Role of the US Financial System Essay Example | Topics and Well Written Essays - 750 words

Role of the US Financial System - Essay Example The financial system consists of two types of markets: the money markets and the capital market. The money markets are financial assets with a maturity date of one year or less. The most influential of all money market instruments which provides liquidity to the system are treasury bills. Treasury bill are 90 day maturity short term bills which pay the investors a modest interest rate for of approximately 4-5% for borrowing money to the government (Jsj, 2007).. Treasury bills are sold in the public market by investors and are considered a risk free proposition for investors since the assets is guaranteed against the US treasury reserves. The government along with the federally issued T-bill also sales other types of financial instruments in the money and capital markets. The government sells a lot of government bonds in order to finance governmental expenses such as making infrastructure improvements, capital projects, and cover emergency expenses among other uses. Bonds are sold by the federal, state, municipal government, and state agencies to acquire funds to finance their operations. The capital market takes place in stock exchanges around the world. The United States has many stock exchanges including the world most powerful exchange called the New York Stock Exchange. Another powerful exchange is the over the counter market of NASDAQ. In the stock market industry there have been a lot of mergers between international exchanges joining forces to gain power. In the floor of the stock exchange the brokers make purchases and sales of common stock, preferred stocks, futures, options, bonds among other types of financial instruments immediately after a client places an order. The stock market and the exchanges in which activity takes place are an economic market structure that is considered a perfect competition. In a perfectly competitive market the market reacts to new information immediately and