Ghulam Irtaza Roll 6

UNIVERSITY OF SINDH
MIRPURKHAS CAMPUS
DEPARTMENT OF BUSINES ADMINISTRATION
Assignment of Financial Institutions And Market
Submitted by
GHULAM IRTAZA
2K18/MKBBA/06
BBA PART-3
Submitted to
Sir Suhail Asgher Abro
Section A
Qno 1: Define financial market. Discuss the role of

financial markets.
Define Financial Market

Financial markets refer broadly to any market in which securities trading takes
place, including the stock market, bond markets, forex market, and commodity
markets, among others. Financial markets are critical to the functioning of
capitalist economies
.
Discuss the role of financial markets

Financial markets play a vital role in the economy. They empower individuals to
achieve a better balance between current and future use Financial markets bring the
borrowers in contact with the lenders and in the process make both better off.
Financial markets also allow efficient risk sharing among investors.
Financial markets make the division of ownership and management a real need to
run large corporations. Many organizations have hundreds of thousands of
shareholders with very different interests, wealth, risk tolerance and investment
opportunities.
To summarize, well financial markets bring borrowers and lenders together,
improve risk sharing, lead to the better allocation of resources, provide information
to market participants, allow separation of ownership and management and help
the monitoring of management. Together they improve the quality of investment
decisions and the welfare of all market participants
Qno 2: Classify the types of financial institutions mentioned
in the chapter 1 as either depository or non-depository.
Explain the general difference between depository and non-
depository institution sources of funds.
Types Of Financial Institutions Depository And Non Depository
1. Commercial bank
2. Credit union
3. Finance companies
4. Insurance companies
5. Mutual funds
6. Pension funds
7. Saving bank
8. Securities companies
9. Security pools
Explain the general difference between depository and non-

depository institution sources of funds.
Depository institution are such institution which accept deposits i.e. it can be in
form of cash or others for safe keeping or depository for share transfer etc.
Depository are needed for security liquidity etc.
Non depository institution are such institution which do not accept deposits while
they perform their activity without such deposits i.e. Insurance companies, Pension
fund, Mutual funds other etc.
Qno 3: Distinguish between primary and secondary
markets. Distinguish between money and capital markets.
1. Primary And Secondary Markets

The primary market is where securities are created, while the secondary market is
where those securities are traded by investors.
The secondary market is commonly referred to as the "stock market." This

includes the New York Stock Exchange (NYSE), Nasdaq, and all major
exchanges around the world.
Primary market" and "Secondary market" are both distinct terms; the primary
market refers to the market where securities are created, while the secondary
market is one in which they are traded among investors
2. Money And Capital Markets.

Money market and Capital market are types of financial markets. Money markets
are used for short-term lending or borrowing usually the assets are held for one
year or less whereas, Capital Markets are used for long-term securities they have a
direct or indirect impact on the capital
Money markets are unorganized markets where banks, financial institutions,
money dealers and brokers trade in financial instruments for a short period of time.
The capital market is a type of financial market where financial products like
stocks, bonds, debentures are traded for a long duration of time. They serve the
purpose of long-term financing and long-term capital requirement.
Qno 4: Distinguish between perfect and imperfect
security markets. Explain why the existence of
imperfect markets creates a need for financial
intermediaries.
1) Distinguish between perfect and imperfect security markets
Perfect Market:
With perfect financial markets, all information about any securities for sale would
be freely available to investors, information about surplus and deficit units would
be freely available. A perfect market is characterized by perfect competition,
market equilibrium, and an unlimited number of buyers and sellers. Perfect
markets are theoretical and cannot exist in the real world; all real-world markets
are imperfect markets.
Imperfect Market:
All real-world markets are imperfect. In an imperfect market, individual buyers
and sellers can influence prices and production, there is no full disclosure of
information about products and prices, and there are high barriers to entry or exit in
the market. Market structures that are categorized as imperfect include monopolies,
oligopolies, monopolistic competition, monopsonies, and oligopsonies.
2) Explain why the existence of imperfect markets creates a need for

financial intermediaries.
Markets are imperfect, so that surplus and deficit units do not have free access to
information, and securities cannot be unbundled as desired and financial
intermediaries are needed to facilitate the exchange of funds between surplus and
deficit units. They have the information to provide this service and can even
repackage deposits to provide the amount of funds borrowers’ desire.
Qno 5: Some countries do not have well-established markets
for debt securities or equity securities. Why do you think
this can limit the development of the country, business
expansion, and growth in national income in these
countries?
ANS:
All we know businesses rely on financial markets to expand. If they
cannot issue debt or equity securities, they cannot obtain funding to
expand. Local investors who want invest money will likely invest their
money in other countries if their home country financial markets are not
developed. Thus, they will essentially help other countries grow instead
of helping their own country grow.
Qno 6 : Explain what is meant by interest elasticity. Would

you expect the federal government’s demand for loanable
funds to be more or less interest-elastic than household
demand for loanable funds? Why?
ANS:
Interest elasticity of supply represents a change in the quantity of
loanable funds supplied in response to a change in interest rates. Interest
elasticity of demand represents a change in the quantity of loanable
funds demanded in response to a change in interest rates. The federal
government demand for loanable funds should be less interest elastic
than the consumer demand for loanable funds, because the government's
planned borrowings will likely occur regardless of the interest rate.
Conversely, the quantity of loanable funds by consumers is more
responsive to the interest rate level.
Qno 7: Explain why interest rates tend to decrease
during recessionary periods. Review historical interest
rates to determine how they reacted to recessionary
periods. Explain this reaction.
ANS:
During a recession period, consumers and firms reduce their amount of
borrowing. The demand for loanable funds decreases and interest rates
decrease as a result.
Q no 8: Explain how the expected interest rate in one year

depends on your expectation of economic growth and
inflation.
ANS:
If economic growth and inflation are expected to rise, or decrease if
economic growth and inflation are expected to decline. Then The
interest rate in the future will increase.
Q no 9: During periods when investors suddenly become

fearful that stocks are overvalued, they dump their stocks
and the stock market experiences a major decline. During
these periods, interest rates also tend to decline. Use the
loanable funds framework discussed in this chapter to
explain how the massive selling of stocks leads to lower
interest rates.
ANS:
When investors shift funds out of stocks, they move it into money
market securities, causing an increase in the supply of loanable funds,
and lower interest rates.
Qno 10: Offer an argument for why the terrorist
attack on the United States on September 11, 2001,
could have placed downward pressure on U.S. interest
rates. Offer an argument for why that attack could
have placed upward pressure on U.S. interest rates.
ANS :
The terrorist attack could cause a reduction in spending related to travel
(airlines, hotels), and would also reduce the expansion by those types of
firms. This reflects a decline in the demand for loanable funds, and
places downward pressure on interest rates. Conversely, the attack
increases the amount of government borrowing needed to support a war,
and therefore places upward pressure on interest rates.

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UNIVERSITY OF SINDH

DEPARTMENT OF BUSINES ADMINISTRATION

Assignment of Financial Institutions And Market

Qno 1: Define financial market. Discuss the role of

Define Financial Market

Discuss the role of financial markets

Types Of Financial Institutions Depository And Non Depository

Explain the general difference between depository and non-

1. Primary And Secondary Markets

The secondary market is commonly referred to as the "stock market." This

2. Money And Capital Markets.

1) Distinguish between perfect and imperfect security markets

2) Explain why the existence of imperfect markets creates a need for

Qno 6 : Explain what is meant by interest elasticity. Would

Q no 8: Explain how the expected interest rate in one year

Q no 9: During periods when investors suddenly become

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