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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

FINANCIAL MARKETS AND INSTITUTIONS Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the brokerage firm of Smyth Barry & Co. Your first assignment is to explain the nature of the U.S. financial markets to Michelle Varga, a professional tennis player who recently came to the United States from Mexico. Varga is a highly ranked tennis player who expects to invest substantial amounts of money through Smyth Barry. She is very bright; therefore, she would like to understand in general terms what will happen to her money. Your boss has developed the following questions that you must use to explain the U.S. financial system to Varga.

  1. a. What are the three primary ways in which capital is transferred between savers and borrowers? Describe each one.
  2. b. What is a market? Differentiate between the following types of markets: physical asset markets versus financial asset markets, spot markets versus futures markets, money markets versus capital markets, primary markets versus secondary markets, and public markets versus private markets.
  3. c. Why are financial markets essential for a healthy economy and economic growth?
  4. d. What are derivatives? How can derivatives be used to reduce risk? Can derivatives be used to increase risk? Explain.
  5. e. Briefly describe each of the following financial institutions: investment banks, commercial banks, financial services corporations, pension funds, mutual funds, exchange traded funds, hedge funds, and private equity companies.
  6. f. What are the two leading stock markets? Describe the two basic types of stock markets.
  7. g. If Apple Computer decided to issue additional common stock, and Varga purchased 100 shares of this stock from Smyth Barry, the underwriter, would this transaction be a primary or a secondary market transaction? Would it make a difference if Varga purchased previously outstanding Apple stock in the dealer market? Explain.
  8. h. What is an initial public offering (IPO)?
  9. i. What does it mean for a market to be efficient? Explain why some stock prices may be more efficient than others.
  10. j. After your consultation with Michelle, she wants to discuss these two possible stock purchases:
    1. 1. While in the waiting room of your office, she overheard an analyst on a financial TV network say that a particular medical research company just received FDA approval for one of its products. On the basis of this “hot” information, Michelle wants to buy many shares of that company’s stock. Assuming the stock market is highly efficient, what advice would you give her?
    2. 2. She has read a number of newspaper articles about a huge IPO being carried out by a leading technology company. She wants to purchase as many shares in the IPO as possible and would even be willing to buy the shares in the open market immediately after the issue. What advice do you have for her?
  11. 3. How does behavioral finance explain the real-world inconsistencies of the efficient markets hypothesis (EMH)?

a.

Summary Introduction

To describe: The primary ways to transfer the capital.

Capital:

Capital refers the amount of money, which is required for the investment to start a business or venture. Businesses raise the capital from the various sources such as initial public offerings and follow up public offering.

Explanation
  • Directly transfer of the stock and bonds to savers is one of the kinds to transfer of capital. Businesses directly transfer the capital to the investors who are ready to give money.
  • Investment banks bought the stock and bond from the companies and sell the securities to the savers...

b.

Summary Introduction

To explain: A market and the difference between the various types of market such as: financial asset markets versus physical asset markets, futures markets versus spot markets, money markets versus capital markets, primary markets versus secondary markets, and private markets versus public markets.

Market: A medium through which the subject matter can be transferred from the supplier to its receiver on demand or any other purpose is known as a market.

Physical Asset Markets: Markets, where the trade of commodities between the suppliers and receiverstake place, are known as physical asset markets.

Financial asset market: Markets, where the trade of financial securities or commodities between the suppliers and receivers take place, are known as financial asset markets.

Spot Markets: Markets, where trade, for the purpose of immediate delivery of financial securities or commodities,takes placeare known as spot markets.

Futures Markets: Markets, where the contractfor future trade takes place, is known as futures markets.

Money Market: Markets where the companies issue the highly liquid or short-term securities are known as money markets.

Capital Market: Markets where the companies are registered and issue the long-term debt and equity securities to the public. Primary market and secondary market are the types of capital markets. Capital markets mainly raise the long-term finances.

Primary Markets: Markets where the companies firstly invite to the public to buy the securities are known as primary markets.

Secondary Markets: Markets, where the companies invitedthe public to buy the securities, are known as a secondary market.

Public Market: Markets, which exist for the purpose to provide the securities or commodities to the public, are known as a public market.

Private Market: Markets, where the trade of securities or commodities between the pre-existing investors takes place, are known as a public market.

c.

Summary Introduction

To explain: The reason of significance of the financial market for the economic growth.

Financial Market: A market where the trade the financial securities such as equity, and bonds are known as a financial market. Money market and capital market are the types of financial market.

d.

Summary Introduction

To explain: The derivatives, its use in the reduction of risk and can be possible to increase the risk.

Derivatives:

Derivatives are a financial tool for minimization or maximization of the risk of the underlying assets.

e.

Summary Introduction

To explain: The investment banks, financial corporations, commercial banks, pension funds, exchange-traded funds, mutual funds, hedge funds, and private equity companies.

Financial Institutions: A financial institution is an institution which involves the financial activities such as deposit money, stock exchange, investments and currency exchange. The institutions refer the dealing of monetary transaction.

f.

Summary Introduction

To identify: The two stock exchanges and two basic types.

New York stock exchange: New York stock exchange is a U.S. stock exchange, founded in 1792 by intercontinental exchange, to buy and sell the securities and provide a direct connection between buyer and seller.

NASDAQ: NASDAQ is an American exchange, founded in 1971, to trade the stocks of telecommunication platform and provide a virtual connection between buyer and seller.

g.

Summary Introduction

To identify: The related markets which reflect the situations.

Financial Market: A market where the trade the financial securities such as equity, and bonds are known as a financial market. Money market and capital market are the types of financial market.

h.

Summary Introduction

To explain: The initial public offering.

i.

Summary Introduction

To describe: The efficiency of a market and the reason for the more or less effectiveness of some stock markets.

Financial Market: A market where the trade the financial securities such as equity, and bonds are known as a financial market. Money market and capital market are the types of financial market.

j. 1.

Summary Introduction

To identify: The best option to buy an initial public offering.

Initial Public Offering:

Initial public offering refers to the offering which is done first time by any private corporation to invite the public to buy the stock in the primary market. To raise the more funds company go for the initial public offering.

2.

Summary Introduction

To identify: The best option to buy an initial public offering.

Initial Public Offering:

Initial public offering refers to the offering which is done first time by any private corporation to invite the public to buy the stock in the primary market. To raise the more funds company go for the initial public offering.

k.

Summary Introduction

To explain: The concept of behavioral finance in respect of the inconsistencies of the real world of the efficient market hypothesis.

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