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bbf- hw 2 solutions - IntegratedCase 21 SmythBarry&Company...

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Integrated Case 2-1 Smyth Barry & Company 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. A. What are the three primary ways in which capital is transferred between  savers and borrowers?  Describe each one. Answer: [Show S2-1 through S2-3 here.]  Transfers of capital can be made (1) by  direct transfer of money and securities, (2) through an investment banking  house, or (3) through a financial intermediary.  In a direct transfer , a  business sells its stocks or bonds directly to investors (savers), without  going through any type of institution.  The business borrower receives  Chapter 2:  Financial Markets and Institutions Integrated Case 1
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dollars from the savers, and the savers receive securities (bonds or stock)  in return. If the transfer is made through an investment banking house , the  investment bank serves as a middleman.  The business sells its securities  to the investment bank, which in turn sells them to the savers.  Although  the securities are sold twice, the two sales constitute one complete  transaction in the primary market. If the transfer is made through a financial intermediary , savers invest  funds with the intermediary, which then issues its own securities in  exchange.  Banks are one type of intermediary, receiving dollars from  many small savers and then lending these dollars to borrowers to  purchase homes, automobiles, vacations, and so on, and also to  businesses and government units.  The savers receive a certificate of  deposit or some other instrument in exchange for the funds deposited  with the bank.  Mutual funds, insurance companies, and pension funds are  other types of intermediaries. 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.
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