Financial Markets Chapter 1

In: Business and Management

Submitted By mindyang
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1. What is monetary policy and who is responsible for its implementation?

Monetary policy is the use of interest rates to control inflation, usually in a specified range, and to promote economic growth. Usually a central bank is responsible for the carrying out of monetary policy

2. Explain what a debt security is. What are some common types of debt securities? How is debt different from equity?

A debt security represents a contractual claim against the issuer of the instrument who has borrowed the funds. The borrower agrees to abide by the terms of the contract such as meeting covenants. A major part of the contract is the terms of payment to the lender. Corporations issue debt securities such as debentures, term loans, commercial bills, promissory notes and unsecured notes.

3. Identify and explain briefly the types of derivatives in a financial system.

A future contract is a contract to buy (or sell) a specified amount of a commodity or financial instrument at a price determined today for delivery or payment at a future specified date

A forward contract has features similar to a future contract but is generally more flexible as it is negotiated with a bank or investment bank.

An option gives the buyer the right but not the obligation to buy (or sell) a certain asset before or at a specified date at a predetermined price

A swap contract is an arrangement to exchange specified future cash flows. With an interest rate swap, there is an exchange of future cash flows, say one based on a floating interest rate and the other on a fixed interest rate on a notional principal.

4. The capital markets provide the opportunity for large corporations to manage their long-term cash flows. Discuss this statement using the example of a surplus entity and a deficit entity.

The debt part of capital markets consists of a range…...

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