Answers to Chapter 1
1. a. primary
2. a. money market
b. money market
c. capital market
d. capital market
e. capital market
f. money market
g. money market
h. money market
i. capital market
j. money market
3. The capital markets are more likely to be characterized by actual physical locations such as the New York Stock Exchange or the American Stock Exchange. Money market transactions are more likely to occur via telephone, wire transfers, and computer trading.
4. According to Figure 1-3, the ...view middle of the document...
As of mid-March 2009, the Dow Jones Industrial Average (DJIA) had fallen in value 53.8 percent in less than 1 ½ year’s time, larger than the
decline during the market crash of 1937-1938 when it fell 49 percent. However, stock prices recovered along with the economy in the last half of 2009, rising 71.1 percent between March 2009 and April 2010.
7. The bank would fear a depreciation of the yen against the dollar.
8. Financial institutions consist of:
Commercial banks - depository institutions whose major assets are loans and major liabilities are deposits. Commercial banks’ loans are broader in range, including consumer, commercial, and real estate loans, than other depository institutions. Commercial banks’ liabilities include more nondeposit types of nondeposit sources of funds, such as subordinate notes and debentures, than other depository institutions.
Thrifts - depository institutions in the form of savings and loans, savings banks, and credit unions. Thrifts generally perform services similar to commercial banks, but they tend to concentrate their loans in one segment, such as real estate loans or consumer loans.
Insurance companies - financial institutions that protect individuals and corporations (policyholders) from adverse events. Life insurance companies provide protection in the event of untimely death, illness, and retirement. Property casualty insurance protects against personal injury and liability due to accidents, theft, fire, etc.
Securities firms and investment banks - financial institutions that underwrite securities and engage in related activities such as securities brokerage, securities trading, and making a market in which securities can trade.
Finance companies - financial intermediaries that make loans to both individual and businesses. Unlike depository institutions, finance companies do not accept deposits but instead rely on short- and long-term debt for funding.
Mutual funds - financial institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of asset.
Pension funds - financial institutions that offer savings plans through which fund participants accumulated savings during their working years before withdrawing them during their retirement years. Funds originally invested in and accumulated in a pension fund are exempt from current taxation.
9. If there were no FIs then the users of funds, such as corporations in the economy, would have to approach the savers of funds, such as households, directly in order to fund their investment projects and fill their borrowing needs. This would be extremely costly because of the up-front information costs faced by potential lenders. These include costs associated with identifying potential borrowers, pooling small savings into loans of sufficient size to finance corporate activities, and assessing risk and investment opportunities. Moreover, lenders would have to monitor the...