Supercorp

Supercorp offers new common stock worth $180 million. The primary market

HiTech, Inc. goes public with a $30 million Offering of common shares. The primary market

Megaorg sells $10 million of HiTech preferred shares from its portfolio of marketable instruments. Second-hand market

The XYA Fund purchases previously issued Supercorp bonds for $220 million. Second-hand market

A. B. Company sells XYZ common stock for $15 million. Market for Secondary Goods (Weaver & Weston, 2001)

Question No. 2

U.S. Treasury bills. Capital market securities

U.S. Treasury notes. Capital market securities

U.S. Treasury bonds. Capital market securities Mortgages. Securities in the money market

Federal funds are available. Securities in the money market

Certificates of deposit are negotiable. Securities in the money market

Stock in common. Securities traded on the stock exchange

State and government bonds. Capital market securities

Mortgages. Money market securities

Federal funds. Money market securities

Negotiable certificates of deposit. Money market securities

Common stock. Capital market securities

State and government bonds. Capital market securities

Corporate bonds. Capital market securities (Sherman, 2011)

Question 3 Types of Financial Institutions

According to Sherman (2011), while dealing with the depositing of money, taking loans, and the exchange of currencies, people, must deal with financial institutions as they remain solely responsible for conducting transactions such as issuing of loans, deposits, and making investments. The major categories of the financial institutions and their roles include the following.

Commercial Banks

The commercial banks perform tasks for their customers such as deposits, providing security, and convenience (Sherman, 2011). Initially, the primary role of commercial banks was to offer their customers a safekeeping for their money as there were risks for customers to keep money in their wallet for risks of theft. Commercial banks provided a convenient way to handle money as people could easily handle transactions with debit cards, checks, and credit cards. The commercial banks offer loans to individual and businesses so that they can manage to expand their business operations. The expansion in businesses leads to more funds deposited in the banks, and as the commercial banks lend to customers at a higher lending rate, they end up making more money (Weaver & Weston, 2001).

Investment Banks

The investment banks mode of operation is different from the commercial banks. For the investment banks, they perform variety of services for businesses and governments such as offering equity, acting as brokers for institutions, and underwriting debt (Weaver & Weston, 2001).

Insurance Companies

The insurance companies protect people and businesses from loss, by collecting premiums from them. Such damage includes fire, death, lawsuits, and illness. They can operate at a profit if they give insurance to a large percentage of people (Berk et al., 2014).

Brokerage firms

The brokerage firms always form an intermediary between the buyers and the sellers during any security transaction. The brokerage firms make a profit through commissions after the successful completion of the deal (Berk et al., 2014).

Investment Firms

In the investment companies, the individuals invest in diversified portfolios or securities by merging their funds with other investors. In such a scenario, the investor can purchase securities indirectly through packages such as mutual funds instead of buying a combination of individual stocks (Berk et al., 2014).

Non-banking Institutions

In this forms of financial institutions, they provide services which are nearly the same as banks. Some of the non-banking institutions are the savings and loans associations (S&L) or the thrifts. Thrifts perform functions similar to commercial banks such as deposits and loans (Berk et al., 2014). However, the difference is on the loan segment where thrifts primary focus is on the mortgage, business loans, and consumer loans. Another form of non-banking institutions are the credit unions that offer higher rates on deposits and charge lower interest rates on loans when compared to the commercial banks.

Question 4 Factors Affecting Nominal Interest Rate

In finance, nominal interest rate refers to the interest rate on loan before taking other factors such as fees or before compounding the interest. The factors affecting nominal interest rate include the following.

Inflation

Inflation refers to the continuous level of increase in the prices of goods and services and thus reducing the purchasing power of the currency. To ensure that the economy thrives, the central bank in that country can attempt to limit the inflation (Weaver & Weston, 2001).

Default risk

The default risk refers to the chance that an individual or a corporation will be unable to meet their required payments on their debts. The client can either miss the interest or the principal payments (Weaver & Weston, 2001).

Liquidity risk

Liquidity risk is a type of a risk that emanates when security fails to reach its predicted price with low transaction costs within a short notice (Sherman, 2011).

Special Provisions

The special provisions include such factors as taxability, callability, and convertibility. These factors can have an impact on the security holder either positively or negatively thus reflecting in the interest rates that contain these provisions (Sherman, 2011).

The Term of Maturity

The term of maturity refers to the duration that security takes to reach its maturity. If for example, it’s a debt security, the term of maturity refers to the period it takes for the security holder to get their principal back (Sherman, 2011).

Real-risk Free Rate

The real-risk free rate assumes that there exists no risk or uncertainty on the security and thus the interest rate that would exist if no there was no inflation.

Question 5 Term Structure of Interest Rates and Theories affecting Yield Curve

The term structure of interest rates refers to the relationship that exists between interest rates and maturities. Also known as the yield curve, term structure of interest rates plays a significant role in the economy as it reflects on the future expectations of the market about any changes in the interest rates (Berk et al., 2014). The theories that try to describe the yield curve include the following. The first theory is the market segmentation theory, which deals with the supply and demand in specific maturity sectors that then determines the interest rate in that sector. Also known as the preferred habitat theory, it can be used to explain all types of yield curves that the investor can encounter in the market (Berk et al., 2014). Under this theory, the yield curve can range from a negative, a positive, or a humped slope. The second theory is the liquidity preference theory, which states that the investors always want to be compensated for the risks emanating from the long-term issues that may arise. Also known as the biased expectations theory, the more prolonged maturity leads to more significant volatility associated with these forms of security (Berk et al., 2014). The structure of this theory is determined by the future expectations of the interest rates and yield in premium for interest rate risk. The last theory is the pure expectation theory that explains the yield curve in terms of the expected short-term rates. As it is the most direct and most straightforward of the theories, it assumes that the investors have no preference in terms of the different maturities and the inherent risks involved (Berk et al., 2014).

References

Berk, B., DeMarzo, P., Harford, J., Ford, G., Mollica, V., & Finch, N. (2014). Fundamentals of corporate finance (2nd ed.). Melbourne: Pearson Higher Education AU.

Sherman, E. (2011). Finance and Accounting for NonFinancial Managers (3rd ed.). New York: American Management Association.

Weaver, S., & Weston, J. (2001). Finance & accounting for nonfinancial managers (1st ed.). New York: McGraw Hill Professional.