Types of Markets Distinguish between primary and secondary markets. Distinguish between money and capital money.
- Efficient Markets. Explain the meaning of efficient markets. Why might we expect markets to beefficient most of the time? In recent years, several securities firms have been guilty of using inside informationwhen purchasing securities, thereby achievingreturns well above the norm (even when accounting forrisk). Does this suggest that the security markets arenot efficient? Explain.
- Securities Firms. What are the functions of securities firms? Many securities firms employ brokers and dealers. Distinguish between the functions of a broker and those of a dealer, and explain how each is compensated.
- Comparing Financial Institutions. Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondepository institution sources of funds. It is often said that all types of financial institutions have begun to offer services that were previously offered only by certain types. Consequently, the operations of many financial institutions are becoming more similar. Nevertheless, performance levels still differ significantly among types
of financial institutions. Why?
- Global Financial Market Regulations. Assumethat countries A and B are of similar size, that they havesimilar economies, and that the government debt levels of both countries are within reasonable limits. Assume thatthe regulations in country A require complete disclosureof financial reporting by issuers of debt in that countrybut that regulations in country B do not require muchdisclosure of financial reporting. Explain why the governmentof country A is able to issue debt at a lower costthan the government of country B.
- Impact of Government Spending. If the federalgovernment planned to expand the space program,how might this affect interest rates?
- Real Interest Rate. Estimate the real interest rateover the last year. If financial market participantsoverestimate inflation in a particular period, will realinterest rates be relatively high or low? Explain.
- Impact of Stock Market Crises. During periodswhen investors suddenly become fearful that stocks areovervalued, they dump their stocks and the stockmarket experiences a major decline. During theseperiods, interest rates also tend to decline. Use theloanable funds framework discussed in this chapter toexplain how the massive selling of stocks leads to lowerinterest rates.
- Impact of Economic Crises on Interest Rates. When economic crises in countries are due to a weakeconomy, local interest rates tend to be very low. However,if the crisis was caused by an unusually high rate ofinflation, interest rates tend to be very high. Explain why.