Question

Graduate level Finance Class:

Questions:

1) What is the purpose of the capital market? How do the capital market securities differ from money market securities in their general characteristics?

2) Using the Gordon growth model, explain why the 2001 terrorist attacks and the Enron financial scandal caused stock prices to decline.

3) Describe the sequence of events in a financial crisis and explain why they can cause economic activity to decline

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Answer 1

The purpose of capital Market are cover in two aspects. They are-

1. Investors bring holding capital and most of the big companies establish seeking capital through equity and debt instruments.

2. Secondly are the most important purpose of Capital Market, Capital Market provides secondary Market where investors and holders of these securities exchange the shares with one market price at another market price.

There are two types of financial Market which Market commonly used. They are-

1. Capital Market.

2. Money Market.

A Financial Market brings investors together to trade in securities such as bonds, currency, derivatives, equity and commodity.

Money Market are mostly used by government and corporate entities for borrowing and lending the short term loan or advances in assets of which have maturities upto one year.

Capital Market are used for long term assets of which maturities are more than one year. It also includes equity market and bond market.

Financial Market are most commonly used for managing the position of liquidity and risk of companies, individuals and government.

2. In the Gordens Model, the market prices of the share are affected by investors confidence which the investors thinks and believing in growing the forcasted growth rates which usually affected the required rate of return. There are mainly two factors.

- An erosion of investors confidence which loose the reduction in expected growth in dividned and in required rate of return.

- Market price are goes downward from initial price P0 to lower price.

3. Economic in early stage of Market development that have most recently opened upto the flow of services, goods and capital of the world. There are three steps of which finincial crisis are fully emerged in. They are -

- Initiative of financial crisis.

- Currency Crisis

- Full fleged finamcial crisis.

These above activity affected the whole market in the world which causes recession in whole over the world.