Fin370 Week 2 Assignment

Running Head: ASSIGNMENTS FROM THE READING.

University of Phoenix

September 30, 2010

Amanda Johnson

FIN 370

14-1 Q. What are financial markets? What functions do they perform? How would an economy be worse off without them?

A. A financial market is a mechanism that allows people to buy and sell financial securities, commodities, and other fungible items of value at low transaction cost and at a price that reflects the efficient market hypothesis. They perform six basic functions, borrowing and lending, price determination, information aggregation and coordination, risk sharing, liquidity, and efficiency. If the financial markets did not exist, the wealth of the economy would decrease and the rate of capital formation would not be as high.

14-3 Q. Distinguish between the money and capital markets?

A. The primary difference between the money and capital markets is maturity period of the securities traded in them. The money market handles transactions within the short-term credit instruments while the capital market handles transactions in long-term financial instruments. Typically, a maturity period above one year would be categorized long-term, and less than one year would be categorized short-term.

14-4 Q. What major benefits do corporations and investors enjoy because of the existence of organized security exchanges?

A. Corporations and investors enjoy three main benefits from organized security exchanges. The first is a continuous market, which leads to continuous security prices. It also establishes and publishes fair security prices based on supply and demand rather than bargaining. Organized security exchanges also help business’ raise new capital because the secondary market makes it easier for firms to float new security offerings successfully.

15-12AQ. (Break-even point) You are a hard working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the...