Question 1

Compare and contrast financial institutions that act as brokers to those that transform
assets. In what sense are both types of institutions financial intermediaries? Provide one example of each type and describe how each functions as a financial intermediary.

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Question 2

Explain how the introduction of asset-backed securities has allowed investors to take advantage of higher returns from loans that most investors could never make on their own.

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Question 3

What are some of the advantages of trading in decentralized electronic exchanges?

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Question 4

A high school basketball player decides to bypass college and go right into the NBA, (the National Basketball Association). Describe the risk the individual is taking and a contract that might transfer the risk.

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Question 5

Why didn't the over-the-counter (OTC) exchanges suffer the disruption of service that the
New York Stock Exchange did after the terrorist attacks of September 11, 2001?

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Question 6

Trading in electronic exchanges has grown tremendously in recent years, what are some of the disadvantages of trading in decentralized electronic exchanges?

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Question 7

Can a financial instrument be bought and sold in both a primary and secondary financial market? Explain.

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Question 8

Explain the various ways that financial intermediaries increase the efficiency of an economy.

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Question 9

What evidence is there that the transaction costs involved with the buying and selling of stocks is low?

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Question 10

What is meant by the "paradox of leverage?"

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Question 11

Describe what is likely to happen to the average price of a share of stock if the stock markets decide to close every Friday and Monday to provide workers at the exchanges with longer weekends.

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Question 12

What is the primary distinction between debt/equity markets and derivative markets?

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Question 13

Why has the pace of structural change in financial markets accelerated in recent years?

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Question 14

As we saw in the chapter, some financial instruments are used primarily to transfer risk. Explain how a bread maker can use a financial instrument to transfer the following risk: the bread maker has the opportunity to provide bread to a local army base. The base figures they will need 10,000 loaves of bread each week, or roughly 500,000 for a year. The problem is the baker must quote a price for the entire year. The baker would really like to have this contract but he realizes that fluctuating input prices (specifically wheat) could result in significant losses.

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Question 15

Suppose that an internet-based program, Novus, wants to raise $10 million to expand its business operations. Describe how Novus can raise these funds directly through each of the follow options: issuing stock, issuing bonds, or obtaining a bank loan. Compare and contrast these three options.

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Question 16

How do financial markets pool and communicate the information regarding issuers of financial instruments in a convenient way?

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Question 17

Consider a typical individual who owns the following financial instruments: A life insurance policy for $250,000; a certificate of deposit for $10,000; homeowner's and auto insurance policies; $50,000 in a mutual fund, and $150,000 in her pension fund at work. Which of these are instruments used primarily as stores of value and which are being used to transfer risk?

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Question 18

Standard & Poor's sells information to investors; this is their primary business. Is this an example of a financial intermediary? Explain.

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Question 19

Is the obtaining of a car loan a primary or secondary market transaction?

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Quiz 3: Financial Instruments, Financial Markets, and Financial Institutions

Compare and contrast financial institutions that act as brokers to those that transform assets. In what sense are both types of institutions financial intermediaries? Provide one example of each type and describe how each functions as a financial intermediary.