BUS 3062 Unit 1 Assignment 2 Financial Markets and Institution
BUS 3062 Unit 1 Assignment 2 Financial Markets and Institutions
Question 1
Proficient-level: Classify the following transactions as a primary or secondary market
– P&G sells $5 million of GM preferred stock from its marketable securities portfolio: Secondary Market
– The Vanquish Fund buys $100 million of previously issued P&G bonds: Secondary Market
– Gecko Insurance Co. sells $10 million of GM common stock: Secondary Market
– Ford Motor issues $200 million of new common stock: Primary Market
– The Betterment Company issues $50 million of common stock in an IPO: Primary Market. BUS 3062 Unit 1 Assignment 2 Financial Markets and Institutions
Distinguished-level: Correct responses
– P&G sells $5 million of GM preferred stock from its marketable securities portfolio: Secondary Market
– The Vanquish Fund buys $100 million of previously issued P&G bonds: Secondary Market
– Gecko Insurance Co. sells $10 million of GM common stock: Secondary Market
– Ford Motor issues $200 million of new common stock: Primary Market
– The Betterment Company issues $50 million of common stock in an IPO: Primary Market
Question 2
Proficient-level: Classify the following financial instruments as money market or capital market securities
– Mortgages: Capital Market
– Common Stock: Capital Market
– Corporate Bonds: Capital Market
– Banker’s Acceptances: Money Market
– U.S. Treasury Bills: Money Market
– Commercial Paper: Money Market
– U.S. Treasury Notes and Bonds: Capital Market
– State and Local Government Bonds: Capital Market
– U.S. Government Agency Bonds: Capital Market
Distinguished-level: Correct responses
– Mortgages: Capital Market
– Common Stock: Capital Market
– Corporate Bonds: Capital Market
– Banker’s Acceptances: Money Market
– U.S. Treasury Bills: Money Market
– Commercial Paper: Money Market
– U.S. Treasury Notes and Bonds: Capital Market
– State and Local Government Bonds: Capital Market
– U.S. Government Agency Bonds: Capital Market
Question 3
Proficient-level: Types of financial institutions and their primary services
– Commercial banks: Provide lending services to consumers, commercial entities, and real estate.
– Thrifts (savings associations, savings banks, and credit unions): Focus on specific segments like real estate or consumer lending.
– Insurance companies: Offer protection against financial risks for corporations and individuals.
– Security firms and investment banks: Engage in underwriting securities, brokerage, and securities trading.
– Finance companies: Provide loans to individuals and businesses using short and long-term debt.
– Mutual funds: Pool financial resources from multiple investors and invest in diversified asset portfolios.
– Pension funds: Accumulate savings through tax-exempted retirement plans during individuals’ working years. BUS 3062 Unit 1 Assignment 2 Financial Markets and Institutions
Distinguished-level: Definition of liquidity
– Liquidity refers to the ease of converting an asset into cash without significant loss in value or incurring high transaction costs.
Question 4
Proficient-level: Factors determining the nominal interest rate on security
– Inflation: Increase in the economy’s overall price of goods and services.
– Real risk-free rate: Adjusted for inflation, it represents the rate without any risk.
– Default risk: The probability that an issuer will fail to make interest or principal payments.
– Liquidity risk: The risk that a security cannot be sold quickly and at a fair price.
– Special provisions: Features like taxability, convertibility, or callability that affect the interest rates on securities.
– Time to maturity: The time until security is repaid.
Distinguished-level: Two factors common to all financial securities
– Risk and return.
Question 5
Proficient-level: Definition of the term structure of interest rates and theories explaining its shape:
– Term structure of interest rates compares yields on securities with similar characteristics but different maturities.
– Unbiased expectations theory suggests that the yield curve reflects market expectations of future short-term rates. BUS 3062 Unit 1 Assignment 2 Financial Markets and Institutions
– Liquidity premium theory states that investors require a premium on long-term securities to compensate for uncertainty.
– Market segmentation theory argues that investors have specific maturity preferences, resulting in different interest rates.
– The most common U.S. Treasury yield curve is typically upward-sloping, indicating higher yields for longer-term securities.
– The shape of the yield curve can vary based on economic conditions and market expectations.
References
Cornett, M., Adair, Nofsinger. (01/2015). M: Finance, 3rd Edition. [Bookshelf Online]. Retrieved from
https://online.vitalsource.com/#/books/1259821552/
