Question

respond to the reading below the course is Money and Banking.

Chapter 1

2. The fall in stock prices of a company’s share indicates that the business can accumulate a smaller amount of funds and its fundamentals have gone down. This causes businesses to postpone undertaking an investment project. Therefore, the company’s investment in assets will go down. A fall in stock prices leads to fall in business investment.

4. Financial markets are important to the health of the economy because of several factors. It facilitates transferring funds from individuals who has surplus funds to individuals who have deficiencies. A good functioning financial market will lead to a better and high economic growth. A well-developed financial system should improve the efficiency of financing decisions, favoring a better allocation of resources and thereby economic growth.

Chapter 2

7. Mortgages are loans to households or firms to purchase land, housing, or other real structures, in which the structure or land itself serves as collateral for the loans. Whereas, a mortgage-backed security is bond-like debt investments backed by a of bundle of individual mortgages, whose interest and principal payments are collectively paid to the holders of the security.

10. Financial intermediaries benefit by carrying risk at relatively low transaction costs. Since higher risk assets on average earn a higher return, financial intermediaries can earn a profit on diversified portfolio of risky assets. Private investors benefit by earning returns on a pooled collection of assets issued by intermediaries at lower risk. Risk to private investors is lowered through the polling of assets by the financial intermediary.

Answer 1

2. True. The statement is true because fall in the stock prices leads to fall in the company's profitability which reduces the level of business investment by the firm. When the company's stock prices are rising, then the level of business investment also increases.

4. Financial markets act as an intermediary between the savers and investors of funds. The health of the economy can be judged from the way the financial markets are functioning in the economy. When the markets are functioning well, economic growth also increases and economic growth also influences the functioning of financial markets. Thus, there is a two way relationship and the statement is true.

7. The statement is correct. Mortgage is when the purchased land itself serves as collateral. Whereas a mortgage backed security is packed by a bundle of individual mortgages.

8. This is true because diversification of assets in the portfolio reduces risk because returns are ensured from a pool of assets rather than a single asset.