FMT tutorial 1

Economists group commercial banks, saving and loans associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds and finance companies under the heading financial intermediaries. Financial intermediaries:

• 1. produce nothing of value and therefore a drain on society’s resources

• 1. provide a channel for linking between those who want to save and those who want to spend

• 1. can hurt the performance of the economy

• 1. have been a source of slow and resistant financial innovation

What is the basic activity of banks?

• 1. To sell shares of corporations to the general public

• 1. To facilitate the transfer of money from savers to borrowers

• 1. To represent the interest of insurance companies

• 1. To ensure everyone who wants a loan gets one

• 1. To equate future consumption with current consumption

Banks, savings and loans associations, mutual savings banks and credit unions

• 1. are no longer important players in financial intermediation

• 1. have been adept at innovating in response to changes in regulatory environment.

• 1. produce nothing of value and therefore a drain on society’s resources

• 1. since deregulation now provide services only to small depositors

Why are financial markets important to the health of the economy?

• 1. They channel funds from investors to savers

• 1. They eliminate the needs for financial intermediaries

• 1. They allow consumers to time their purchase better

• 1. They identify and shut down inefficient firms

These financial institutions are very small cooperative lending institutions organized around a particular group: union members, employees of a firm and so forth. They acquire funds from deposits called shares and primarily make consumer loans. They are

• 1. Credit unions

• 1. Commercial banks

• 1. Savings and loan associations

• 1. Mutual fund

These financial intermediaries raise funds primarily by issuing checkable deposits, savings deposits and time deposits. They then use these funds to make commercial, consumer and mortgage loans, and to buy US government securities and municipal bonds. They are

• 1. Credit union

• 1. Commercial bank

• 1. Savings and loan

• Mutual fund

These instruments are typically overnight loans between banks of their deposits at Federal Reserve.

• 1. Commercial paper

• 1. Treasury bills

• 1. Repurchase agreement

• 1. Federal Funds

• 1. Banker’s acceptances

Short-term debt instruments issued by large banks and well-known corporations

• 1. Commercial paper

• 1. Treasury bills

• 1. Repurchase agreement

• 1. Federal Funds

• 1. Banker’s acceptances

These instruments are effectively short-term loans (usually with maturity of less than two weeks) for which Treasury bills serve as collateral, which the lender receives if the borrower does not pay back the loan.

• 1. Commercial paper

• 1. Treasury bills

• 1. Repurchase agreement

• 1. Federal Funds

• 1. Banker’s acceptances

A share of Microsoft common stock is:

• 1. a liability to the shareholder because it must be sold to realize a capital gain

• 1. an asset of Microsoft because it allows Microsoft to invest in capital equipment or other companies

• 1. identical to a bond issued by Microsoft

• 1. an asset for its owner and a liability for Microsoft.