Solution Manual For
Financial Markets and Institutions, 10th Edition By Jeff
Madura Chapter 1-25
Chapter 1
Role of Financial Markets and Institutions
Outline
Role of Financial Markets
Accommodating Investment Needs
Accommodating Corporate Finance Needs
Primary Versus Secondary Markets
Securities Traded in Financial Markets
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities
Securities Regulations
International Securities Transactions
Role of Financial Institutions
Role of Depository Institutions
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Relative Importance of Financial Institutions
Consolidation of Financial Institutions
Credit Crisis for Financial Institutions
Systemic Risk During the Credit Crisis
Government Response to the Credit Crisis
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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
,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 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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, 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.).
2. Types of Markets. Distinguish between primary and secondary markets. Distinguish
between money and capital markets.
ANSWER: Primary markets are used for the issuance of new securities while secondary
markets are used for the trading of existing securities.
Money markets facilitate the trading of short-term (money market) instruments while capital
markets facilitate the trading of long-term (capital market) instruments.
3. Imperfect Markets. Distinguish between perfect and imperfect security markets. Explain
why the existence of imperfect markets creates a need for financial intermediaries.
ANSWER: With perfect financial markets, all information about any securities for sale
would be freely available to investors, information about surplus and deficit units would be
freely available, and all securities could be unbundled into any size desired. In reality,
markets are imperfect, so that surplus and deficit units do not have free access to information,
and securities cannot be unbundled as desired.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Financial Markets and Institutions, 10th Edition By Jeff
Madura Chapter 1-25
Chapter 1
Role of Financial Markets and Institutions
Outline
Role of Financial Markets
Accommodating Investment Needs
Accommodating Corporate Finance Needs
Primary Versus Secondary Markets
Securities Traded in Financial Markets
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities
Securities Regulations
International Securities Transactions
Role of Financial Institutions
Role of Depository Institutions
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Relative Importance of Financial Institutions
Consolidation of Financial Institutions
Credit Crisis for Financial Institutions
Systemic Risk During the Credit Crisis
Government Response to the Credit Crisis
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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
,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 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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, 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.).
2. Types of Markets. Distinguish between primary and secondary markets. Distinguish
between money and capital markets.
ANSWER: Primary markets are used for the issuance of new securities while secondary
markets are used for the trading of existing securities.
Money markets facilitate the trading of short-term (money market) instruments while capital
markets facilitate the trading of long-term (capital market) instruments.
3. Imperfect Markets. Distinguish between perfect and imperfect security markets. Explain
why the existence of imperfect markets creates a need for financial intermediaries.
ANSWER: With perfect financial markets, all information about any securities for sale
would be freely available to investors, information about surplus and deficit units would be
freely available, and all securities could be unbundled into any size desired. In reality,
markets are imperfect, so that surplus and deficit units do not have free access to information,
and securities cannot be unbundled as desired.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
