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Unformatted text preview: Chapter 4: Securities Markets ANSWERS TO END-OF-CHAPTER QUESTIONS 4-1. Financial markets are essential for both businesses and governments in raising capital to finance their operations. Both experience demands for funds that are not in balance with their actual funds on hand. Financial markets are absolutely essential to the functioning of our capitalistic economy. Technically, primary markets can exist without secondary markets since new securities can be sold to investors. For example, bonds could be sold to institutional investors to be held until they mature. However, investors would have difficulty reselling these securities if they needed to, and many would be discouraged from buying them because of this reason. 4-2. Investment bankers act as intermediaries between issuers and investors. They provide several functions, including: (1) an advisory function, wherein they offer advice to clients concerning the issuance of new securities; (2) an underwriting function, consisting of the purchase of securities from an issuer and their subsequent sale to investors; (3) a marketing function, involving the sale of the securities to the investing public. 4-3. In a primary offering involving investment bankers, the potential issuer of the securities meets with an investment banking firm for advice on selling the new issue. In a negotiated bid arrangement, these two parties negotiate and work together on the issue. Subsequently, the investment banker, working with other investment banking firms (i.e., a syndicate), underwrites the issue; that is, the investment bankers purchase the securities from the issuer, thereby assuming the risk involved in actually selling the securities. After all legal requirements have been met (e.g., the issue is registered with the SEC), the selling group sells the securities to the public via brokers who contact their customers about the issue. 4-4. The equity markets in the United States consist primarily of the organized exchanges-- the NYSE (which merged with the Amex) and Nasdaq (approved to be an exchange in January, 2006). Over- the-counter securities are now traded on the OTC Bulletin Board or the Pink Sheets LLC. Auction markets , involving the NYSE, Amex, and any regional exchanges, include a bidding (auction) process in a specific physical location with brokers representing 1 buyers and sellers....
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This note was uploaded on 02/13/2012 for the course FINA 3480 taught by Professor Moore during the Spring '11 term at Toledo.
- Spring '11
- Financial Markets