Chapter Questions
Distinguish between primary and secondary markets and between money and capital markets.
The secondary market for T-bills is active, and the secondary market for federal agency securities is limited. How does this affect the primary market for each security? Why are well-developed secondary markets important for the operation of an efficient financial system?
What is the difference between financial futures and financial forward markets? What are derivative markets? What are the ways derivatives can be used?
Discuss the major function of market makers in securities markets. What is the difference between a broker and a dealer?
If you call a local brokerage firm, you will find that the commission or brokerage fee charged for purchasing $$\$10,000$$ of T-bills is less than the fee associated with purchasing $$\$ 10,000$$ of, say, municipal bonds issued by the City of Cincinnati. Explain why.
Explain why it would be incorrect to view the various sectors of the financial markets as totally separate entities.
Define commercial paper, negotiable certificates of deposit, repurchase agreements, bankers' acceptances, federal funds, and Eurodollars. In what ways are they similar, and in what ways are they different?
What are mortgages?
Define and contrast stocks and bonds. What are the advantages of owning preferred stock? What are the advantages of owning common stock?
What is the difference between a government security and a government agency security? Which asset would you prefer to own if safety and liquidity were important to you?
Would you rather own the stocks or bonds of a particular corporation if you believed that the corporation was going to earn exceptional profits next year?
Why are municipals attractive to individuals and corporations with high incomes or profits?
Can the bid price ever be greater than the asked price?
Questions marked with a check mark $(\mathcal{})$ are objective in nature. They can be completed with a short answer or number.Rank the following financial instruments terms of their safety and liquidity:a. U.S. T-billsb. Large negotiable CDsc. Mortgagesd. Government bondse. Government agency securitiesf. Commercial paperg. Eurodollars
Questions marked with a check mark $(\mathcal{})$ are objective in nature. They can be completed with a short answer or number. In June 2010, John pays $\$ 9,800$ for a one-year T-bill that can be redeemed for $\$ 10,000$. What is the amount of interest earned? What is the yield?