Week 2 Questions

Assignments from the Readings

Fin/370

December 12, 2011

1. What are financial markets? What function do they perform? How would an economy be worse of without them?

Financial markets are institutions and/or procedures that help complete transactions in all types of financial claims, such as securities. Financial markets make it possible to meet the demands of the economy by allocating the supply of savings. Financial markets are related to the forces of demand and supply for a specific type of financial claim. The economy would be worse without financial markets because the wealth of the economy would be less (Keown, Martin, & Scott, 2005, p. 476).

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

Money markets are “all institutions and procedures that facilitate transactions in short-term credit instruments” (Keown, Martin, & Scott, 2005, p. 486). Whereas, capital markets are “all institutions and procedures that facilitate transactions in long-term financial instruments” (Keown, Martin, & Scott, 2005, p. 486).

Money markets are generally issued to borrowers with very high credit ratings and are considered to have maturity in one year or less. Money markets trade U.S. Treasury bills, federal agency securities, certificates of deposits (C.O.D), and commercial paper.

Capital markets have maturity related to beyond a period of one year. Term loans, financial leases, corporate equities, and bonds are traded within the capital market (Keown, Martin, & Scott, 2005, p. 486).

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

An organized security exchange is a “formal organization involved in the trading of securities. They are tangible entities that conduct auction markets in listing securities” (Keown, Martin, & Scott, 2005, p. 486).

Corporations and investors are able to enjoy continuous security prices in a continuous...