Financial Markets and Institutions

Bonds, for the fact that if they do go bankrupt you have a better chance at getting some money back where as equity holders will only get back money if bondholders eave been paid in full and there is excess funds. Chi 2 Q “In the world without Information and transaction costs, financial intermediaries would not exist. ” Is this statement true, false, or uncertain? Explain your answer. Uncertain. I can see this question In two ways, Individuals could loan out money to each other at no cost if there were no information and transaction cost.

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On the other hand we would still have some sort of currency or accepted trading and people are greedy so they would want extra for a loan, due to the fact someone else needs it and hey can charge an extra amount thus creating a financial intermediary. Chi 7 IQ How can economies of scale help explain the existence of financial intermediaries? An example of why financial intermediaries became about Is mutual funds. The company buys large blocks of stocks and bonds after pooling a bunch of people’s money together.

The transaction cost Is lower for the Institution and therefore passed on to the customer. This also reduces the risk of the Investment because of the diversification. How can the existence of asymmetric information provide a rationale for government regulation of financial markets? There are many scandals that are seen in the financial industry in today’s world. It would be unfair for the public stockholders if the CEO that has more knowledge about the internal workings of the company to trade based on his knowledge and leave everyone else out of the loop.

This could cause insider trading to happen a good example is Martha Stewart. She as accused of asymmetric information and it cost her money and Jail time. Its very rational for the government to regulate the financial markets as you can see. There are still more ways to trick the system but little by little the government is putting a stop to it. Chi Q How does the free-rider problem aggravate adverse selection and moral hazard problems in financial markets?

Free-riders Just like they sound use information not paid for to make the same decision that another mostly larger investor does after purchasing the information. The problem comes in when the larger investor can’t make as much money off their decision because of the price going up so quickly. If the investor does not make money they can’t buy more information and if they can’t buy more then there is no need to produce more and that causes other issues with not having enough information to make a well-informed decision.