Chapter 2
The Domestic and International Financial Marketplace
CHAPTER 2
THE DOMESTIC AND INTERNATIONAL
FINANCIAL MARKETPLACE
ANSWERS TO QUESTIONS:
1. The saving-investment cycle consists of net savers (surplus spending units) transferring
2. Financial middlemen and intermediaries facilitate the transfer of funds during the saving-
investment cycle. When financial middlemen aid in the transfer of funds, primary claims are
3. Money markets deal in short-term securities having maturities of approximately one year or
less, whereas capital markets deal in longer-term securities having maturities greater than one
4. Financial intermediaries:
• Commercial banks – Sources of funds are demand and time deposits. Uses of these funds
• Thrift institutions – These include savings and loan associations, mutual savings banks,
• Investment companies – These include mutual funds and real estate investment trusts
• Pension funds – These intermediaries pool the contributions of employees (and/or
• Insurance companies – Sources of funds are premiums (payments) from individuals and
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Chapter 2
The Domestic and International Financial Marketplace
organizations (policyholders). In exchange for these premiums, the insurance companies
• Finance companies – These intermediaries obtain funds by issuing their own securities and
5. Factors that should be considered when determining the optimal form of organization for a
6. In primary financial markets, new securities from an issuing firm are bought and sold for the
first time. Hence, firms actually raise the capital they need in the primary financial markets. In
7. The New York Stock Exchange is a physical location where buyers and sellers of securities
meet to exchange assets. The New York Stock Exchange works through a specialist system and
complex computer linkages that match buyers and sellers and maintain an orderly market. In
8. In an efficiently functioning capital market, security prices will be bid to a level where the
security’s expected return just equals its required return. New information about the expected
9. It is much easier and cheaper for a firm to raise capital in the marketplace if that
marketplace operates in an informationally efficient manner. When the capital markets are
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10. a. A multinational corporation is a firm that has investments in manufacturing and/or
b. The spot exchange rate is the rate of exchange for currencies being bought and sold
c. The forward exchange rate is the rate of exchange between currencies to be
d. A direct quote is the come currency price of one unit of a foreign currency. An indirect
e. An option is a contract or security that gives the option buyer the right, but not the
f. The London interbank offer rate (LIBOR) is the interest rate at which banks in the
g. The Euro is a composite currency whose value is based on the weighted value of 19
European currencies. On January 1, 2002, the euro replaced the individual currencies of the
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SOLUTIONS TO PROBLEMS:
1. Returns over the past 12 months:
a. +0.3%
2. Percentage Holding Period (HP) Return
Note: This problem ignores transaction costs. Also, since the stock
has been sold, next year’s expected price performance is irrelevant.
Note: This solution ignores interest the investor may have
received from reinvesting the first $600 interest payment.
The information about the common stock purchases is not
relevant in computing bond returns.
4. Percentage Holding Period Return:
5. Percentage Holding Period Return:
6.a. Expected Percentage Holding Period Return =
b. Realized Percentage Holding Period Return =
c. Realized Percentage Holding Period Return =
d. Realized Percentage Holding Period Return =
7. Percentage Holding Period (HP) Return
Note: The information about Treasury bill yields is not needed to
solve this problem.
8. Percentage Holding Period (HP) Return (based on equity investment
only)
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The Domestic and International Financial Marketplace
Percentage Holding Period (HP) Return (based on total original cost)
9. Percentage Holding Period Return
The stock appears to be a good investment because the expected
return exceeds the required rate of return.
Costs of Automobile
10. Date Exchange Rate U.S. Dollar Japanese Yen
11. Cost per watch
Exchange No. of U.S. Swiss
Date rate watches Dollar Francs
Total Cost
U. S. Dollars Swiss Francs
* 1,260,000 francs x $1.0728/franc = $1,351,728
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The Domestic and International Financial Marketplace
12. Exchange Rate
Country Currency 11/18/15 2/25/13
a. India Rupee 0.01514 0.01845
b. UK Pound 1.5236 1.5165
a. [(0.01514 – 0.01845)(100)]/0.01845 = -17.94%
b. [(1.5236 – 1.5165)(100)]/1.5165 = +0.47%
13. Holding Period Return (HPR):
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