A goal of the securities and exchange commission is

Info icon This preview shows pages 5–7. Sign up to view the full content.

View Full Document Right Arrow Icon
28. A goal of the Securities and Exchange Commission is to reduce problems arising from a. competition. b. banking panics. c. risk. d. asymmetric information. e. all of the above. .Analyzing and explanation: 1. Describe the two routes for funds to be raised in an economy. 2. Specify the important functions served by secondary market 3. Specify some financial instruments traded in money market. 4. Why financial system is heavily regulated by governme nt? 5. How does regulation reduce the problems of adverse selection and moral hazard in United States? What regulations are or have been used to protect the public from panics? . Essay questions 1. Describe the pros and cons of holding an equity instrument. 2. Explain the concepts of asymmetric information, adverse selection, and moral hazard. When do adverse selection and moral hazard become relevant to the lending process? How has the financial system developed to deal with these problems? Answer: . Key terms 1. The process of turning risky assets into safer assets for investors by creating and selling assets with risk characteristics that people are comfortable with and then using the funds they acquire by selling these assets to purchase other assets that may have far more risk. 2. The problem created by asymmetric information before a transaction occurs: The people who are the most undesirable from the other party’s point of view are the ones who are most likely to want to engage in the financial transaction. 3. The unequal knowledge that each party to a transaction has about the other party. 4. Agents for investors, they match buyers with sellers.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
5. A financial market in which longer-term debt (generally with original maturity of greater than one year) and equity instruments are traded. 6. People who link buyers with sellers by buying and selling securities at stated prices. 7. Investing in a collection (portfolio) of assets whose returns do not always move together, with the result that overall risk is lower than for individual assets. 8. Periodic payments made by equities to shareholders. 9. The reduction in transaction costs per dollar of transaction as the size (scale) of transactions increases. .Multiple choice 1 e 2 b 3 b 4 a 5 d 6 d 7 a 8 e 9 e 10 d 11 e 12 a 13 e 14 c 15 a 16 a 17 a 18 b 19 a 20 d 21 d 22 c 23 d 24 d 25 b 26 e 27 b 28 d .Analyzing and explanation 1. Answer: Through direct finance in which borrowers borrow funds directly from lenders by selling them securities, or through indirect finance, which financial institutions stands between the lender-savers and the borrower- spenders to channel funds from one to the other. 2. Answer: a)They make previously financial instruments more liquid and desirable; b)They determine the price of the security that the issuing firm sells in the primary market.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern