...Chapter 01 Introduction True / False Questions 1. Primary markets are markets where users of funds raise cash by selling securities to funds' suppliers. True False 2. Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period. True False 3. In a private placement, the issuer typically sells the entire issue to one, or only a few, institutional buyers. True False 4. The NYSE is an example of a secondary market. True False 5. Privately placed securities are usually sold to one or more investment bankers and then resold to the general public. True False 6. Money markets are the markets for securities with an original maturity of 1 year or less. True False 7. Financial intermediaries such as banks typically have assets that are riskier than their liabilities. True False 8. There are three types of major financial markets today: primary, secondary, and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets. True False Multiple Choice Questions 9. What factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc.? I. Regulatory changes allowing institutions to offer more services II. Technological improvements reducing the cost of providing financial services III. Increasing competition from full service...
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...of goods and services is made more efficient by: A. barters. B. money. C. governments. D. some combination of government transfer and barter. Short selling is: A. the sale of a financial product at a discount to its current market value. B. the sale of a financial product in small quantities. C. the sale of a financial product that the seller does not own. D. the sale of a financial product where the seller agrees to buy it back at a predetermined price. The term ‘medium of exchange' for money refers to its use as: A. coinage. B. currency. C. something that is widely accepted as payment for goods and services. D. any standard of value that prices can be expressed in. The role of money as a store of value refers to: A. the value of money falling only when the money supply falls. B. the value of money falling only when the money supply increases. C. the fact that money allows worth to be stored readily. D. the fact that money never loses its value compared with other assets. Money increases economic growth by assisting transfers from: A. consumers to investors. B. savers to borrowers. C. businesses to consumers. D. borrowers to investors. Financial markets have developed to facilitate the exchange of money between savers and borrowers. Which of the following is NOT a function of money? A. A store of value B. A medium of exchange for settling economic transactions C. A claim to future cash flows D. Short-term protection against inflation Buyers of financial claims lend their excess...
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...CHAPTER 3: The Role of Financial Intermediaries and Financial Markets FOCUS OF THE CHAPTER This chapter provides an analysis of the roles and importance of financial institutions and financial markets, two important parts of the financial system. A broad classification of Canadian financial institutions is presented with an historical overview. Some basic classifications of financial markets are described. The chapter ends with an evaluation of the importance of the financial system to the Canadian economy, and of the future of banks, given recent developments in the financial system. Learning Objectives: □ Explain what financial intermediaries do □ Explain a classification of the financial system by type of institution □ Name the original four pillars of the financial system □ Provide a classification of the financial system by type of market □ Describe the financial system in Canada □ Discuss the effects of technology and deregulation on banks, and whether banks as we know them will survive SECTION SUMMARIES Intermediation A financial intermediary (such as a bank) simultaneously interacts with savers (or lenders) and borrowers and produces a set of services which facilitate the transformation of its liabilities (such as deposits) into assets (such as loans). The function of facilitating liabilities (or assets) into assets (or liabilities) is called intermediation. Through intermediation financial intermediaries allow indirect lending (and borrowing)...
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...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 and money markets. In these markets, according to O. Gwilym (2011), the participants can be categorized...
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...Chapter 1: Introduction True/False 1. Primary markets are markets where users of funds raise cash by selling securities to funds suppliers. Answer: True Level: Easy 2. Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period. Answer: False Level: Easy 3. In a private placement the issuer typically sells the entire issue to one or only a few institutional buyers. Answer: True Level: Easy 4. The NYSE is an example of a secondary market. Answer: True Level: Easy 5. Privately placed securities are usually sold to one or more investment bankers and then resold to the general public. Answer: False Level: Easy 6. Money markets are the markets for securities with an original maturity of 1 year or less. Answer: True Level: Easy 7. Eurodollar bonds are dollar denominated bonds issued outside the United States. Answer: True Level: Easy 8. Financial intermediaries such as banks typically have assets that are riskier than their liabilities. Answer: True Level: Easy 9. Spinning is the process of allocating shares in a ‘hot’ IPO to certain favored clients of investment banking firms in exchange for receiving additional investment banking business. Answer: True Level: Easy 10. Many stock research analysts of investment banking firms have been accused of issuing overly optimistic stock research reports on firms in order to help support the investment...
