Chapter 14 Study Questions

Chapter 14 Study Questions

Chapter 14 Study Questions
14-1. What are financial markets? What function do they performer? How would an economy be worse off without them?
- Through review of the text, Financial Management: Principles and Applications, the reader will notice that financial markets are “institutions and procedures that facilitate transactions in all types of financial claims” (Keown, Martin, Petty, & Scott, 2005, p. 475). The function of financial markets is to facilitate the transfer of savings from those economic units with a surplus to those with a deficit. Financial markets exist in order to distribute the supply of savings in the economy to the demanders of those savings (Keown, Martin, Petty, & Scott, 2005). Moreover, if an economy did not have financial markets, then the economic wealth would decrease. Additionally, the rate of capital formation would not be as high if financial markets did not exist (Keown, Martin, Petty, & Scott, 2005).
14-2. Define in a technical sense what we mean by financial intermediary. Give an example of your definition.
- According to Keown, Martin, Petty, and Scott (2005) financial intermediary is a type of system that collects the savings of individuals and issues its own securities in exchange for those savings. Afterward the intermediary uses the funds collected from individual savers to obtain the business firm’s securities. An example would be a 401K; also Chase bank serves as a financial intermediary by taking in deposits and placing them in mortgage loans and different securities.
14-3. Distinguish between the money and capital markets.
- Keown, Martin, Petty, and Scott (2005) states that the primary distinguishing feature between the money and capital markets is the maturity period of the securities traded in these markets “The money market refers to all institutions and procedures that facilitate transactions in short-term credit instruments.   The capital market refers to all institutions and procedures that facilitate...