Daily Archives: August 5, 2017

Part A  |  Part B | Part C

Erratum on Post 18: Figure 18.10 has reversed proportions: about 30 percent are issued by nonfinancial corporations.

Note: As I was afraid it would happen, someone emailed me to take issue with the way I use the term promissory note. “Promissory note” has a specific meaning in the law—it is a specific type of financial instruments—but Post 18 uses the term conceptually to mean any formal promise made by someone—a synonymous to financial instrument—, which may create some confusion. I am trying to find an alternative terms that contains the word “promise” (maybe promissory paper?, promissory contract? Contractual promise?) any suggestion welcome. For the moment, I will use the terms financial instrument, or promise…maybe that is good enough…

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Part A  |  Part B | Part C

Regulated Portfolio Management Companies: Mutual Funds and Others

Portfolio management companies provide a wide variety of placement opportunities to economic units with spare funds who do not want to, or cannot, directly buy securities or other assets. There are three broad types of portfolio management companies: mutual funds, closed-end funds, and unit investment trusts (UITs). One of the main differences between them is the characteristics of the shares they issue in terms of marketability and redeemability. Mutual fund shares are nonmarketable and redeemable on demand, closed-end fund shares are marketable and irredeemable, and UIT shares are marketable and redeemable on demand. Closed-end funds and UITs do not continuously offer their shares for sale. Rather, they sell a fixed number of shares in an initial public offering, after which the shares typically trade on a secondary market such as the New York Stock Exchange or through the sponsor (for UIT). The price of closed-end funds is determined by the market and may differ greatly from the net asset value per share (see below). Another main different is the type of asset they are allowed to acquire, with closed-end funds allowed to buy more illiquid assets than mutual funds.

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Part A  |  Part B | Part C

Farmer Mac, Fannie Mae, Freddie Mac, and Sallie Mae

This section closes the presentation of government-sponsored enterprise with a quick look at other GSEs. They work in a similar fashion to the FCS, by issuing securities and using the proceeds to buy or to back illiquid financial instruments held by financial institutions. The goal is once again to lower the level and volatility of interest rates on specific financial instruments and to encourage credit for specific economic activities.

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