s02

s02 - THE DOMESTIC AND INTERNATIONAL FINANCIAL MARKETPLACE...

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Chapter 2 THE DOMESTIC AND INTERNATIONAL FINANCIAL MARKETPLACE ANSWERS TO QUESTIONS: 1. The saving-investment cycle consists of net savers (surplus spending units) transferring funds to net investors (deficit spending units). The transfer can be made through either financial middlemen or financial intermediaries. For a given time period, actual savings equals actual investment. 2. Financial middlemen and intermediaries facilitate the transfer of funds during the saving-investment cycle. When financial middlemen aid in the transfer of funds, primary claims are issued to surplus spending units. When financial intermediaries are involved in the funds transfer process, secondary claims are issued to surplus spending units. These secondary claims are normally less risky than the primary claims received by the financial intermediaries. 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. Primary markets are financial markets in which new securities are bought and sold for the first time, whereas secondary markets are financial markets in which existing securities are offered for resale. 4. Financial intermediaries: • 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 - These include savings and loan associations, mutual savings banks, and credit unions. Sources of funds are demand and time deposits. Savings and loan associations and mutual savings banks invest most of their funds in home mortgages and credit unions are engaged primarily in consumer loans. • Investment companies - These include mutual funds and real estate investment trusts (REIT's). Mutual funds pool the funds of many savers and invest in financial assets, such as stocks, bonds, and money market instruments. REIT's invest in commercial and residential real estate. • Pension funds - These intermediaries pool the contributions of employees (and/or employers) and invest these funds in both financial and real assets. • 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
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s02 - THE DOMESTIC AND INTERNATIONAL FINANCIAL MARKETPLACE...

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