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...plays an important role in financing the investment projects, successive governments in Nigeria have carried out reforms and institutional innovations in the banking sector. The overall intention of these reforms has been to ensure financial stability so as to influence the growth of the economy and also enhance banks to play a critical role of financial intermediation in Nigeria. However, despite the fact that Nigerian banks have undergone series of restructuring/reforms aimed at strengthening the banks’ ability to efficient service delivery and fund the real sector, problems such as; inefficiency in allocating funds to the real sector, lack of long-dated funding, neglect of the core private sector in terms of credit extension, weak capacity of the banks to fund the real sector, low-level activities of banks, and illiquidity still lingers. This study therefore, examines empirically the impact of financial intermediation on the development of the Nigerian economy with the aim of determining the importance of financial intermediaries and its influence. This study found out that the financial intermediaries (banks) in Nigeria exhibit inefficiency and weak capacity in the allocation of funds to finance the some sectors. On the overall therefore, the study found that the economy Nigeria rely heavily on the banking sector to finance its activities even though the desired expectation is not met by the banks. The study therefore, concluded that financial intermediaries (banks) are important...
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...CHAPTER 1 INTRODUCTION AND OVERVIEW Learning Objectives The subject matter of economics and finance • The general role of the financial system in a modern economy • The major functions of financial markets and financial intermediaries • What saving is and its uses • How the financial system channels funds from lenders to borrowers • The role of the Federal Reserve and its regulatory and monetary policy responsibilities Lectures Notes I. Economic and financial analysis of an ever-changing system A. Economics is about how society decides what gets produced, how it gets produced and who gets what. B. Microeconomics studies about individual decision making units. Macroeconomics deals with aggregate or total behavior of all households and firms. C. Finance is about how the financial system coordinates the flow of funds from lenders to borrowers and how new funds are created by financial intermediaries in the borrowing process. D. Historically, the financial system has been highly regulated since a smooth functioning, efficient financial system is vital to a healthy economy. C. In recent years, the financial system has been changing due to new ways to raise and use money through financial intermediation, increased globalization, and deregulation. II. Finance in our daily lives A. Money is something generally acceptable and generally used to make payments. Saving is income not spent on...
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...Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones) Chapter 2 Financial Institutions, Financial Intermediaries, and Asset Management Firms Multiple Choice Questions 1 Financial Institutions 1) Financial enterprises, more popularly referred to as financial institutions, provide a variety of services. Which of the below is NOT one of these? A) Transform financial assets acquired through the market and constituting them into a different, and more widely preferable, type of asset–which becomes their liability. B) Exchange financial assets on behalf of customers but not for their own accounts. C) Manage the portfolios of other market participants. D) Assist in the creation of financial assets for their customers, and then sell those financial assets to other market participants. Answer: B Comment: Financial enterprises exchange financial assets both on behalf of customers and for their own accounts. Diff: 2 Topic: 2.1 Financial Institutions Objective: 2.1 the business of financial institutions 2) Financial intermediaries include ________ that acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposits; insurance companies, pension funds, and finance companies. A) depository institutions B) utilities C) initial public offerings D) preferred equity instrument. Answer: A Diff: 1 Topic: 2.1 Financial Institutions Objective: 2.1 the business of financial institutions 3)...
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...Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones) Chapter 2 Financial Institutions, Financial Intermediaries, and Asset Management Firms Multiple Choice Questions 1 Financial Institutions 1) Financial enterprises, more popularly referred to as financial institutions, provide a variety of services. Which of the below is NOT one of these? A) Transform financial assets acquired through the market and constituting them into a different, and more widely preferable, type of asset–which becomes their liability. B) Exchange financial assets on behalf of customers but not for their own accounts. C) Manage the portfolios of other market participants. D) Assist in the creation of financial assets for their customers, and then sell those financial assets to other market participants. Answer: B Comment: Financial enterprises exchange financial assets both on behalf of customers and for their own accounts. Diff: 2 Topic: 2.1 Financial Institutions Objective: 2.1 the business of financial institutions 2) Financial intermediaries include ________ that acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposits; insurance companies, pension funds, and finance companies. A) depository institutions B) utilities C) initial public offerings D) preferred equity instrument. Answer: A Diff: 1 Topic: 2.1 Financial Institutions Objective: 2.1 the business of financial institutions 3)...
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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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...En The Economics of Money, Banking, and Financial Markets, 9e (Mishkin) – Global Edition Chapter 8 An Economic Analysis of Financial Structure 8.1 Basic Facts About Financial Structure Throughout the World 1) American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries. Answer: D Ques Status: Revised 2) Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60% Answer: C Ques Status: Previous Edition 3) Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50% Answer: C Ques Status: Previous Edition 4) Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries. Answer: B Ques Status: Previous Edition 5) Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40% Answer: B Ques Status: Previous Edition 6) Which of the following statements concerning external...
