money subordinate to secure a particular swapping scale. Subsidiaries that could be utilized to support this sort of hazard incorporate cash prospects and money swaps.

A theorist who anticipates that the euro should acknowledge contrasted with the dollar could benefit by utilizing a subsidiary that ascents in incentive with the euro. When utilizing subordinates to guess on the value development of a basic resource, the financial specialist does not need a holding or portfolio nearness in the basic resource

5.Forex Market

In forex market the currencies are traded in the financial market. This market is most of the liquid market in the world, as cash is only the most liquid asset. There are banks in the financial market that trades the currency between the banks of the other nation.

Financial instrument are the assets that are or else can be used for packages of capital that may be traded. Most of the financial instrument provides efficient flow and transfer of capital all throughout th world's investors. The instrument is owned by the owner of the entity.

The remote trade market isn't overwhelmed by a solitary market trade, yet a worldwide system of PCs and representatives from around the globe. Forex agents go about as market creators also, and may post offer and approach costs for a money pair that varies from the most focused offer in the market.

The forex market is comprised of two levels; the interbank advertise and the over-the-counter (OTC) showcase. The interbank market is the place enormous banks exchange monetary standards for purposes, for example, supporting, accounting report modifications, and for the benefit of customers. The OTC market is the place people exchange through online stages and agents.

Financial instruments are of two types:

Debt based instrument

Equity based instrument

1.Debt based instrument:

In debt based instrument the money of the owner of the instrument is safe and the investors gets the fixed rate of interest on the debt based instrument however the rate of interest of the debt based instrument is lower than the equity based instrument.

in debt based instrument the owner of the entity does not takes any risk and play the safe by receiving the fixed rate of interest every year.

DebtMarket is related with generally safe in contrast with value advertise and furthermore Debtmarket guarantees ordinary pay and capital conservation. Value market is more less secure than Debt show case and is normally unstable. When you put resources into value, you become an investor of the organization and you may get benefits of the organization as profits. The profits from value are additionally nearly higher than the Debtinstruments. In value advertise, shares are purchased and sold. Debtadvertise: Here, bonds, authentications of stores, debentures, G-Secs are sold.

Bonds: A bond can be issued by an administration or an organization. The financial specialist in security essentially loans cash to the bond guarantor and thus the bond backer ideas to reimburse the credit on a specific development period. The bond backer additionally pays enthusiasm to the financial specialist all the time till the residency of the advance.

G-Secs: These are issued by the RBI for the benefit of administration of India. These compensation a fixed coupon and are either for a present moment or a long haul period.

Debentures: These are issued by organizations and bear a fixed pace of intrigue. A few debentures are convertible for example they can be changed over into value shares while non-convertible debentures can't be changed over into value shares.

2.Equity based instrument:

In equity market the investment is done on the pure equity based instrument and the investors take the huge risk but also get rewarded by the good amount of interest. As bigger the risk bigger the return. The owner of the equity based entity is liable to take all the market risk and enjoys the higher rate of return which he gets every year.

Generally, financial specialists are reluctant to enter the value advertise as they fear misfortunes. Value markets are powerless against political, financial, national and worldwide elements.

One can either be a financial specialist or a broker in value markets. Any organization issues shares for rising capital. When you purchase portions of the organization, you become an investor. As the organization is ready to develop, the estimation of your offer additionally increments at the appointed time of time. It is fundamental to realize when to hold and when to sell the stock.

Brokers purchase and undercut shares inside a timeframe. You can likewise put resources into offers to accomplish long haul objectives. To purchase and sell shares, you should hold a demat and exchanging account. Presently, let us think about various kinds of exchanging.

Conveyance: The offers you purchase get credited to your demat account. The Indian stock trades work from 9.15 am to 3.30 pm from Monday to Friday.

Intraday: Here, one purchases and sells shares around the same time itself. You need to square off your situation by 3.10 pm.

Purchase Today Sell Tomorrow (BTST): You can sell the offers before it gets credited to your demat account by this procedure.

Currency market instruments are protections that give organizations, banks, and the legislature with a lot of minimal effort capital for a brief span. The period is medium-term, a couple of days, weeks, or even months, yet in every case not exactly a year. The monetary markets meet longer-term money needs.

