2 Explain the role of brokers, dealers, and investment bankers. How does each make a profit? Brokers never own the securities that they trade. Brokers bring buyers and sellers together and receive a commission if the sale takes place. Dealers on the other hand create a market for securities by owning an inventory of securities. Dealers make profits by trading from their inventory and dealing as a matchmaker. Investment Bankers help firms bring their debt or equity securities to market. They also help with helping firm determine whether a certain project is feasible. Explain how you would believe economic activity would be affected if we did not have financial markets and institutions. If there were no financial markets and institutions it would be almost impossible for people to get together to buy and sell interest in a company. There would be no middle man to bring the people who are willing to loan and the people who need to borrow. There would be no efficient market so the world economy would not be what it is today. Financial markets and institutions ware what keeps this country and every country in a natural progression. Explain the concept of financial intermediation. How does the possibility of financial intermediation increase the efficiency of the financial system? The 5 intermediation services that financial institutions provide are denomination divisibility, currency transformation, maturity flexibility, credit risk diversification, and liquidity. The goal of the financial institution in financial intermediation is to bring together SSU’s and DSU’s so that they may gain a profit by acquiring funds at a lower interest rate than the rate they charge when they sell products.
Financial Intermediation allows for a greater number of funds to be channeled through the market which in turn reflects the wealth of the US economy. 7 Explain the differences between money markets and capital markets. Which market would GM use to finance a new vehicle assembly plant? Money and capital markets are both direct credit markets. Money markets are markets where commercial banks and other businesses borrow, lend, or invest for short periods of time. Money markets are a wholesale market for financial claims.
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The major instruments in money markets are Treasury Bills, NCDs, Commercial Paper, and Federal Funds. Capital markets are where capital goods are financed with stock or long-term debt instruments. These are less marketable risk levels vary and maturities range from 5 to 30 years. Some of the instruments in the capital markets are common stock, corporate bonds, municipal bonds, and mortgages. GM would use the capital markets for its new project since corporate bonds fall under this market. 9 Enterprise Bank provides the service of turning the $5000 invested by Sarah and Ted into a 6 month certificate of deposit.
This money is then invested by the bank in the municipal bonds which have a maturity of 20 years. As an intermediary the bank has the ability to bring together all kinds of investors and pay out many different types of investments by buying and selling funds. Nashville BankSarah and Ted Assets Liab. Assets Liabilities Assets +$10000(Bank) +direct claim (Bank)-10000 +indirect claim(S&T) -5000 +5000(S&T) +indirect (Bank) 10
Explain the statement, “A financial claim is someone’s asset and someone else’s liability. ” When, for example, someone purchases stock in a company. The person investing in the company is gaining an asset which is the stock in the company. The money then changes hands and the company has the liability to the investor for that stock. Therefore the company has a direct claim liability to the investor if this were a direct financing situation. InvestorCompany AssetLiab. AssetLiab. -money+money+direct claim +Direct claim