Warm Up Exercises
E2–1 What does it mean to say that individuals as a group are net suppliers of funds for
For financial institutions, the key suppliers of funds and the key demanders of
funds are individuals, businesses, and governments. The savings that individual
consumers place in financial institutions provide these institutions with a large
portion of their funds. Individuals not only supply funds to financial institutions
but also demand funds from them in the form of loans. However, individuals as a
group are the net suppliers for financial institutions: They save more money than
What do you think the consequences might be in ...view middle of the document...
Some of those needs could be short term inventory and long term equipment. If they need to finance an activity or an equipment for several years they may finance it with securities.
E2–4 Your broker calls to offer you the investment opportunity of a lifetime, the chance to
invest in mortgage-backed securities. The broker explains that these securities are
entitled to the principal and interest payments received from a pool of residential
mortgages. List some of the questions you would ask your broker to assess the risk
of this investment opportunity.
What is the quality and the type of real estate that the investment would be in?
What kind of mortgage backed securities? Or are these securities risky or are they mortgages were most customers have a good credit rating?
How will the interest rate be affecting the market?
E2–5 Reston, Inc., has asked your corporation, Pruro, Inc., for financial assistance. As a
long-time customer of Reston, your firm has decided to give that assistance. The
question you are debating is whether Pruro should take Reston stock with a 5%
annual dividend or a promissory note paying 5% annual interest.
Assuming payment is guaranteed and the dollar amounts for annual interest and
dividend income are identical, which option will result in...