A goal of the securities and exchange commission is

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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.
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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.
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  • Spring '10
  • huong
  • Stock exchange, Adverse selection

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