Financial Markets Introduction 1 Financial Markets & Flow of Funds Financial Markets M k t Lenders Households Firms Governments Foreigners Borrowers Households Firms Governments Foreigners Financial Institutions Note that lenders are suppliers of funds (surplus units) while borrowers are demanders/users of funds (deficit units) 2 1 Flow of Funds Financial institutions perform the essential function of channeling funds from surplus units to deficit units. Agents (e.g. brokers)
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mortgage rates rise from 5% to 10%‚ but the expected rate of increase in housing prices rises from 2% to 9%‚ are people more likely or less likely to buy houses? Explain you answer. People are more likely to buy houses because the real interest rate when purchasing a house has fallen from 3 percent (5 percent –2 percent) to 1 percent (10 percent –9 percent). The real cost of financing the house is thus lower‚ even though mortgage rates have risen. (If the tax deductibility of interest payments
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Major Determinants of Interest Rates Inflation Inflation is a factor that decisively affects the nature or outcome of interest rates. “Inflation is an increase in prices of goods and services over time”(Financial Institutions‚ Instruments and Markets‚ 2012). Inflation is the natural byproduct of a robust‚ growing economy. No inflation‚ or deflation (the lowering of prices)‚ is actually a much worse economic indicator. Also‚ in a healthy economy‚ wages rise at the same rate as prices. A standard
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Econ 252 Spring 2011 Final Exam Econ 252 - Financial Markets Professor Robert Shiller Spring 2011 Professor Robert Shiller Final Exam Instructions: • • • • • • • • The exam consists of a total of twelve pages including this coversheet. There are two parts to this exam. In Part I‚ answer any sixteen of the twenty questions‚ five minutes each. The total for Part I is 80 minutes. In Part II‚ answer all seven questions. The total for Part II is 70 minutes.
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EXCHANGE TRANSACTIONS WITH PRIMARY FINANCIAL INSTRUMENTS (4/4hs) 2.1. Organization of spot transactions on different stock exchanges Organizational forms of stock exchange trading‚ usually‚ depend on the general standing of securities market‚ especially on: Market depth (the bigger is the number of investors‚ the deeper is the secondary market); Market size (the higher is the supply and demand of securities‚ the more extended is the stock exchange market); Resistance level (has
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to financial markets ------------------------------------------------- Essay questions 1. Direct finance: Surplus economic units lend their funds “direct” to deficit economic units which are the ultimate borrowers. Financial institutions may facilitate this process by providing financial services in return for fees and commissions. The financial assets issued by the deficit units are held by the surplus units. Indirect finance: Surplus economic units lend their funds to financial institutions
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Chapter 5 : Interet rates Page161 Interest rate quotes and adjustments 5-1. Your bank is offering you an account that will pay 20% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length of a. Six months. b. One year. c. One month. a. Since 6 months is [pic] of 2 years‚ using our rule [pic] So the equivalent 6 month rate is 4.66%. b. Since one year is half of 2 years [pic] So the equivalent 1 year rate is 9.54%. c. Since
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Bank of Canada and Interest Rates Bank of Canada Will Raise Interest Rates The Bank of Canada has indicated that it has concerns over inflation being too low. (Parkinson). However‚ inflation has been rising and the Canadian economy has strengthened over the last several months. Keeping interest rates too low over a long period of time may have a tendency to over-inflate the economy and create asset bubbles while also creating pockets of greater debt‚ not dissimilar to those that contributed to
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assets are financed. The international model of banking system gather their funds via domestic market and then allocated to borrowers in a foreign market. By contrast‚ Global Banking generates funds in a foreign market and finances its claims on borrower in the same foreign market. In this way we can see that international bank concentrates on cross border business while global bank mainly focus on local market businesses. b/ Identify five ways in which a bank headquartered in the USA can fund loans
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Discuss the importance of direct and indirect financing for the flow-of-funds function of the financial system. Bottom of Form Content Page 1. Executive Summary 4 2. Introduction 5 3. Flow of funds 5 4. Direct Financing 6 4.1 Advantages 7 4.2 Disadvantages 8 5. Indirect financing 9 5.1 Advantages 9 5.2 Disadvantages 11 6. Global Financial Crisis 11 7. Conclusion 12 8. Referencing and citation 14 9. Appendix 16 1. Executive Summary This report mainly
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