Question & Answer

 During a financial crisis, liquidity in financial markets declines dramatically, and many surplus units no longer participate in financial markets. Yet, if the markets are efficient, securities prices should decline due to existing economic conditions, which should make these securities appealing to potential investors. Nevertheless, many investors typically are no longer willing to participate in the financial markets under these conditions. Write a short essay that explains the logic behind why participants may temporarily disappear during a financial crisis even though security prices are low, causing illiquidity in financial markets.

Describe some of the fintech innovations in the financial markets. (LO5)

Explain why financial institutions are highly exposed to systemic risk during a financial crisis. (LO4)

Explain how each type of financial institution serves as a financial intermediary. (LO3)

Assume that your publicly traded company attempts to be completely transparent about its financial condition, and provides thorough information about its debt, sales, and earnings every quarter. Explain why there still may be much uncertainty surrounding your company’s stock price. (LO3)

Different types of financial institutions commonly interact. Specifically, they may provide loans to each other and take opposite positions on many different types of financial agreements, whereby one will owe the other based on a specific financial outcome. Explain why these kinds of relationships create concerns about systemic risk. (LO4)

Some countries do not have well-established markets for debt securities or equity securities. Why do you think this can limit the development of the country, business expansion, and growth in national income in these countries? (LO3)

Assume that countries A and B are of similar size, that they have similar economies, and that the government debt levels of both countries are within reasonable limits. Assume that the regulations in country A require complete disclosure of financial reporting by issuers of debt in that country, whereas regulations in country B do not require much disclosure of financial reporting. Explain why the government of country A is able to issue debt at a lower cost than the government of country B. (LO3)

Describe how a country’s laws can influence the degree of its financial market liquidity. (LO3)

Explain why financial markets may be less liquid if companies are not forced to provide accurate financial reports. (LO3)

Explain why mortgage defaults during the credit crisis in 2008 and 2009 adversely affected financial institutions that did not originate the mortgages. What role did these institutions play in financing the mortgages? (LO4)

Which factors influence a security’s liquidity? (LO2)

Integrate the roles of accounting, regulation, and financial market participation. That is, explain how financial market participants rely on accounting, and why regulatory oversight of the accounting process is necessary. (LO3)

Look in a business periodical for news about a recent financial transaction involving two financial institutions. For this transaction, determine the following:

a. How will each institution’s balance sheet be affected?

b. Will either institution receive immediate income from the transaction?

c. Who is the ultimate user of funds?

d. Who is the ultimate source of funds? (LO3)

Classify the types of financial institutions mentioned in this chapter as either depository or nondepository. Explain the general difference between depository and nondepository institutions as sources of funds. It is often said that all types of financial institutions have begun to offer services that were previously offered only by certain types. Consequently, the operations of many financial institutions are becoming more similar. Nevertheless, performance levels still differ significantly among types of financial institutions. Why? (LO3)

Why is it important for long-term debt securities to have an active secondary market? (LO2) 

What is the function of a mutual fund? Why are mutual funds popular among investors? How does a money market mutual fund differ from a stock or bond mutual fund? (LO3)

Compare the main sources and uses of funds for finance companies, insurance companies, and pension funds. (LO3)

With regard to the profit motive, how are credit unions different from other financial institutions? (LO3) 

Explain the primary use of funds by commercial banks versus savings institutions. (LO3)

Commercial banks use some funds to purchase securities and other funds to make loans. Why are the securities more marketable than the loans in the secondary market? (LO3)

Explain why some meme stocks were misvalued by investors. 

What are the functions of securities firms? Many securities firms employ brokers and dealers. Distinguish between the functions of a broker and those of a dealer, and explain how each type of professional is compensated. (LO3)

What type of information do investors rely on when determining the proper value of stocks? (LO2)

Discuss why many financial institutions have expanded internationally in recent years. What advantages can be obtained through an international merger of financial institutions? (LO3)