Financial Market Essay

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Essay Questions: Lecture 1: 1. Discuss the purpose of the primary and secondary markets, and how each functions. Explain how the secondary market supports the function of the primary market, and how financial market turmoil (e.g. 2008-09) impedes this. 2. Discuss the differences between the Money and Capital Markets, and the types of securities trade in those markets. Give examples. 3. Discuss what market whether you would go to the Money or Capital Markets to raise funds for construction of a factory. Explain why. Discuss which market and the sort of instruments you should use to manage corporate treasury funds. Lecture 2: 4. Explain in words why a dollar has different values dependent on point in time received, and how “present valuing” or “future valuing” cash-flows corrects for these differences. Also, look at the mathematics of the “annuity” versus the “annuity due”, and explain why the annuity is 1+r more valuable. Finally, create an amortization table using your calculator (like in the notes) and explain why the amount of interest paid is decreasing, and the principle paid is increasing. 5. Explain what makes bonds more sensitive to discount rate changes, and how Duration measures bond sensitivity. Why does higher Duration mean greater sensitivity, and lower Duration less (explain by using the equation, in terms of the present value of the coupon and principle payments)? 6. Explain why the current yield does not correctly reflect the true yield (yield to maturity) of a bond. Also discuss the effect of maturity on the error. Lecture 3: 7. Discuss in words and graphs what will happen to bond prices, interest rates, and the dollar volume of bonds issued, due to factors such as: rising inflationary expectation, increased indebtedness, changes in taxation policies, etc. Think in terms of both supply and

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