Financial Management Integrated Case 2 Answers
|Ally Zmijeski |
|Financial Management Section C |
|Homework 2: Integrated Case Questions |
Chapter 2 Integrated Case 2-11
A) In a well-functioning economy, capital flows efficiently from those with surplus capital to those who need it in one of three ways: • Direct transfers: occur when a business sells its stocks or bonds directly to savers without going through any type of financial institution. This is used primarily by small firms and doesn’t raise much capital. • Transfers also can go through an investment bank that underwrites the issue, or serves as middleman/facilitator. The company sells its stocks or bonds to the investment bank, which then sells these same securities to savers. Because new securities are involved and the corporation receives the sale proceeds, this transaction is called a primary market transaction. • Transfers can also be made through a financial intermediary, such as a bank, insurance company, or mutual fund. Intermediaries increase efficiency of money and capital markets.
B) People and organizations wanting to borrow money are brought together with those who have surplus funds in the financial markets.
Types of Financial Markets include… • Physical Asset vs. Financial Asset: physical asset markets are for tangible products, while financial asset markets are for stocks, bonds, notes, and mortgages. They also deal with derivative securities whose values are derived from changes in the prices of other assets. o A share of Ford stock is a pure financial asset, while an option to buy Ford shares is a derivative security whose value depends on the
|Financial Management Section C |
|Homework 2: Integrated Case Questions |
Chapter 2 Integrated Case 2-11
A) In a well-functioning economy, capital flows efficiently from those with surplus capital to those who need it in one of three ways: • Direct transfers: occur when a business sells its stocks or bonds directly to savers without going through any type of financial institution. This is used primarily by small firms and doesn’t raise much capital. • Transfers also can go through an investment bank that underwrites the issue, or serves as middleman/facilitator. The company sells its stocks or bonds to the investment bank, which then sells these same securities to savers. Because new securities are involved and the corporation receives the sale proceeds, this transaction is called a primary market transaction. • Transfers can also be made through a financial intermediary, such as a bank, insurance company, or mutual fund. Intermediaries increase efficiency of money and capital markets.
B) People and organizations wanting to borrow money are brought together with those who have surplus funds in the financial markets.
Types of Financial Markets include… • Physical Asset vs. Financial Asset: physical asset markets are for tangible products, while financial asset markets are for stocks, bonds, notes, and mortgages. They also deal with derivative securities whose values are derived from changes in the prices of other assets. o A share of Ford stock is a pure financial asset, while an option to buy Ford shares is a derivative security whose value depends on the