Solution Manual for Financial Markets and Institutions, 13th Edition

Name: Solution Manual for Financial Markets and Institutions, 13th Edition
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Author: Sophia Lee

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Chapter 1
Role of Financial Markets and Institutions
Outline
Role of Financial Markets
Accommodating Corporate Finance Needs
Accommodating Investment Needs
Securities Traded in Financial Markets
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities
Securities Regulations on Financial Disclosure
International Financial Markets
Government Intervention in Financial Markets
Role of Financial Institutions
Role of Depository Institutions
Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Relative Importance of Financial Institutions
Consolidation of Financial Institutions
Systemic Risk Among Financial Institutions

Chapter 1: Role of Financial Markets and Institutions ❖ 2
Key Concepts
1. Explain the role of financial intermediaries in transferring funds from surplus units to deficit units.
2. Introduce the types of financial markets available and their functions.
3. Introduce the various financial institutions that facilitate the flow of funds.
4. Provide a preview of the course outline. Emphasize the linkages between the various sections of the
course.
POINT/COUNTER-POINT:
Will Computer Technology Cause Financial Intermediaries to Become
Extinct?
POINT: Yes. Financial intermediaries benefit from access to information. As information becomes more
accessible, individuals will have the information they need before investing or borrowing funds. They will
not need financial intermediaries to make their decisions.
COUNTER-POINT: No. Individuals rely not only on information, but also on expertise. Some financial
intermediaries specialize in credit analysis so that they can make wise choices when offering loans.
Surplus units will continue to provide funds to financial intermediaries rather than make direct loans,
because they are not capable of credit analysis, even if more information about prospective borrowers is
available. Some financial intermediaries no longer have physical buildings for customer service, but they
still require agents who have the expertise to assess the creditworthiness of prospective borrowers.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: Computer technology may reduce the need for some types of financial intermediaries such as
brokerage firms, because individuals can make transactions on their own (if they prefer to do so).
However, loans will still require financial intermediaries because of the credit assessment that is needed.
Questions
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.
ANSWER: Surplus units provide funds to the financial markets while deficit units obtain funds from
the financial markets. Surplus units include households with savings, while deficit units include firms
or government agencies that borrow funds.
This exercise allows students to realize that they constantly interact with financial institutions, and
that they often play the role of a deficit unit (on car loans, tuition loans, etc.).

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