Organizations need momentary money since installments for products and ventures sold may take months. Without currency market instruments, they'd need to sit tight until installments were gotten for merchandise officially sold. This would postpone the buys of the crude merchandise and hinder the assembling of the completed item.

Organizations additionally use currency market instruments to contribute additional money. It will gain a little enthusiasm until it needs to pay its fixed working expenses. These incorporate lease, utilities, and wages.Money markets should likewise be anything but difficult to pull back immediately. They can't have huge exchange charges. Something else, the business would simply keep additional money in a safe. There is $883 billion in currency market instruments issued all through the world, as indicated by the Bank for International Settlements.

A large number of these instruments of the currency market are a piece of the U.S. cash supply. This incorporates cash, check stores, just as currency market reserves, authentications of store, and bank accounts. The size of the cash supply influences loan costs, subsequently impacting monetary development.

You can exploit the liquidity of numerous currency market instruments. You can get currency showcase common assets, Treasury charges, Treasury charge shared assets, and city note shared assets from your agent. You can likewise purchase Treasury charges legitimately from the U.S. Treasury on the off chance that you mean to hold them until development.

You can buy CDs from a bank. You can buy fates contracts from a financier. You can exchange prospects choices at a monetary administrations organization or agent.

A portion of these instruments will secure you during rising financing costs. Search for investment funds items with variable loan costs that will ascend alongside rates. These incorporate currency advertise common assets, momentary CDs, and Treasury bills.

While we're on the theme, you can likewise get investment accounts and currency market accounts from your bank. These aren't founded on currency market instruments. Rather, they are enthusiasm bearing records issued by your bank. These records are safeguarded by the Federal Deposit Insurance Corporation, not at all like currency showcase common assets.

Maintain a strategic distance from fixed salary ventures that are secured for a month or more. These incorporate CDs, and Short-term Bond Funds. Both just pay a similar low rate after some time. As loan costs rise, their qualities fall.

Investment risk can be characterized as the likelihood or probability of event of misfortunes with respect to the normal profit for a specific venture.

Expressing just, it is a proportion of the degree of vulnerability of accomplishing the profits according to the desires for the financial specialist. It is the degree of unforeseen outcomes to be figured it out.

Risk is a significant part in appraisal of the possibilities of a speculation. Most financial specialists while causing a venture to consider less risk as ideal. The lesser the speculation hazard, increasingly worthwhile is the venture. In any case, the thumb principle is the higher the risk, the better the return.

Types of Investment risk

1. Market risk

The danger of speculations declining in worth as a result of monetary advancements or different occasions that influence the whole market. The fundamental sorts of market risk are value risk, loan fee risk,also, money risk.

2.Liquidity Risk

The danger of being not able sell your venture at a reasonable cost and get your cash out when you need to. To sell the speculation, you may need to acknowledge a lower cost. At times, for example, excluded showcase speculations, it may not be conceivable to sell the venture by any means.

3. Credit risk

The riskthat the administration substance or organization that issued the bond will keep running into money related troubles and won't almost certainly pay the premium or reimburse the head at development.

4. Credit risk

applies to obligation ventures, for example, bonds. You can assess credit chance by taking a gander at the FICO assessment of the bond. For instance, long haul

Canadian government bonds have a FICO score of AAA, which demonstrates the most minimal conceivable credit chance.

5. Reinvestment risk

The danger of misfortune from reinvesting head or pay at a lower loan fee. Assume you purchase a bond paying 5%. Reinvestment risk will influence you if loan fees drop and you need to reinvest the standard premium installments at 4%. Reinvestment riskwill likewise apply if the bond develops and you need to reinvest the head at under 5%. Reinvestment riskwon't have any significant bearing on the off chance that you plan to spend the normal premium installments or the head at development.

Borrowings:

To receive money from another party with the agreement that the money will be repaid. Most borrowers borrow atinterest, meaning they pay a certain percentage of the principal amount to the lender as compensation forborrowing. Most loans also have a maturitydate by which time the borrower must have repaid the loan. Borrowing occurs informally from family and friends, at the retail level through a bank, and also on a large scale involving governments and institutional investors.

