Question

1. Please explain, in detail, the following concepts:

a. Explain why money market securities are liquid assets while capital market securities are not.

b. How does financial intermediation affect the cost of conducting financial transactions?

c. What are three ways finance professionals use duration analysis?

d. What is Milton Friedman’s critique of the standard textbook analysis of the effect of Federal Reserve policy?

 

Answer 1

a) Money market securities are liquid becaus ethey are short term adn can be converted into cash on a short notice whereas capital market securities are of a longer term and cannot be easily conveted into cash. Capital market securities also have to be sold at a significant discount to be converted into cash.

b) When there is an intermediary present, he needs to charge his premium for providing services. The usage of financial services rise however. The fee for a financial intermediary increases the cost of financial transaction. However it helps to obtain funds or put up idle funds to earn income.

c) Duration analysis is used to:
Check the effect of change in interest rate on price of asset.
To match liability and assets of an entity.
To measure the change in assets and liability or networth due to change in interest rate

d) Milton Friedman criticized Fed policy leading up to the great depressions and stated that they ecacerbated the crisis. Fed continued its restrictive monetary policy which lead to low money supply in the economy. This lead to a recessiona dn shut down of business activity, leading to the depression.