• Examples of financial assets: U.S. Treasury bonds, Foreign bond,.Home mortgage loan,Common stock. Financial assets are referred to as debt instruments in the case of: U.S. Treasury bonds, Corporate bonds, Municipal bonds. Financial assets represent a residual claim in the case of Common stock. The process of valuing financial assets include: Estimating the cash flows, Determining the appropriate discount rate, Discounting the expected cash flows. the following risks are associated with realizing the expected cash flows: Default risk, Purchasing power risk, Foreign-exchange risk. The principal economic functions of financial assets include: The transfer of funds from those with surplus funds to those who need funds, The transfer of funds so as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and providing the funds. the following are properties of financial assets: Reversibility, Moneyness, Liquidity. The length of time between the date the instrument was issued and is scheduled to make final payment is called term to maturity.
• The price discovery process is an economic function, which refers to: Financial markets that signal how funds in the economy should be allocated among financial assets. Common stock issued by Digital Equipment Corporation is not traded in Money market, Debt market, Derivatives market or Capital market. When an issuer sells a new financial asset to the public, it is sold in the primary market. Financial assets that are bought and sold amongst investors are traded in the secondary market. Securities with a maturity of less than one year are traded in the money market. The factors in the integration of financial markets throughout the world are: Increased institutionalization of financial markets, Advances in telecommunications and computer technologies, Deregulation or liberalization of major financial markets. Securities of issuers not domiciled in the country are traded in foreign market. Derivative instruments can be used for speculative purposes. Two basic types of derivative instruments are option and futures. The bid-ask spread is the difference between the price the market maker is willing to sell a financial asset and the price the market maker is willing to buy a financial asset. The risk attached to financial assets whose cash flows are not denominated in U.S. dollars is called foreign exhange risk
• Securities traded in the external market are distinguished by: Being offered simultaneously to investors in a number of countries. Being issued outside the jurisdiction of any single country. Financial institutions provide these services: Exchanging financial assets on behalf of customers. Providing investment advice. Managing portfolios. Assisting in the creation of financial assets. Treasury securities are debt obligations issued by central gov. The depository institutions are: Commercial banks. Savings and loan associations. Savings banks. Credit unions. the following transactions is an example of direct investment: An investment company buys a portfolio of stocks and bonds. An individual makes a deposit at a commercial bank. Financial intermediaries transfer financial assets that are less desirable into other financial assets, which are more widely preferred by the public. This transformation involves several economic functions: Providing maturity intermediation. Risk reduction via diversification. Reducing the costs of contracting and information processing. Providing payments mechanism. Maturity intermediation has implications for financial markets in that: Investors have more choices concerning the maturity of their investments. Borrowers have more choices for the length of their debt obligations. Investors will require that long-term borrowers pay a higher interest rate than on short-term borrowing. In contrast to individual investors, financial intermediaries will be willing to make longer term loans,...
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