Fin 443

1. How do the roles of money market dealers and brokers differ?

One of the main differences between a money market broker and dealer is their role within the market and the capital required. A broker is a person who executes the trade on behalf of others and a dealer is a person who trades business on their own behalf. A dealer will buy and sell securities on their own account, while a broker will buy and sell securities for their clients.

2.  Define the following

a. default risk - The event in which companies or individuals will be unable to make the required payments on their debt obligations.

b. liquidity risk - The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize loss.

c. reinvestment risk - The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased.

d. interest rate risk - The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship.

e. prepayment risk - The risk associated with the early unscheduled return of principal on a fixed income security.

3.  What is the difference between a primary and a secondary market?  Why does a primary market functionally depend on the secondary market?

The difference between the primary and secondary market is that the primary market is where securities are created. It is the market where firms sell new stocks and bonds to the public for the first time. A simple way to look at this is it is the market where IPO's are first sold to the public. The secondary market is the place that people refer to when they are talking about the stock market. It includes The NYSE, Nasdaq, and the many other major markets of the world. In the secondary market, investors will trade among themselves. This is where...