An Overview of the Financial System Assignment

An Overview of the Financial System Assignment
*1. Why is a share of IBM common stock an asset for its
owner and a liability for IBM?
2. If I can buy a car today for $5,000 and it is worth
$10,000 in extra income next year to me because it
enables me to get a job as a traveling anvil seller,
should I take out a loan from Larry the Loan Shark at
a 90% interest rate if no one else will give me a loan?
Will I be better or worse off as a result of taking out
this loan? Can you make a case for legalizing loansharking?
*3. Some economists suspect that one of the reasons that
economies in developing countries grow so slowly is
that they do not have well-developed financial markets. Does this argument make sense?
4. The U.S. economy borrowed heavily from the British
in the nineteenth century to build a railroad system.
What was the principal debt instrument used? Why
did this make both countries better off?
*5. “Because corporations do not actually raise any funds
in secondary markets, they are less important to the
economy than primary markets.” Comment.
An Overview of the Financial System Assignment
6. If you suspect that a company will go bankrupt next
year, which would you rather hold, bonds issued by
the company or equities issued by the company?
Why?
*7. How can the adverse selection problem explain why
you are more likely to make a loan to a family member than to a stranger?
8. Think of one example in which you have had to deal
with the adverse selection problem.
*9. Why do loan sharks worry less about moral hazard in
connection with their borrowers than some other
lenders do?
10. If you are an employer, what kinds of moral hazard
problems might you worry about with your employees?
*11. If there were no asymmetry in the information that a
borrower and a lender had, could there still be a
moral hazard problem?
12. “In a world without information and transaction costs,
financial intermediaries would not exist.” Is this statement true, false, or uncertain? Explain your answer.
*13. Why might you be willing to make a loan to your
neighbor by putting funds in a savings account earning a 5% interest rate at the bank and having the bank
lend her the funds at a 10% interest rate rather than
lend her the funds yourself?
14. How does risk sharing benefit both financial intermediaries and private investors?
*15. Discuss some of the manifestations of the globalization
of world capital markets.