Chapter 2- Overview of the Financial System

1. What is the basic function of the financial markets?

2. Securities brokers and dealers are crucial to a well-functioning secondary market.

Differentiate between securities brokers and dealers?

3. Differentiate between primary market and secondary market?

4. Because corporations do not actually raise any funds in the secondary markets, they
are less important to the economy than primary markets”. Comment.

5. What are the differences between foreign bonds, Eurobond and Eurocurrencies?

6. Assume an investor want to start a new business that will cost him about 300,000
Egyptian pounds, and will have a net profit of 100,000 after 2 years. And he is
thinking of whether borrowing the money from his friend or going to an institution to
borrow the money. If he borrows money from his friend he will repay the loan after 2
years with an interest rate of 8 % and this will cost him registration costs of 30,000.

On the other hand if he borrows money from the institution, he will pay 11% interest
rate and at the same time the registration cost of the project will cost him 2,000
Egyptian pounds. And this investor managed to borrow the money from this
institution.
Analyze this case with clarifying why does the investor prefer to use this type of finance?
And what kind of finance does the investor acquire? And what are the benefits of this
type of finance?

7. Why are financial intermediaries and indirect finance so important in financial

markets?
8. There are three major types of financial intermediaries, Discuss with examples?
9. Explain the problem of adverse selection created by asymmetric flow of information.
Use an example to illustrate your answer.

10. Lisa is planning to purchase a new house and is looking for a home loan that will
give her the lowest interest rate. Discuss how she can be affected by asymmetric
information and adverse selection.

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. “Financial intermediaries play a crucial role in an economic crisis–they are

responsible for both causing the market to crash and then helping it recover from the
crisis.” Is this statement true? Discuss with an example.
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 do financial intermediaries solve the problem of adverse selection?