...Explain the main reasons why financial markets and financial intermediaries exist. Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In the past decade the banks have become a very important part of the economy. Banks are financial intermediaries, financial intermediaries and financial markets main role is to provide a system by which funds are transferred and allocated to their most productive opportunities. Banks need money and they get the money from people who invest in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be allocated to people or companies with deficit funds (borrowers). In doing so they increase the economic efficiency by promoting a better distribution of resources. How can the transfer of wealth from surplus units to deficit units occur? There are two ways that the transfer of wealth can happen its either direct finance or indirect finance. Direct finance is the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial intermediaries step in. Why is there a need for financial markets and why do they exist? Financial Market exists in order to facilitate the relations between providers of capital such as savers and investors and users of capital such as companies and...
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...between a financial asset and a tangible asset. A financial asset is an intangible asset whose value is derived from a contractual claim, such as bank deposits, bonds, and stocks. Financial assets are usually more liquid than other tangible assets, such as commodities or real estate, and may be traded on financial markets. In contrast, a tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. 3. Describe the two principle roles of financial assets. The principal economic function of financial assets are: (1) to transfer funds from persons who have surplus funds to those who need funds to invest in tangible assets( e.g. mortgage funds lending to homebuyers); (2) transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds (seekers of funds ask others to share the risks in their undertakings). 4. a. Explain the three factors that have led to the globalization of financial markets. Globalization has led to an expansion and integration of global financial markets. Prior to the 1980’s, the US financial market was the largest in the world but with the advent of new technologies and globalization, many markets have emerged and indeed the majority of them have been integrated to form a global financial hub. The growth of global financial markets...
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...is financial intermediation? 2 a) The brokerage function: 2 b) The asset transformation function 2 c) The Risk evaluation and management function 3 Why are financial intermediaries important? 3 THEORIES OF FINCANCIAL INTERMEDIATION 3 Informational Asymmetries 3 Transaction Costs Theory 4 Regulation 4 HISTORICAL DEVELOPMENT 5 Origin of Financial Intermediation 5 EVOLUTION OF FINANCIAL INTERMEDIATION 6 THE FUTURE OF FINANCIAL INTERMEDIATION 7 TRENDS IN FUTURE FINANCIAL INTERMEDIATION 8 Regulation (Deregulation) 8 Revised regulatory framework 8 Revised reporting standards and accounting 8 International Monitoring and Oversight 9 Effects on Insurance 9 Technology 9 New financial innovations 9 Globalization 9 Presence 9 Scale 10 Increased Government involvement 10 IMPLICATIONS 11 CONCLUSION 11 BIBLIOGRAPHY 12 FINANCIAL INTERMEDIATION INTRODUCTION Financial Intermediation is a crucial and pervasive feature of all world economies. But as Franklin Allen (2001) observed in his AFA presidential Address, there is a widespread view that financial intermediaries can be ignored because they have no real effect. But this cannot be true, in my opinion, savings-investment process, corporate finance decisions, and consumer portfolio choices cannot be understood without studying financial intermediation. So what is financial intermediation? When talking about financial markets we generally are talking about two kinds of markets, capital...
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...Homework Assignment – Week 1 Chapter 1 1- Why are financial markets important to the health of the economy? Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency. 2- When interest rates rise, how might businesses and consumers change their economic behavior? Businesses would cut investment spending because the cost of financing this spending is now higher, and consumers would be less likely to purchase a house or a car because the cost of financing their purchase is higher. 3- How can a change in interest rates affect the profitability of financial institutions? A change in interest rates affects the cost of acquiring funds for financial institution as well as changes the income on assets such as loans, both of which affect profits. In addition, changes in interest rates affect the price of assets such as stock and bonds that the financial institution owns that can lead to profits or losses. 4- Is everybody worse off when interest rates rise? No. People who borrow to purchase a house or a car are worse off because it costs them more to finance their purchase; however, savers benefit because they can earn higher interest rates on their savings. 5- What effect might a fall in stock prices have on business investment? The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plant and equipment will fall. 6- What...
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...Homework Assignment – Week 1 Chapter 1 1- Why are financial markets important to the health of the economy? Because they channel funds from those who do not have a productive use for them to those who do, thereby resulting in higher economic efficiency. 2- When interest rates rise, how might businesses and consumers change their economic behavior? Businesses would cut investment spending because the cost of financing this spending is now higher, and consumers would be less likely to purchase a house or a car because the cost of financing their purchase is higher. 3- How can a change in interest rates affect the profitability of financial institutions? A change in interest rates affects the cost of acquiring funds for financial institution as well as changes the income on assets such as loans, both of which affect profits. In addition, changes in interest rates affect the price of assets such as stock and bonds that the financial institution owns that can lead to profits or losses. 4- Is everybody worse off when interest rates rise? No. People who borrow to purchase a house or a car are worse off because it costs them more to finance their purchase; however, savers benefit because they can earn higher interest rates on their savings. 5- What effect might a fall in stock prices have on business investment? The lower price for a firm’s shares means that it can raise a smaller amount of funds, and so investment in plant and equipment will fall. 6- What...
