chp 3 test bank - Chapter 3 Financial Markets Instruments...

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Chapter 3: Financial Markets, Instruments, and Institutions 1 Chapter 3: Financial Markets, Instruments, and Institutions Chapter Summary This chapter explains how financial markets function and surveys different types of financial instruments and institutions involved in those markets. It also discusses the roles of financial intermediaries and the implications of automated financial trading for both domestic and world financial markets. Financial markets channel funds from those who save to those who wish to make capital investments. Financial markets can be divided into primary and secondary markets. The former deal with newly issued financial instruments, whereas the latter deal with transactions of previously issued financial instruments. Financial markets can also be divided into money and capital markets. Financial instruments in money markets have maturities under one year. Examples of money market instruments are U.S. Treasury bills, commercial paper, bank certificates of deposit, Eurodollar deposits, and federal funds loans. Financial instruments in capital markets have maturities equal to or greater than one year. Examples of capital market instruments are business equities, corporate bonds, U.S. Treasury notes and bonds, mortgage loans, and consumer and commercial loans. Cybertrading of financial instruments using Internet brokers and other automated trading systems has speeded up financial exchanges both within and across national markets. Development in cross-border financial exchange using automated trading systems has raised regulatory concerns from different nations. Financial intermediaries serve to reduce problems associated with asymmetric information in financial transactions. Asymmetric information can lead to potential problems stemming from adverse selection and moral hazard. Financial intermediaries may also allow savers to benefit from economies of scale as a result of lower average costs of fund management. The majority of financial institutions are depository institutions, which include commercial banks, savings banks and savings and loan associations, and credit unions. Non-depository financial institutions include insurance companies, pension funds, mutual funds, finance
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