Homework 2
Bài 1:
1. The basic function of financial markets is to channel funds from savers who
have an excess of funds to spenders who have a shortage of funds.
Financial markets can do this through direct finance, where borrowers
borrow funds directly from lenders by selling them securities, or through
indirect finance, which involves a financial intermediary that stands
between lender-savers and borrower-spenders, helping transfer funds from
one to the other. This channeling of funds improves the economic welfare
of everyone in society. Because it allows funds to move from those without
productive investment opportunities to those who have such opportunities,
financial markets contribute to economic efficiency. Additionally, the
channeling of funds directly benefits consumers by allowing them to make
purchases when they need them most.
2. Financial markets can be classified into debt and equity markets, primary
and secondary markets, exchanges and over-the-counter markets, and
money and capital markets.
3. The main money market instruments (debt instruments with maturities of
less than one year) include U.S. Treasury bills, negotiable bank certificates
of deposit, commercial paper, repurchase agreements, and federal funds.
The main capital market instruments (debt and equity instruments with
maturities greater than one year) include stocks, mortgages, corporate
bonds, U.S. government securities, U.S. government agency securities, state
and local government bonds, and consumer and bank commercial loans.
4. A significant trend in recent years is the increasing internationalization of
financial markets. Eurobonds, which are denominated in a currency other
than the currency of the country in which they are sold, are now the
dominant security in the international bond market and have surpassed
U.S. corporate bonds as a source of new funds. Eurodollars, which are U.S.
dollars deposited in foreign banks, are an important source of funds for
American banks.
5. Financial intermediaries are financial institutions that acquire funds by
issuing liabilities and, in turn, use those funds to acquire assets by
purchasing securities or making loans. Financial intermediaries play an
important role in the financial system because they reduce transaction
costs, allow risk-sharing, and solve problems created by adverse selection
and moral hazard. As a result, financial intermediaries allow small savers
and borrowers to benefit from the existence of financial markets, thereby
increasing the efficiency of the economy. However, the economies of scope
that help make financial intermediaries successful can also lead to conflicts
of interest, which make the financial system less efficient.
Bài 2:
7. The difference between a mortgage and a mortgage-backed security is that a
mortgage is a loan secured by real estate, while a mortgage-backed security is a
financial instrument created by pooling together multiple mortgages and selling
them to investors.
8. The U.S. economy borrowed heavily from the British in the 19th century to
build a railroad system, which made both countries better off. The British were
able to invest capital in a profitable project, while the U.S. developed
infrastructure that stimulated economic growth.
9. The fact that European banks held large amounts of assets in mortgage-backed
securities from the U.S. housing market, which crashed after 2006, demonstrates
both a benefit (the opportunity for international profit) and a cost (major losses
due to global risk) of the internationalization of financial markets.
10. Risk-sharing benefits both financial intermediaries and private investors by
allowing the spreading of risk. Financial intermediaries can provide loans or
investments without bearing all the risk, while individual investors can invest in a
wider range of assets without worrying about large uncertainties.
11. The adverse selection problem explains why you are more likely to lend to a
family member than to a stranger because you have better knowledge of your
family member's reliability and financial situation, while you lack sufficient
information to assess the risk with a stranger.
12. The financial crisis of 2007-2009 illustrates adverse selection through the
widespread issuance of subprime mortgages. Many borrowers who were granted
loans were not financially capable of repaying them, leading to the collapse of the
financial market when they defaulted.
13. Loan sharks worry less about moral hazard with their borrowers because they
often use harsh, even illegal, methods of enforcement to ensure repayment,
unlike legitimate lenders who rely on legal frameworks.
14. If you are an employer, you might worry about moral hazard issues with your
employees, such as them not working diligently when unsupervised or misusing
company resources for personal gain.
15. Even if there were no asymmetry of information between a borrower and a
lender, a moral hazard problem could still exist. This happens when the borrower
lacks sufficient incentive to use the funds effectively after receiving the loan.
16. The statement "In a world without information costs and transaction costs,
financial intermediaries would not exist" may be true. If there were no
transaction or information costs, borrowers and lenders could trade directly with
each other without needing intermediaries.
17. In this situation, it can be concluded that the companies currently on the
market are in financial trouble, making them risky investments. I would advise
investors to consider other options, such as investing in private, unlisted
companies or seeking less risky investment opportunities.
18. Conflicts of interest worsen the asymmetric information problem by giving
financial intermediaries incentives to hide important information or provide
misleading information for their benefit, which can harm investors.
19. The provision of multiple financial services by one firm can be beneficial by
reducing costs and increasing convenience for customers. However, it can also
create problems with conflicts of interest and reduce transparency in operations.
20. If you were going to get a loan to purchase a new car, you should use a credit
union, as it typically offers lower interest rates compared to an investment bank
or pension fund and often has more flexible policies for borrowers.
