An Introduction to Financial Markets Examine the functions

An Introduction to Financial Markets•Examine the functions performed by financial markets in a free economy.•Interpret the prices of financial assets and interest rates as listed in commonly available information sources in print and on the Internet.•Explain the significance of information to market participants and what happens when it is not readily available to market participants.•Consider the ethical and economic ramifications of insider trading.•Distinguish between the various types of financial institutions and financial assets.Module 1: AssignmentsProblems and Issues1) Complete Problems and Issues 1, 2, and 3 at the end of chapter 1 in the textbook.2) Complete Problems and Issues 4 and 7 at the end of chapter 2 in the textbook.3) Complete Problems and Issues 4 and 5 at the end of chapter 3 in the textbook.4) You must submit your homework in a single excel file, with each problem on a separate identified tab, e.g. Problem 2 for chapter 1 would be labeled CH1-2. 5) Submit the assignment to the instructor by the end of Module 1.Chapter 11. None of the following statements are correct. In each case, identify the error and correct the statement.a.A household’s current savings includes its current purchases of corporate stock as well as prior holdings of corporate stock and its current investment includes the equity it currently has in its house.b.The change in a household’s wealth over a quarter is given by its wealth at the beginning of the quarter plus its savings during the quarter.c.The ability of a household to borrow money from a bank to purchase a new PC is an example of the payments function of the financial markets, while the ability of the bank to make the loan is an example of the liquidity function.d.The ability of Treasury bills to retain their value over time is an example of the savings function of the economy, while the ability of a household to sell a Treasury bill on short notice with little risk of loss is an example of the liquidity function.e.The ability of the Federal Reserve to manipulate interest rates is an example of the policy function of the financial markets, while the ability of households to earn interest on those investments affected by the Fed’s decision is an example of the risk-protection function of the financial markets.2. George Wilkins checked the spreadsheet where he keeps track of his assets and liabilities. He discovered that (i) he owes $80,000 on his house, which he believes to be worth $150,000; (ii) his car is worth $20,000, against which there is $2,000 on the remaining bank loan; (iii) his stock portfolio has risen to$50,000; (iv) he has a $10,000 balance in his bank account, which is earning a 1.2 percent annual interest rate; and (v) the value of his other belongings is $45,000. He has just received his monthly paycheck for $6,000 and he is trying to decide about taking a vacation and whether or not to pay off his car loan. His monthly expenses are $3,000 which includes the interest expense on his auto loan. He has two possible vacation choices: the Bahamas for $2,000 or a local beach for $1,000. If he has any money left over at the end of the month, it will go into his bank account. If he doesn’t have enough money to cover all of his expenses for the month, he will sell enough of his stock to cover the excess expenses.a.Use a spreadsheet to input each of George’s assets, (i) to (v), in the first column; the value of these assets in the second column; and the liabilities (if any) against those assets in the third column. In the fourth column compute the net asset value of each of the assets. Total the fourth column to determine George’s net worth at the beginning of the month.b.Compute the additional net income that George will have from his paycheck plus the interest on his bank account minus the monthly expenses. Use this information to answer parts (c) through (f) below.c.Repeat part (a) for the end of the month assuming George does not take a vacation and pays off his auto loan.d.Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and only pays $1,000 on the principal of the auto loan.e.Repeat part (a) for the end of the month assuming that George takes the local beach vacation and pays off his auto loan.f.Repeat part (a) for the end of the month assuming George takes the Bahamas vacation and pays off the auto loan.3. James Jenkins walks into a Big Box electronics store in search of a new HDTV.He finds exactly what he wants. The price is $2,000 and the HDTV has a $100 maintenance contract that ensures against component failures. He has $1,000 in cash, $3,500 in his checking account that pays 2 percent interest, a credit card with a 7 percent interest charge on unpaid balances, and a savings account paying 5 percent (all annual rates). Discuss which of the functions that the money and capital markets perform are important to Jim Jenkins as he considers various options for purchasing the HDTV.Chapter 24. What would happen to the purchasing power of the U.S. dollar if the base period for the