Financial system: What is the role of the financial system, and what are the two major components of the financial system?

1. Financial system: What is the role of the financial system, and what are the two major components of the financial system?

2. Financial system: What does a competitive financial system imply about interest rates?

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3. Financial system: What is the difference between saver-lenders and borrower-spenders, and who are the major representatives of each group?

4. Financial markets: List the two ways in which a transfer of funds takes place in an economy. What is the main difference between these two?

5. Financial markets: Suppose you own a security that you know can be easily sold in the secondary market, but the security will sell at a lower price than you paid for it. What does this imply for the security’s marketability and liquidity?

6. Financial markets: Why are direct financial markets also called wholesale markets?

7. Financial markets: Trader Inc. is a $300 million company, as measured by asset value, and Horst Corp. is a $35 million company. Both are privately held corporations. Explain which firm is more likely to go public and register with the SEC, and why.

8. Primary markets: What is a primary market? What does IPO stand for?

9. Primary market: Identify whether the following transactions are primary market or secondary market transactions.

(a) Jim Hendry bought 300 shares of IBM through his brokerage account.

(b) Peggy Jones bought ,000 of General Motors bonds from another investor.

(c) Hathaway Insurance Company bought 500,000 shares of Trigen Corp. when the company issued stock.

10. Investment banking: What does it mean to “underwrite” a new security issue? What compensation does an investment banker get from underwriting a security issue?

11. Investment banking: Cranjet Inc. is issuing 10,000 bonds, and its investment banker has guaranteed a price of $985 per bond. If the investment banker sells the entire issue to investors for $10,150,000.

(a) What is the underwriting spread for this issue?

(b) What is the percentage underwriting cost?

(c) How much will Cranjet raise?

12. Financial institutions: What are some of the ways in which a financial institution or intermediary can raise money?

13. Financial institutions: How do financial institutions act as intermediaries to provide services to small businesses?

14. Financial institutions: Which financial institution is usually the most important to businesses?

15. Financial markets: What is the main difference between money markets and capital markets?

16. Money markets: What is the primary role of money markets? Explain how the money markets work.

17. Money markets: What are the main types of securities in the money markets?

18. Capital markets: How do capital market instruments differ from money market instruments?

19. Market efficiency: Describe the informational differences that distinguish the three forms of market efficiency.

20. Market efficiency: Zippy Computers announced strong fourth quarter results. Sales and earnings were both above analysts’ expectations. You notice in the newspaper that Zippy’s stock price went up sharply on the day of the announcement. If no other information about Zippy became public on the day of the announcement and the overall market was down, is this evidence of market efficiency?

21. Market efficiency: In Problem 20, if the market is efficient, would it have been possible for Zippy’s stock price to go down in the day that the firm announced the strong fourth quarter results?

22. Market efficiency: If the market is strong-form efficient, then trading on tips you hear from Jim Cramer (the host of Mad Money on CNBC) will generate no excess returns (i.e., returns in excess of fair compensation for the risk you are bearing). True or false?

23. Financial markets: What are the major differences between public and private markets?

24. Financial instruments: What are the two risk-hedging instruments discussed in the chapter?

25. Interest rates: What is the real rate of interest, and how is it determined?

26. Interest rates: How does the nominal rate of interest vary over time?

27. Interest rates: What is the Fisher equation, and how is it used?

28. Interest rates: Imagine you borrow $500 from your roommate, agreeing to pay her back $500 plus 7 percent nominal interest in one year. Assume inflation over the life of the contract is expected to be 4.25 percent. What is the total dollar amount you will have to pay her back in a year? What percentage of the interest payment is the result of the real rate of interest?

29. Interest rates: Your parents have given you $1,000 a year before your graduation so that you can take a trip when you graduate. You wisely decide to invest the money in a bank CD that pays 6.75 percent interest. You know that the trip costs $1,025 right now and that inflation for the year is predicted to be 4 percent. Will you have enough money in a year to purchase the trip?

30. Interest rates: When are the nominal and real interest rates equal?

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