1. Describe the characteristics an asset must possess in order to serve as a med
ID: 1107820 • Letter: 1
Question
1. Describe the characteristics an asset must possess in order to serve as a medium of exchange. Which of these is most important for the operation of the economy? What distinguishes commodity money from fiat money?
2.What is the primary difference between the money market and the capital market? Give three examples of financial instruments in each.
3.What are the advantages and disadvantages of direct and indirect financing for the average saver/ lender?
4.What are the primary differences between municipal bonds and U.S. government bonds? Which is likely to have a higher yield? What factors cause the differences in yields on U.S. government bonds?
5.Discuss the difference between systematic and nonsystematic risk. How can each be reduced?
6.What is commercial paper? Who are the major issuers of it? How is it distributed? It is an unsecured short-term IOU issued by a corporation. A finance companies issue about 75 percent of the dollar value of commercial paper. In the primary market, most of it is sold directly to the holder, but dealers are also active.
7.What are the three reasons for the existence of financial intermediaries? Explain the various ways that they increase the efficiency of an economy.
8. Small and new businesses generally must pay higher loan rates than other businesses. How does moral hazard help explain this?
Explanation / Answer
1) characteristics of an asset in order to serve as medium of exchange-
it should value the common asset, easy to preserve, easy to exchange from one hand to another, should have value of its own which is fixed.
The most important of these characteristics is the value which the money carry's which can be used in exchange of goods and serivces.
Commodity money have intrinsic value whereas fiat money do nt have it.
2) Money market is used for financial instruments which are have a short term maturity whereas capital market is used for financial instruments which has long term maturity i.e greater than 1 year.
Money market instruments- Treasury bills, commercial paper, certificates of deposits etc.
Capital market instruments- Equity, preference shares, derivatives etc.
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