Question 3 Financial Markets [10 points]: Kampfire, Inc., a very successful manufacturer of camping equipment, is considering going public next month to raise funds to help finance the companys future growth. The financial manager of Kampfire has approached the investment banking firm at which you work seeking help with its decision. Your boss asked you to explain the nature of the U.S. financial markets and the process of issuing equity to the financial manager. To help with this task, your boss has asked you to answer the following questions in explaining the U.S. financial system to the financial manager:

1. What is a financial market? How are financial markets differentiated from markets for physical assets?

2. Differentiate between money markets and capital markets.

3. Differentiate between a primary market and a secondary market. If Microsoft decided to issue additional common stock and an investor purchased 1,000 shares of this stock from Merrill Lynch, the underwriter, would this transaction be a primary market transaction or a secondary market transaction?

4. Describe the three primary ways in which capital is transferred between savers and borrowers.

5. Securities can be traded on physical exchanges or in the over-the-counter market. Define each of these markets, and describe how stocks are traded in each one.