Ch 02 - CHAPTER 2 THE BUSINESS ENVIRONMENT ANSWERS TO END...

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THE BUSINESS ENVIRONMENT ANSWERS TO END OF CHAPTER QUESTIONS: 1. Financial markets are where trading in financial assets take place . Financial markets are generally classified into primary and secondary markets . Primary markets are where new securities or primary claims are issued resulting in cash inflow to the issuer. Secondary markets are markets where already existing financial claims such as stocks and bonds are bought and sold. 2. In a direct transfer of funds from savers to borrowers, borrowers issue primary claims to savers and savers provide needed funds to borrowers. In the case of a corporation, the primary claims include bonds, preferred stock, and common stock. Usually direct transfers are undertaken with the help of an investment banker who underwrites the issue, i.e., the investment banker buys the primary claim issue from the corporation and resells it to the public at a slightly higher price. 3. Money markets deal in short-term securities having maturities of approximately one year or less, whereas capital markets deal in longer-term securities having maturities greater than one year. Examples of money market instruments include Treasury bills, commercial paper and certificates of deposit. Examples of capital market instruments include Treasury bonds, preferred stock, and common stock. 4. Financial intermediaries include the following. • Commercial banks - Sources of funds are demand and time deposits. Uses of these funds are loans to individuals, businesses (short-term credit and term loans), and governments. • Thrift institutions – Savings institutions that take deposits and invest mainly in consumer loans and mortgage loans. • Investment companies – Mutual funds that pool savings of many individuals and invest in portfolios of securities. They invest in a wide variety of primary claims including bonds and stocks. • Pension funds - These intermediaries pool the contributions of employees (and/or employers) and invest them in wide variety of primary claims to meet retirement obligations. Investments may include bonds, stocks, and real estate. • Insurance companies - Sources of funds are premiums (payments) from individuals and organizations (policyholders). In exchange for these premiums, the insurance companies agree to make certain future contractual payments, such as death and disability benefits and compensation for financial losses arising from fire, theft, accident, or illness. The premiums are used to build reserves, which are invested in various types of financial and real assets. 4
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Ch 02 - CHAPTER 2 THE BUSINESS ENVIRONMENT ANSWERS TO END...

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