Question

● Discuss the types of financial institutions involved in the financial market and the markets they serve. Be sure to distinguish between the primary and secondary markets and the money and capital markets.

● Discuss what it means when it is said that markets are “efficient” and include an explanation of whether this seems true today.

● Discuss the role of regulators in the financial market. Your discussion should include information about the importance of accounting as a key to the success of those regulators.

● Many factors impact interest rates in the financial market and those rates drive the operations of the institutions. The price of money is interest rates; the financial markets determine that price in a very traditional economic sense of demand and supply of money. With this in mind, discuss the impact of a recession, the impact of the money supply, and the impact of international rates.

● Briefly discuss the concepts of Nominal Rate of Interest and Real Interest Rates. Include an example of both.

**This is for Financial Markets in the United States**

Answer 1

1. Types of Financial institution in the financial market:

a. Physical assets vs. Financial assets: Physical assets are those which are tangible like land, building, machinery, etc. whereas financial assets include bonds, cash, stocks, etc.

b. Money market vs. Capital market: In the money market, there are debt and money market instruments like treasury bills, commercial papers, etc. They are risk-free as they are issued by the government. They are also of long term tenure. Whereas in the Capital market, It is not risk-free. It includes preferred stocks, common stocks, derivative securities.

c. Primary vs. Secondary: In the primary market, the stocks are issued and sold by the company through initial public offering whereas, in the secondary market, there is the trading of stocks by the investors in the stock exchange.

d. Spot vs. Futures: There is a big difference between the spot and futures market. In spot market, there is immediate buying and selling of the financial products whereas, in the future market, there is a delay in payment in due date and delivery is ob predetermined future dates.

e. Public vs. Private: In the public market, the government companies sell their shares to the public whereas in the private market, the investors do not own large pie of shares.

2. When it is said that markets are efficient, it means that all market information is immediately used by the investors and it got reflected in the secondary market. So, if the market is efficient then the stock prices respond quickly to the change which is happening in the environment. As information is easily available in an efficient market, the investors respond quickly and make a decision immediately. Sometimes the stocks are also fairly priced in the efficient market. Therefore, the price of the stock will change only when new information is available.

It is not true in today's market because markets are never efficient. As the investors do not know all the information. But it is valid in those markets where information is already available. The debate is continued over the validity of the efficient market.

3. The role of regulators in the financial market is very prominent because they take care of the financial market, in other words, they are the guardian of the financial markets. They force financial regulators to obey laws. They make sure that there should transparency in the system. There should be no manipulation in the system.

The accounting has a big role to play in the success of the regulators as they provide accounting standards on the path of which they perform their duty and make the information organizable according to the accounting standards.

4. Impact of recession: During a recession, the interest increases because the demand for liquidity gets higher, and the supply of credit gets lower.

Impact of money supply: The money in the market is large, so the large supply of the money in the market makes the interest rates lower as the cash is easily available and people can easily borrow the cash.

Impact of international rates:

5. Nominal Interest rate: The nominal interest rate is the rate which is calculated as a percentage increase in the money while giving to the lender. It is the interest rate that is taking into consideration before taking inflation into account.

Real Rate of interest: The real rate of interest is received after taking inflation into account. It is the interest rate that has been used to remove the effects of inflation. It is measured as the percentage change in the purchasing power of the buyer. It is also known as the inflation-adjusted rate.