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...CHANGING FINANCIAL-SERVICES SECTOR Goal of This Chapter: In this chapter you will learn about the many roles financial service - providers play in the economy today. You will examine how and why the banking industry and the financial services marketplace as a whole is rapidly changing, becoming new and different as we move forward into the future. You will also learn about new and old services offered to the public. Key Topics in This Chapter • Powerful Forces Reshaping the Industry • What Is a Bank? • The Financial System and Competing Financial-Service Institutions • Old and New Services Offered to the Public • Key Trends Affecting All Financial-Service Firms • Appendix: Career Opportunities in Financial Services Chapter Outline I. Introduction: Powerful Forces Reshaping the Industry II. What Is a Bank? A. Defined by the Functions It Serves and the Roles It Play: B. Banks and their Principal Competitors C. Legal Basis of a Bank D. Defined by the Government Agency That Insures Its Deposits III. The Financial System and Competing Financial-Service Institutions A. Roles of financial system B. The competitive challenge for banks C. Leading Competitors with banks • Savings Associations • Credit Unions • Money Market Funds • Mutual Funds • Hedge Funds • Security Brokers and Dealers • Investment Banks • Finance Companies • Financial Holding...
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...Financial markets and institution are life blood of any economy. DISCUSS. What are financial markets market An actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments, for money or barter. Markets include mechanisms or means for (1) determining price of the traded item, (2) communicating the price information, (3) facilitating deals and transactions, and (4) effecting distribution. The market for a particular item is made up of existing and potential customers who need it and have the ability and willingness to pay for it. Buyers and sellers of stocks or bonds or futures and options contracts use the financial markets to meet to buy and sell the products through a middleman exchange. What are the financial markets? That's a good question, because financial markets go by many terms, including capital markets, Wall Street, even simply "the markets". Whatever you call them, financial markets are where traders buy and sell stocks, bonds, derivatives, foreign exchange and commodities. These markets are where businesses go to raise cash to grow, companies reduce risks, and investors make money. Types of Financial Markets The Stock Market is a series of exchanges where successful corporations go to raise large amounts of cash to expand. Stocks are shares of ownership of a public corporation that are sold to investors through broker...
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...Financial Institutions, Instruments and Markets—7th edition Instructor’s Resource Manual Christopher Viney and Peter Phillips Chapter 1 A modern financial system Learning objective 1.1: explain the functions of a modern financial system • The introduction of money and the development of local markets to trade goods were the genesis of the financial system of today. • Money is a medium of exchange that facilitates transactions for goods and services. • With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities). • A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. • A financial system encourages accumulated savings which are then available for investment within an economy. • Financial instruments incorporate attributes of risk, return (yield), liquidity and time–pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. • By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. Learning objective 1.2: categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks,...
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...business model? A business model is a clear, simple outline of how the business intends to generate revenue. What are four ways that business can benefit society? Business can benefit society by offering valuable goods and services, providing employment, paying taxes, and contributing to national growth, stability, and security. Do all companies have an R&D function? Explain your answer. No. Many companies simply resell products that other firms make or continue to make the same goods or perform the same services year after year. How is the role of a financial manager different from the role of an accountant? A financial manager is responsible for planning, while an accountant is responsible for monitoring and reporting. What is professionalism? Professionalism is the quality of performing at a high level and conducting oneself with purpose and pride. True professionals exhibit seven distinct traits: striving to excel, being dependable and accountable, being a team player, communicating effectively, demonstrating a sense of etiquette, making ethical decisions, and maintaining a positive outlook. Why is the economic concept of scarcity a crucial concept for businesspeople to understand? The economic concept of scarcity is a crucial concept for businesspeople to understand because scarcity creates competition for resources and forces trade-offs on the part of every participant in the economy. First, businesses and industries compete with each other for the resources they...
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...Michelle DellaTorre, a professional tennis player who has just come to the United States who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre. A. Why is corporate finance important to all managers?Corporate finance is the department that handles strategic financial issues associated with achieving goals such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with firms or other companies. b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. • A proprietorship, or sole proprietorship, is a business owned by one individual. A partnership exists when two or more persons associate to conduct a business. • While a corporation is a legal entity created by a state. The corporation is separate and distinct from its owners managers board member and stockholders •...
