Explain the role of brokers, dealers, and investment bankers. How does each make a profit? Brokers never own the securities that they trade. Brokers bring buyers and sellers together and receive a commission if the sale takes place. Dealers on the other hand create a market for securities by owning an inventory of securities. Dealers make profits by trading from their inventory and dealing as a matchmaker. Investment Bankers help firms bring their debt or equity securities to market. They also help with helping firm determine whether a certain project is feasible. 4
Explain how you would believe economic activity would be affected if we did not have financial markets and institutions. If there were no financial markets and institutions it would be almost impossible for people to get together to buy and sell interest in a company. There would be no middle man to bring the people who are willing to loan and the people who need to borrow. There would be no efficient market so the world economy would not be what it is today. Financial markets and institutions ware what keeps this country and every country in a natural progression. 5
Explain the concept of financial intermediation. How does the possibility of financial intermediation increase the efficiency of the financial system? The 5 intermediation services that financial institutions provide are denomination divisibility, currency transformation, maturity flexibility, credit risk diversification, and liquidity. The goal of the financial institution in financial intermediation is to bring together SSU’s and DSU’s so that they may gain a profit by acquiring funds at a lower interest rate than the rate they charge when they sell products. Financial Intermediation allows for a greater number of funds to be channeled through the market which in turn reflects the wealth of the US economy. 7
Explain the differences between money markets and capital markets. Which market would GM use to finance a new...
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