Wednesday, September 2, 2009

Risk in the Money and Capital Markets (1)

As in the money market, each of these segments of the capital market is differentiated from the other segments by regulations, customs, and the unique characteristics of financial instruments traded there. For example, some financial claims carry more risk of borrower default-credit risk- than others. At one extreme are U.S. Treasury bills, bonds, and notes, regarded as virtually riskless because the federal government can always tax its citizens or print money to pay its debts. In contrast, debt securities issued by private corporations carry varying degrees of credit risk, and each year thousands of firms fail to meet all of the promised payments of principal or interest on their loans. Some of these firms are forced into bankruptcy. The failures of such major corporations as Penn Central Railroad in 1970, Electrospace in 1973, and W.T. Grant in 1975 suggest that even the securities issued by some of the largest, best-known corporations may quickly lose their value. the collapse of major banks like United States National Bank of San Diego in 1973 or Franklin National Bank of New York in 1974 suggest that even bank deposits and bank stock can be risky.

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