14-1. What are financial markets? What function do they perform? How would an economy be worse off without them? Financial markets are the instutions and procedures that enable transactions in all types of financial securities. The function of financial markets is to distribute the savings supply in an economyto those who demand the savings. Economic wealth would decrease and capital formation would be less if our economy didn't have financial markets. 14-3. Distinguish between the money and capital markets.
The maturity period of the securities traded within a market is the distinguishing factor between the money and capital markets. Short term debt instruments issued to borrowers with high credit ratings make up the money market. Short term is typically a term of one year or less. The money market is an intangible market as it is primarly conducted on the telephone and computer. The capital market is comprised of the long term financial instruments. Long term refers to maturity periods of one year or more. A corporation's capital structure is raised in the capital market, such as financial leases and bonds, security exchanges, and over-the-counter markets. 14-4. What major benefits do corporations and investors enjoy because of the existence of organized security exchanges? Organized security exchanges provide corporations and investors with three benefits. The first benefit is a continuous market which provides continuous security prices. Fair security prices are established and published based upon supply and demand as opposed to bargaining. Business are able to raise new capital because the secondary market eases the process of offering new securities through organized security exchanges. 15-12A. (Break-even point) You are a hard-working analyst in the office of financial operations for a manufacturing firm that produces a single product. You have developed the following cost structure information for...
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