Chapter 2 – Financial Markets and Institutions

2-2 Describe the different ways in which capital can be transferred form suppliers of capital

to those who are demanding capital.

The different ways in which capital can be transferred from suppliers of capital to

those who are demanding capital are through direct transfers of money and securities,

which occurs when a business sells its stocks or bonds directly to savers, without going

through any type of financial institution. Another way in which capital can be transferred

between the two is through a primary market transaction, which involves new securities

and the corporation receives the proceeds. Finally, transfers can be made through a

financial intermediary such as a bank, an insurance company, or a mutual fund. The

intermediary obtains funds from savers in exchange for its securities. The intermediary

uses this money to buy and hold businesses’ securities, while the savers hold the

intermediary’s securities.

2-3 Is an initial public offering an example of a primary or secondary market transaction?

Explain.

An initial public offering is an example of a primary market transaction. This is

because a primary market a market in which corporations raise capital by issuing new

securities and initial public offerings issue new securities.

2-4 Indicate whether the following instruments are examples of money market or capital

market securities.

a. U.S. Treasury bills – money market securities.

b. Long-term corporate bonds – capital market securities.
c. Common stocks – capital market securities.
d. Preferred stocks – capital market securities.
e. Dealer commercial paper – money market securities.
2-7 Differentiate between dealer markets and stock markets that have a physical location.

The difference between dealer markets and stock markets that have a physical

location is that a dealer market is defined to include all facilities that are needed to

conduct security transactions not made on the physical location exchanges. These

facilities include relatively few dealers, thousands of brokers who act as agents in

bringing the dealers together with investors, and the computers, terminals, and electronic

networks that provide a communication link between dealers and brokers.

2-8 Identify and briefly compare the two leading stock exchanges in the United States today.

The two leading stock exchanges in the United States today are the New York

Stock Exchange and Nasdaq. Nasdaq is completely an electronic exchange where all

transactions are made on computer. On the other hand, the New York Stock Exchange is

conducted on a trading floor, but it too is starting to trade electronically. Generally the

New York Stock Exchange has larger companies and Nasdaq is balanced towards smaller

companies.

2-9 Describe the three different forms of market efficiency.

The three different forms of market efficiency are weak-form efficiency,

semistrong-form efficiency, and strong-form efficiency. The weak form states that all

information contained in past stock price movements are fully reflected in current market

prices. The semistrong form states that current market prices reflect all publicly available

information. The strong form states that current market prices reflect all pertinent

information, whether publicly available or privately held.