The biblical principles involved in borrowing:

The law of borrowing given in Scripture is that it is a sin to borrow and not repay. “The wicked borrows and does not pay back, but the righteous is gracious and gives” (Psalm 37:21). The implication of this Scripture is that the wicked can repay but will not, as opposed to those who want to repay but cannot.

Principles are given to keep us clearly within God’s path so that we can experience His blessings. To ignore them puts us in a constant state of jeopardy in which Satan can cause us to stumble at any time.

Principle 1: Debt is not normal
Regardless of how it seems today, debt is not normal in any economy and should not be normal for God’s people.

We live in a debt-ridden society that is now virtually dependent on a constant expansion of credit to keep the economy going. That is a symptom of a society no longer willing to follow God’s directions. God told His people what He would do if they kept His statutes.

Principle 2: Do not accumulate long-term debt
It’s hard to believe that a typical American family accepts a 30-year home mortgage as normal today or that it is now possible in some cases to borrow on a home for nearly 70 years.

The need to expand the borrowing base continually forces longer mortgage loans, because expansion through taking on debt causes prices to rise through inflation. As prices rise, mortgages lengthen.

Today it requires from 40 to 70 percent of the average American family’s total income to buy an average home, even with a 30-year mortgage.

The longest term of debt God’s people took on in the Bible was about seven years.

During the year of remission, the seventh year, the Jews were instructed to release their brothers from any indebtedness (see Deuteronomy 15:1-2). Thus, the only debts that could exceed seven years were those made to non-Jews or from non-Jews.

Principle 3: Avoid surety
Surety means accepting an obligation to pay without having a guaranteed way to make the payments.

The most recognizable form of surety is cosigning a loan for another person. But surety also can be any form of borrowing in which an unconditional guarantee to pay is committed.

The only way to avoid surety is to collateralize a loan with property that, if sold, would cover the indebtedness, no matter what.

Currently Americans charge in excess of $400 billion annually on their credit cards, of which $50 billion or more is for annual finances charges, and they carry an average monthly balance of between $3,000 and $5,800 at 12 to 21.5 percent interest.

These credit card purchases have become the most common form of surety in America today. In a credit card transaction, one merchant sells a consumer a product and another finances the purchase, unless the credit purchase is with an in-store credit card.

In the event of a default, the return of the merchandise to the original merchant does not cancel the debt because the finance company has no interest in the merchandise purchased.

Principle 4: The borrower has an absolute commitment to repay
In this generation, situational ethics is widely accepted — so much so that it’s easy to rationalize not paying a debt, especially when the product or service is defective or when family financial situations seem to be out of control.

Unfortunately, many borrowers discover that it is possible for them to accumulate far more debt than they can repay and still maintain the lifestyle they want. As a result, they bail out.

Currently (2002 standards) over one million people a year now choose bankruptcy as a way to postpone or avoid repayment.

Nevertheless, in some cases voluntary bankruptcy is acceptable — but only in the context of trying to protect the creditors, never in the context of trying to avoid payment.

A Christian needs to accept that God allows no exceptions to keeping vows. “It is better that you should not vow than that you should vow and not pay” (Ecclesiastes 5:5).

Conclusion:

Benjamin Franklin’s Poor Richard’s Almanac quotes, “Neither a borrower nor a lender be.” Although it is good common sense, it is not from God’s Word.

However, many Christians feel that all borrowing is prohibited according to Romans 13:8, “Owe nothing to anyone except to love one another; for he who loves his neighbor has fulfilled the law.”

To properly interpret this Scripture, it must be considered in light of the context in which it appears. In this particular reference, Paul was talking specifically about money — teaching that we are never to allow people to do things for us if we are not willing to do even more for them.

Scripture very clearly says that neither borrowing nor lending is prohibited, but firm guidelines are given.

Borrowing is discouraged and, in fact, every biblical reference to it is a negative one. “The rich rules over the poor, and the borrower becomes the lender’s slave” (Proverbs 22:7). The scriptural guideline for borrowing is very clear. When you borrow, you promise to repay. Literally, borrowing is making a vow and God requires that we keep our vows.