Questions and Applications

1. SURPLUS AND DEFICIT UNITS Explain the meaning of surplus units and deficit units. Provide an example of each. Which types of financial institutions do you deal with? Explain whether you are acting as a surplus unit or a deficit unit in your relationship with each financial institution.
2. TYPES OF MARKETS Distinguish between primary and secondary markets. Distinguish between money and capital markets.
3. IMPERFECT MARKETS Distinguish between perfect and imperfect security markets. Explain why the existence of imperfect markets creates a need for financial intermediaries.
4. EFFICIENT MARKETS Explain the meaning of efficient markets. Why might we expect markets to be efficient most of the time? In recent years, several securities firms have been guilty of using inside information when purchasing securities, thereby achieving returns well above the norm (even when accounting for risk). Does this suggest that the security markets are not efficient? Explain.
5. SECURITIES LAWS What was the purpose of the Securities Act of 1933? What was the purpose of the Securities Exchange Act of 1934? Do these laws prevent investors from making poor investment decisions? Explain.
6. INTERNATIONAL BARRIERS Discuss why many financial institutions have expanded internationally in recent years. What advantages can be obtained through an international merger of financial institutions?
7. STOCK VALUATION What type of information do investors rely on when determining the proper value of stocks?
8. SECURITIES FIRMS What are the functions of securities firms? Many securities firms employ brokers and dealers. Distinguish between the functions of a broker and those of a dealer, and explain how each type of professional is compensated.
9. MIS-VALUED MARIJUANA STOCKS Explain why some stocks in the marijuana industry were mis-valued when several states legalized the recreational use of marijuana.
10. MARKETABILITY Commercial banks use some funds to purchase securities and other funds to make loans. Why are the securities more marketable than the loans in the secondary market?
11. DEPOSITORY INSTITUTIONS Explain the primary use of funds by commercial banks versus savings institutions.
12. CREDIT UNIONS With regard to the profit motive, how are credit unions different from other financial institutions?
13. NONDEPOSITORY INSTITUTIONS Compare the main sources and uses of funds for finance companies, insurance companies, and pension funds.
14. MUTUAL FUNDS What is the function of a mutual fund? Why are mutual funds popular among investors? How does a money market mutual fund differ from a stock or bond mutual fund?
15. SECONDARY MARKET FOR DEBT SECURITIES. Why is it important for long-term debt securities to have an active secondary market?