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...are generally past performance chasers, one has no reason not to invest in DFA. The company was founded on a sound investment style based on its core belief in sound academic research, passive fund management. Until almost the end of the 20th century DFA had found a way to make money actively with a passive investment strategy. But looking forward, according to me it needs to evolve with the times and look for questions regarding its own strategy and its evolution with the times and the questions facing the financial future. As highlighted by the boom in the I.T sector towards the end of the last century that DFA missed out on completely, DFA on principle is always poised to miss out on new technology companies, as they intrinsically have low book to market value. Also my another objection to DFA’s selection of small cap stocks only is that these category of companies are among the worst hit companies during a financial crisis because of their limited access to credit and most of these companies don’t survive a major recession. Even some proponents of the efficient market hypothesis have argued that due to DFA and similar companies investing in this particular style, this style’s edge had been eroded. Lastly many prominent academicians and financial institutions have called into question the efficacy of the efficient market theory due the financial bubble created in the financial markets. That fact that market price of a stock represents the fair price has been...
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...from being subject to personal income tax on interest. Even though, offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. September 11, 2011 onwards there were many calls for more regulations on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clear stream, based in Luxembourg, being possible crossroads for major illegal money flows. These attempts have been criticized at regulation by defenders of offshore banking. They claim the process is provoked not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They mention the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organization for Economic Co-operation and Development (OECD) countries are trying to stamp out competition. There are many advantages as well as disadvantages of offshore banking. Offshore banks provide access to politically and economically steady jurisdictions. The banks also may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. It also can help developing countries...
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...Relationship between Financial Markets and Economic Growth: Implications for Canada Research Study Prepared for the Wise Persons’ Committee Gordon Boissonneault Senior Economist, WPC Staff October 24, 2003 The Relationship between Financial Markets and Economic Growth: Implications for Canada Executive Summary The financial sector has experienced significant change over recent decades, driven by advances in information and communications technology and widespread reductions in international barriers to trade and investment. International integration is advancing rapidly, reflecting in part the development of global production chains and the rapid growth of emerging market economies. As a result of the forces of integration, international competition has become more fierce and firms are under increasing pressure to cut costs and differentiate their products to survive. Canada’s economy has numerous linkages beyond its borders, particularly with the United States. The future improvement of Canadians’ standard of living will depend in large part on foreign investment in Canada and the ability of Canadians to invest abroad. In this regard, a thriving financial sector will be a key component of our success. Canada has a small share of the global capital market. Thus, to be competitive, the Canadian capital market must be efficient and offer a low cost of capital. As much as possible, the policies and institutions that govern the Canadian financial sector should...
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...Final Assignment of Financial Management The Final Written Assignment is to answer the questions below. They are divided into four sections based on the class lectures. The first three questions (a,b,c) in each section are calculation problems, and the last question (d) in each section asks for an explanation, which you should use to increase your word count. The assignment should be no less than 3500 words, and should be submitted in Word. You do not need to do any outside research. You should answer the questions based on what you learned in class and on the information given in each question. Your answers should be written in your own words. If your writing is too similar to another student’s or copied from the Internet you will be penalized. You will be graded on the clarity and accuracy of your answers. Please feel free to contact me at davidpollon@yahoo.com if you have any questions about the assignment. Best of luck.Please note: No extensions will be considered for late assignments, unless they are requested. Yann JACOBSEN 10/10/2012 Email : yann.jacobsen.mgt@gmail.com Introduction In this course with Professor David POLLON, we tried to understand what exactly the Time Value of Money is. Now we can say it’s an essential principle of finance which establishes the notion of time and risk of cash flows. Moreover it’s an important key to all financial analysis used to look valuation for stocks and bonds. Moreover, we discussed about financial securities and Net...
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...Ismail & Sanusi —An Empirical Analysis of Cash Flow and Investment Fluctuations ... Gadjah Mada International Journal of Business January-April 2005, Vol. 7, No. 1, pp. 95—107 AN EMPIRICAL ANALYSIS OF CASH FLOW AND INVESTMENT FLUCTUATIONS USING FIRM-LEVEL PANEL DATA* Abd. Ghafar Ismail Nur Azura Sanusi Since the pioneering work of Gurley and Shaw (1955), the attempt has been done to justify money as a primary focal point of macroeconomic theorizing. However, other researchers argue that variables such as financial development and indicators are also important to be linked with macroeconomic performance. Here, if money can be thought as means of production and consumer goods as the ultimate end toward which production is directed, and then capital also occupies a position that is both logically and temporarily intermediate between original means and ultimate ends. This temporarily intermediate status of capital is not in serious dispute, but its significance for macroeconomic theorizing is rarely recognized. The firms’ decision to acquire funds through debt and equity financings affects the capital structure, and, in the firm’s balance sheet, the impact of capital appears to influence the inventory investment. Hence, the significance of capital structure –induced inventory distortions in the context of firm-level is the basis for our article. The sample for our analysis is compiled from the balance sheets of listed syaria firms in the Kuala Lumpur Stock Exchange for the period...
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