1. Capital allocation process The capital allocation process involves the transfer of capital among different entities that include individuals, small businesses, banks, financial intermediaries, companies, mutual funds, and other market participants. In a developed market economy, capital flows freely between entities that want to supply capital to those who want it. This flow of capital can be classified in three ways. In the table below, identify the nature of capital transfer given in the scenario with its appropriate classification: Indirect Transfers through Investment Banks Indirect Transfers through Financial Intermediaries Scenario Direct Transfers Based in Grass Valley, California, L&M Seeds Co. is a small company that manufactures organic seeds. To raise capital, the company sells stocks directly to savers in Grass Valley without involving any bank or financial intermediary Erin borrows money from her uncle to buy a new laptop. Elliot invests $25,000 by purchasing 1,000 shares of an emerging markets mutual fund. This mutual fund invests in companies in Brazil, India, and China. He bought the mutual fund from the mutual fund company. Israel launched a 10-year global bond issue of $1.5 billion in early 2009. Leading investment banks like Citigroup, Deutsche Bank, and Goldman Sachs managed the deal. (Source: Reuters.com, Mar 18, 2009.) Grade it Now Save . Continue 2. Types of financial markets Financial markets across economies involve various kinds of participants and trade various types of assets and securities. It is important to understand the kinds of markets in which financial transactions take place. You are preparing to take an exam in your finance class, and you've been making flash cards on different markets and transactions. Indicate the markets in which each of the following transactions will be traded: Type of Market Description of Transaction You go to an auto dealer and buy a new car. You drive the car home immediately after making the payment Type of Market Description of Transaction Carlos is an immigrant from Mexico to the United States. He sends $200 to Mexicon June 15 at the exchange rate on that day. Type of Market Description of Transaction Abbey allocates 80% of his portfolio for investments in short-term us. Treasury bills. Description of Transaction Type of Market An investor holding 3,000 shares of stock of Strata Corp. sells them to another investor A hedge fund purchased credit default swaps on securities it did not own because it believed that the securities were kely to default. In this example, the hedge fund is 3. Financial institutions Several market participants interact in developed markets to organize the exchange of funds from buyers to sellers. Such institutions as investment banks, commercial banks, financial services corporations, credit unions, pension funds, life insurance companies, mutual funds, exchange traded funds, hedge funds, and private equity companies play a key role in facilitating these transfers. Identify the financial institution based on each description given in the following table: Financial Institution Description These government chartered institutions accept deposits from savers and use the pool of deposits to provide loans, usually foced-rate mortgages, to borrowers. These are financial intermediaries that share the financial risk of the untimely demise of their policyholders, who make regular payments to financial intermediaries for taking this With the use of advanced investment techniques, these largely unregulated portfolios are invested in securities. The investment objective is to offset potential losses by investing in counterbalancing securities. They are open to only a select class of investors. 4. The stock market Which of the following characteristics accurately describes the stock market? An active market that determines the price of a firm's shares A fixed-income market where participants buy and sell debt securities The bid-ask spread in a dealer market represents the profit that a dealer would make on a transaction involving a security. Which of the following statements best describes the bid-ask spread? The difference between the closing price of the security and the opening price of the security on the day of the transaction The difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it The sum of the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it Fernando, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader Ally, is willing to sell 1,500 shares of the same stock. Unfortunately, Fernando and Ally don't know one another, and must complete their transactions using the stock exchange's market making dealer XYZ'S market maker is willing to sell her shares for $32.45 per share and purchase additional shares for $31.75 per share. Select the most appropriate values in the following table: Fernando, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Ally, is willing to sell 1,500 shares of the same stock. Unfortunately, Fernando and Ally don't know one another, and must complete their transactions using the stock exchange's market-making dealer. XYZ's market- maker is willing to sell her shares for $32.45 per share and purchase additional shares for $31.75 per share. Select the most appropriate values in the following table: Term Value Bid price Ask price Bid-ask spread If the market-maker is willing to purchase the entire block of 1,500 shares from Ally and, from that block, resell 1,000 shares to Fernando, then the market-maker's net profit from Fernando's transaction-excluding any inventory effects-will be
