Warm Up Exercise

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E2-1 What does it mean to say that individuals as a group are net suppliers of funds for financial institutions? Individual as groups are net suppliers of the funds for financial institution means that the individuals who deposit their money into financial institutions is the main source of finance which is collected by these institutions and further distributed as loans. What do you think the consequences might be in financial markets if individuals consumed more of their incomes and thereby reduced the supply of funds available to financial institutions? If individuals consume more income and save less income in banks the fund supply of financial institution will reduce and the rate of borrowing from bank will increase.

E2-2 You are the chief financial officer (CFO) of Gaga Enterprises, an edgy fashion design firm. Your firm needs $10 Million dollars to expand production. How do you think the process of raising this money will vary if you raise it with the help of financial institution versus raising it directly in the financial markets? The finance of $10million if taken up from financial institution Gaga Enterprises will have to give interest on the loan taken up. On the other hand, if it directly raises the money form the financial market Gaga Enterprise’s can do so in several ways one by equity the other by debt if raising money by equity it will have to pay dividend and if issuing money by debt it will have to pay interest

E2-3 For what kinds of needs do you think a firm would issue securities in the money market versus the capital market? If a firm invests in the money market is solely because it has some idle funds which by investing in money market will generate an interest in form of income. Investment in money market is typically for less than one year therefore it is also called short term investment. If a firm invests in capital market it is for a long term period generally more than one year. Investment in capital...
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