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... Investment bankers help deficit spending units (DSUs) bring new primary security issues to market. Deposits in a credit union by a household are an example of direct finance. When a surplus spending units (SSU) owns a financial claim created by financial intermediation, its residual claim is against a deficit spending units (DSU). Assets of financial intermediaries include direct financial claims only. Finance companies take small consumer deposits and make large consumer loans. Liabilities of financial intermediaries are indirect financial claims. Direct finance requires a more or less exact match of preferences. There must be an equal number of DSUs and surplus spending units ( SSUs) in a period. Every financial claim appears on two balance sheets. Without a financial sector, real investment must be financed internally by the deficit spending unit. Depository intermediaries issue claims that are for the most part highly liquid. A household is a surplus spending units when income for the period exceeds spending. A surplus spending units surplus spending unit (SSU) must hold a claim until its scheduled maturity. Financial claims or securities are written for the mutual benefit of both SSU and DSU. Deficit spending units (DSUs) and surplus spending units (SSUs) always have some contact with each other in financial markets. Commercial banks lend to businesses in direct financial markets. “Futures contract” and “forward contract”...
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...04 Role of Pension Funds in Financial Intermediation Ondabu Ibrahim Tirimba Finance and Economics Department, PhD Candidate Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya Abstract This paper aimed at discussing the various roles that pensions play in financial intermediat ion. Descriptive research design was adopted with the population being all the available literature on the online web as pertaining pension funds and also financial intermed iation. Using key word characters, the search in itially identified 50 journals and after a tentative scrutiny, 37 journals were selected in a random sampling manner in o rder to give the birth of this discussion paper. The key objective of this article was to discuss the role of pension funds in financial intermed iation. A mong the roles identified in this paper were; provision of a mechanis m for pooling of funds and subdivision of shares, provision of ways to transfer economic resources, provision of ways to manage uncertainty and control risk, provision of ways to manage uncertainty and control risk, provision of pricing informat ion and the provision of ways to deal with incentive problems. This paper provides practical insights into the roles of pension in financial intermed iation and thus highlighting the key importance of such pension funds into the success of any economy. This paper is one of the very first to recognize the key roles that pension funds play in the 21st century. Keywords Intermediary, Financial...
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...ESSAY QUESTION 1 A market is a “place” where goods and services are exchanged. a. Physical assets markets are the markets for such products as wheat and machinery. Also known as tangible markets while financial asset markets deal with stocks, bonds, and other claims on real assets. b. Spot markets are markets in which assets are bought or sold for “on the spot delivery” while futures markets are markets in which participants agree to buy or sell asset at a future date. c. Money markets are for short term, highly liquid debt securities, the ones that mature in less than a year while capital markets are the markets for long term debt and corporate stocks. d. Primary markets are the markets in which corporations sell newly issued securities to raise capital while secondary markets are the markets in which existing securities are traded among investors. e. Public markets are the markets where standardized contracts are traded on organized exchanges while private markets are the markets where transactions are worked out directly between two parties. QUESTION 2 a. Financial markets tend to lower search and transactions costs in the economy. This is possible by providing a large array of financial products, with varying risks and pricing structures. This allows investors to compare cost of financing to their expected return on investment, thus making the investment choice that best suits their needs. b. Financial markets provide products to...
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...risk transfer 1(b) Describe the key functions of financial markets. [6 marks] PRICING FUNCTION: financial markets provide both buyers and sellers with “fair” valuation of the asset they are buying/selling DISCIPLINE FUNCTION: financial markets are regulated – regulation encourages issuers of securities (borrowers) not to engage in activities that the market deems detrimental to the value of their assets 1(c) Describe the problems arising due to information asymmetry. [12 marks] Adverse selection is the problem created by asymmetric information before the transaction occurs. It arises when the potential borrowers who are most likely to produce an undesirable (adverse) outcome are the ones who most actively seek out loans. Thus adverse selection increases the probability that bad credit risks will get loans. As a consequence, lenders may decide not to give any loans, even to good credit risks. Moral hazard is the problem that occurs after the transaction is made. It is the risk (hazard) that the borrower will engage in activities that are undesirable (immoral) for the lender. These activities potentially reduce the probability that the loan will be repaid. Again, the consequence is that lenders may decide not to make any loans. Investors are more likely to behave differently when using borrowed funds rather than when using their own funds. 1(d) Compare and contrast money markets with capital markets [7 marks]...
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