Carinoza Jea Ann B.

BSA-3
A. Discuss the following items in 5 sentences per item. (5 pts.)
1. A Need for an efficient financial system for a country.
A vibrant and healthy economy requires a financial system that makes or
channels funds from people who save productive investment opportunities. The
financial system is complex in structure and functions throughout the world. A
developed economy relies in financial markets and institutions for efficient
transfer of funds. Every person’s life, family, business, and government are
affected by the financial system.
2. The Nature and Main objectives of the Financial System.
Financial system is a collection of agreements or conventions that govern the
lending and borrowing of funds by non-financial economic units and the
intermediation of this function by financial intermediaries in order to facilitate
the transfer of funds, to create additional money when necessary, and to create
markets for debt and equity instruments in order to efficiently determine the
price and allocation of funds. It enables an efficient transfer of funds between
entities with funds and those in need of funds. The financial system acts as a
reliable, timely, and cost-effective conduit between fund providers and fund
demanders. Additionally, it encourages savings among its stakeholders and
efficiently converts these resources into investment vehicles that help the
economy grow quicker.

3. The Basic Flow of Funds through the Financial system.

The financial system consists of all financial intermediaries and financial
markets and their relations with respect to the flow of funds to and from
households, governments, business firms and foreigners, as well as the
financial infrastructure.
Now let’s look at the figure who are the lenders and borrowers in financial
markets. So, if you look at the lender-savers sides you find that households are
the main savers of the financial markets and then business firms then
governments and foreigners, also work as a savers or lenders in economy. Now
if you look at the borrowers side you find that business firm are the main
borrowers of the firm, so they are known as the number one power in an
economy of governments, households and foreigners. Now let’s look at the
segments of financial markets there are two broad segments namely direct
finance and indirect finance. If funds are transferred through financial markets
that means by selling financial instruments that called direct finance. Then if
funds are transferred through financial intermediaries like banks, insurance
companies or other financial institution then it well known as indirect finance.

4. Transaction and Information costs.

Transaction costs are expenses incurred when buying or selling a good or
service. Transaction costs represent the labor required to bring a good or
service to market, giving rise to entire industries dedicated to facilitating
exchanges. In a financial sense, transaction costs include brokers'
commissions and spreads, which are the differences between the price the
dealer paid for a security and the price the buyer pays. While Information costs
are costs incurred by an individual or a firm while amassing information to
help make a financial decision. If these costs are significant enough, it can
affect the profitability of a business enterprise or the soundness of a
consumer's purchase.

B. Define the following terms (5 pts.)

1. Risk sharing
Risk sharing is a contractual arrangement in which the buyer and seller
agree to “share” or split currency movement impacts on payments between
them.
2. Liquidity
Liquidity is the ease with which an asset can be exchanged for money
which savers view as a benefit.
3. Transaction costs
The cost of a trade or a financial transaction.
4. Moral Hazards
This is the problem investors experience in verifying that borrowers are
using their funds as intended.
5. Adverse Selection
This is the problem investors experience in distinguishing low-risk
borrowers from high-risk borrowers before making an investment.