Chapter 2 - Chapter 2 Financial Markets and Institutions...

Chapter 2: Financial Markets and Institutions Learning Objectives 7
Chapter 2
Financial Markets and Institutions
Learning Objectives
After reading this chapter, students should be able to:

Identify the different types of financial markets and financial institutions and realize how these markets
and institutions enhance capital allocation.

Explain how the stock market operates and list the distinctions between the different types of stock
markets.

Explain how the stock market has performed in recent years.

Discuss the importance of market efficiency and explain why some markets are more efficient than
others.

8 Integrated Case Chapter 2: Financial Markets and Institutions
Answers to End-of-Chapter Questions
2-1 The prices of goods and services must cover their costs. Costs include labor, materials, and capital.
Capital costs to a borrower include a return to the saver who supplied the capital, plus a mark-up
(called a “spread”) for the financial intermediary that brings the saver and the borrower together.
The more efficient the financial system, the lower the costs of intermediation, the lower the costs to
the borrower, and, hence, the lower the prices of goods and services to consumers.
2-2 In a well-functioning economy, capital will flow efficiently from those who supply capital to those
who demand it. This transfer of capital can take place in three different ways:
1. Direct transfers of money and securities occur when a business sells its stocks or bonds directly
to savers, without going through any type of financial institution. The business delivers its
securities to savers, who in turn give the firm the money it needs.
2. Transfers may also go through an investment banking house which underwrites the issue. An
underwriter serves as a middleman and facilitates the issuance of securities. The company
sells its stocks or bonds to the investment bank, which in turn sells these same securities to
savers. The businesses’ securities and the savers’ money merely “pass through” the
investment banking house.