Question

Q3. Why regulators must enforce efficiency in financial markets

Q4. Draw figures to show the government, foreign, and households demand for loanable fund

Q5. LMB Inc. wants to issue 365-day commercial paper. One year T-bills currently have a yield of 6 percent. Assume that a default risk premium of 1.65 percent, a liquidity premium of 0.15 percent, and a 0.35 percent tax adjustment are necessary to sell the commercial paper to investors. What is the appropriate yield the company should offer on its commercial paper?

Q6. Knowledge of financial markets is power- explain how?

Q7. Give a numerical example of how businesses evaluate projects using net present value (NPV)

Answer 1

Regulators must enforce efficiency in financial markets

Investors trust the market are efficient and this is the reason why investors invest money in the financial market. To ensure this trust ,regulators must ensure that they must enforce efficiency in financial markets .In a inefficient market there are many things can happens price of the stock might trade overpriced which might lead to a bubble like situation like what happened in the United States between 1995- 2001 dot-com bubble during which company like Pets.com and Boo.com completely shut down and other company such as cisco noticed a sudden drop of more than 80% in the prices of the stock. Something simpler happens in 2007 during Subprime mortgage crisis when in 2009 stock market drop by almost 50% this time there was a bubble in the in the property prices which burst .To avoid such situation regulators must ensure efficiency in the financial market. In an inefficient market stock traded with unexpected high PE ratio which shows that stocks are overpriced which might be ok if it happens with one or two stock but if it becomes a trend with approx. All stocks than it’s a warning situation. Such situation occurred either when investors are not much educated about the trends or they misbelieved about the market this kind of situation makes market inefficient .