cost of living index were 1980 = 100 and the index reached the following levels in the indicated years?a. 1985—116b. 1990—127c. 1995—134d. 2000—151e. 2005—1707, Jack and Jill are small business owners who run a hot dog stand licensed to operate outside a business shopping district. They have been so successful that they believe a second hot dog stand in the area also would be profitable. The capital expense to set it up would be $10,000 and they are considering several options. Use a spreadsheet to evaluate these options by inserting (i) their receipts in column 1; (ii) expenses in column 2; (iii) change in financial assets in column 3; and (iv) change in their debt in column 4. State whether they would be a surplus-budget unit or a deficit-budget unit under each option.a.Their sales for the month turn out to be $12,000 and their expenses are $9,500; they borrow $10,000 for the new hot dog stand.b.Their sales for the month turn out to be $15,000 and their expenses $9,500; they sell $5,000 in stock and borrow the remaining funds needed to finance the new hot dog stand.c.Their sales for the month turn out to be $8,000 and their expenses are $9,500; they choose neither to borrow any funds nor build the second hot dog stand.d.Their sales for the month turn out to be $9,500 and their expenses also are $9,500; they use $5,000 in their bank account (with no other asset sales) to help finance the new hot dog stand.Chapter 34. In the appendix to this chapter (especially Exhibit 3A.2) you are given household balance sheet information relating to the U.S. household sector’s financial assets and liabilities. Households also possess nonfinancial assets, the bulk of which is housing. Use the information presented below along with the information in Exhibit 3A.2 to examine how housing has affected U.S. household wealth since 1980.2006$10,914.7 $23,915.6 $48,772.2 $65,705.925,780.419,926.1For each of the years: 1980, 1990, 2000, and 2006, please place into a spreadsheet the following information: Total assets, Total nonfinancial assets, Total housing, Total liabilities, and Total mortgages. For each year, determine what percentage of Total assets is made up of Housing.For each year, determine what percentage of Total liabilities is made up of Mortgages.For each year compute the net equity that U.S. households have in their homeby subtracting Mortgages (liability) from Housing (asset).For each year, compute U.S. households’ Net worth _ Total assets less Total liabilities.For each year, compute the percentage of households’ Net worth that is made up of net equity in their homes.Describe the principal trends in the makeup of U.S. households’ balance sheets that you observe and try to explain why these trends are occurring. What role might the development of the financial information marketplace play in the trends you observe?5. The following situations may be covered by insider trading laws in the United States. Examine each situation described and indicate whether, in your opinion, a violation of insider trading laws might have occurred. If you think a violation occurred, what kind of violation was it?a.The chief financial officer of Start Corporation reads an internal memorandum criticizing the firm’s recent oil field development investments and picks up his phone to call his broker, placing an order to sell his holdings of the firm’s shares when the market opens in the morning. b.Corren Professional Corporation, a CPA firm, assists Selkirk Industrial Corporation with its quarterly and annual financial reports. Jim Roberts, a CPA with Corren, after reviewing the latest information provided by Selkirk’s CEO, calls a friend and suggests making certain stock and bond trades involving Selkirk’s securities. Roberts will not benefit financially from these suggested trades and refuses to get involved.c.James Smith works for Cohen and Cooper, a local law firm, and while browsing in his firm’s law library, he discovers a new report from a legal client of his colleague, Roscoe Adams, that predicts serious financial problems if the client proceeds with its recently drafted strategic plan. Smith subsequently discovers discreetly that the strategic plan is to be launched next week. He also learns that Roscoe is selling the client’s stock short through his broker. Smith quietly advises Roscoe not to make the short sale and lets the matter drop.d. Samuel Joule learns from conversations with Sarah Conklin, a bartender at a local bar, that neighboring Locket Corporation has recently developed a warning device that may help prevent air collisions and may be worth tens of millions of dollars once announced to the public. Neither Joule nor Conklin works for Locket, though he has been dating Miss Conklin. Both of these individuals decide to purchase 1,000 shares of Locket’s stock before Locket holds a press conference to announce the new air collision device. Joule and Conklin will use a bank loan to finance the purchase of Locket’s shares. A wedding is planned if the transaction pays off.

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