Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition, Instructor’s Manual

Van Horne and Wachowicz, Fundamentals of Financial Management, 13 th edition, Instructor’s Manual
demand by investors. For example, the new product might be a zero-coupon bond and the
new process, automatic teller machines.
17. These exchanges serve as secondary markets wherein the buyer and seller meet to exchange
shares of companies that are listed on the exchange. These markets have provided
economies of time and scale in the past and have facilitated exchange among interested
parties.
18. a. All other things being the same, the cost of funds (interest rates) would rise. If there are
no disparities in savings pattern, the effect would fall on all financial markets.
b. Given a somewhat segmented market for mortgages, it would result in mortgage rates
falling and rates on other financial instruments rising somewhat.
c. It would lower the demand for common stock, bonds selling at a discount, real estate,
and other investments where capital gains are an attraction for investment. Prices would
fall for these assets relative to fixed income securities until eventually the expected
returns after taxes for all financial instruments were in equilibrium.
d. Great uncertainty would develop in the money and capital markets and the effect would
likely be quite disruptive. Interest rates would rise dramatically and it would be difficult
for borrowers to find lenders willing to lend at a fixed interest rate. Disequilibrium
would likely to continue to occur until the rate of inflation reduced to a reasonable level.
e. Financial markets would be less efficient in channeling funds from savers to investors
in real estate.
19. Answers to this question will differ depending on the financial intermediary that is chosen.
The economic role of all is to channel savings to investments at a lower cost and/or with
less inconvenience to the ultimate borrower and to the ultimate saver than would be the case
in their absence. Their presence improves the efficiency of financial markets in allocating
savings to the most productive investment opportunities.
20. Money markets serve the short-term liquidity needs of investors. The usual line of
demarkation is one year; money markets include instruments with maturities of less than a
year while capital markets involve securities with maturities of more than one year.
However, both markets are financial markets with the same economic purpose so the
distinction of maturity is somewhat arbitrary. Money markets involve instruments that are
impersonal; funds flow on the basis of risk and return. A bank loan, for example, is not a
money-market instrument even though it might be short-term.
21. Transaction costs impede the efficiency of financial markets. The larger they are, the less
efficient are financial markets. Financial institutions and brokers perform an economic
service for which they must be compensated. The means of compensation is transaction
costs. If there is competition among them, transaction costs will be reduced to justifiable
levels.
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22. The major sources are bank loans, bond issues, mortgage debt, and stock issues.
23. Financial brokers, such as investment bankers in particular as well as mortgage bankers,
facilitate the matching of borrowers in need of funds with savers having funds to lend. For
this matching and servicing, the broker earns a fee that is determined by competitive forces.
In addition, security exchanges and the over-the-counter market improve the secondary
market and hence the efficiency of the primary market where securities are sold originally.
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