Alex Wolf
Money and Banking Summer 2017
Yuanting Wu
Mid-term
1) Indirect financing occurs when a company borrows money from a financial intermediary
like a bank. The company pays the intermediary interest while the intermediary pays
interest to its investors or depositors. Direct financing, however involves the company’s
borrowing of funds directly from investors. According to our textbook, indirect financing
is more important than direct financing methods, especially in the United States. This is
due primarily to the added efficiency available through the financial intermediary.
2) One method is to organize exchanges, where buyers and sellers of securities meet in one
central location to conduct trades. The New York stock exchange for stocks and Chicago
Board of Trade for commodities are examples of organized exchanges. The other method
of organizing a secondary market is to have an over the counter (OTC) market, in which
dealers at different locations who have an inventory of securities stand ready to buy and
sell securities “over the counter” to anyone who comes to them and is willing to accept
their prices.
3) Foreign bonds are subject to currency risks, as when you hold the bond it is denominated
in a foreign currency. As bonds take a specified time to mature, there is no guarantee of
the return of the bond given the currency exchange fluctuations. A eurobond is a bond
