1-Explain how the household sector participates as both a borrower and lender of funds in the financial market. 2.Whatentitiesareincludedinthenonfinancialbusinesssectorofthefinancialmarket? 3. Explain why some subsidiaries of a nonfinancial business may be classified as financial businesses. 4. Why were government agencies created in the United States? 5. The European Investment Bank was established by the European Economic Com- munity and charged with the role of promoting balanced regional development, serving the common interest of member states, and furthering industrial modernization. The member states include certain European countries. Would the European Investment Bank be classified as a municipal government or a financial business entity? If neither, how would it be classified? 6. a. Explain why an individual?s account at a financial intermediary may be called an indirect investment in a firm that has borrowed money from the intermediary.

7: Referring to Table 2-2, match the types of liabilities to these four assets that an individual might own: a. Car insurance policy b. Variable rate certificate of deposit c. Fixed rate certificate of deposit d. A life insurance policy that allows the holder?s beneficiary to receive $100,000 when the holder dies, or $150,000 for an accidental death. 8. A bank issues an obligation to depositors in which it agrees to pay 8% guaranteed for 1 year. With the funds it obtains, the bank can invest in a wide range of financial assets. What is the risk if the bank uses the funds to invest in common stock? 9. Explain how financial intermediaries provide maturity intermediation. 10. How do financial intermediaries reduce the cost of contracting? 11. a. What is the economic rationale for the widespread use of ?disclosure regulation?? b. Why do some economists believe that disclosure regulation is unnecessary? 12. What is meant by financial activity regulation? 13. A 1989 study entitled ?Globalization and Canada?s Financial Markets,? a research report prepared for the Economic Council of Canada, reported the following:

Commercial banks are financial institutions that raise funds by issuing claims against themselves and then use the funds to provide loans. What do you think are the implications of the shift from financial intermediation to market inter- mediation for commercial banks? b. What do you think some of the obstacles are in market intermediation? 14. a. What is the difference between a financial innovation process and a financial innovation product? b. Give an example of how a financial innovation process can lead to a financial innovation product. 15. The term ?securitization? can be used in a general way to describe a process and in a specific way. Explain the two ways. 16. With automobile leases, a major risk to the lessor (the party from whom the car is leased) is that the market value of the car when the lease term expires is less than the expected value of the car when the lease was negotiated. Consider Toyota Motor Credit Corporation?s situation as a lessor. It was concerned that the 260,000 1998 motor vehicles (cars and light duty trucks) it leased to customers would decline in value if the used-car market weakened. To protect itself, Toyota issued a cat bond that insured against a loss in market value of the fleet of leased motor vehicles. a. Explain what a cat bond is. b. Explain how Toyota Motor Credit Corporation was able to use the public market to insure against the risk that the market price of the leased vehicles would decline.

1-Explain how the household sector participates as both a borrower and lender of funds in the financial market. 2.Whatentitiesareincludedinthenonfinancialbusinesssectorofthefinancialmarket? 3. Explain why some subsidiaries of a nonfinancial business may be classified as financial businesses. 4. Why were government agencies created in the United States? 5. The European Investment Bank was established by the European Economic Com- munity and charged with the role of promoting balanced regional development, serving the common interest of member states, and furthering industrial modernization. The member states include certain European countries. Would the European Investment Bank be classified as a municipal government or a financial business entity? If neither, how would it be classified? 6. a. Explain why an individual's account at a financial intermediary may be called an indirect investment in a firm that has borrowed money from the intermediary. 7: Referring to Table 2-2, match the types of liabilities to these four assets that an individual might own: a. Car insurance policy b. Variable rate certificate of deposit c. Fixed rate certificate of deposit d. A life insurance policy that allows the holder's beneficiary to receive $100,000 when the holder dies, or $150,000 for an accidental death. 8. A bank issues an obligation to depositors in which it agrees to pay 8% guaranteed for 1 year. With the funds it obtains, the bank can invest in a wide range of financial assets. What is the risk if the bank uses the funds to invest in common stock? 9. Explain how financial intermediaries provide maturity intermediation. 10. How do financial intermediaries reduce the cost of contracting? 11. a. What is the economic rationale for the widespread use of \"disclosure regulation\"? b. Why do some economists believe that disclosure regulation is unnecessary? 12. What is meant by financial activity regulation? 13. A 1989 study entitled \"Globalization and Canada's Financial Markets,\" a research report prepared for the Economic Council of Canada, reported the following: Commercial banks are financial institutions that raise funds by issuing claims against themselves and then use the funds to provide loans. What do you think are the implications of the shift from financial intermediation to market inter- mediation for commercial banks? b. What do you think some of the obstacles are in market intermediation? 14. a. What is the difference between a financial innovation process and a financial innovation product? b. Give an example of how a financial innovation process can lead to a financial innovation product. 15. The term \"securitization\" can be used in a general way to describe a process and in a specific way. Explain the two ways. 16. With automobile leases, a major risk to the lessor (the party from whom the car is leased) is that the market value of the car when the lease term expires is less than the expected value of the car when the lease was negotiated. Consider Toyota Motor Credit Corporation's situation as a lessor. It was concerned that the 260,000 1998 motor vehicles (cars and light duty trucks) it leased to customers would decline in value if the used-car market weakened. To protect itself, Toyota issued a cat bond that insured against a loss in market value of the fleet of leased motor vehicles. a. Explain what a cat bond is. b. Explain how Toyota Motor Credit Corporation was able to use the public market to insure against the risk that the market price of the leased vehicles would decline