University of Santo Tomas

Alfredo M. Velayo College of Accountancy

Financial Management

Name: Rhian Cher C. Subido

Section: 2A12

CASE STUDY ⎯ INTEGRATED CASE: SMYTH BARRY & COMPANY FINANCIAL

MARKETS AND INSTITUTIONS

1. What are the 3 primary ways in which capital is transferred between savers and
borrowers?
- Capital can be moved between savers and borrowers in three ways: (1) directly, (2)
indirectly through investment bankers, and (3) indirectly through a financial
intermediary (Brigham & Houston, 2009, p. 28). A direct transfer occurs when a
corporation offers its stocks or bonds to depositors directly. The firm receives the
money donated by the saver directly. This form of transfer is more common in smaller
businesses. In an indirect transfer, the investment banker functions as a
"middleman," as the firm sells its stocks or bonds to the investment banker, who then
resells the assets to savers. Banks, insurance firms, and mutual funds are examples of
financial intermediaries (Brigham & Houston, 2009, p. 29). A financial intermediary
receives monies from savers and invests them or lends them to borrowers.

2. What is a market? Differentiate between the following types of markets: physical asset
markets versus financial asset markets, spot markets versus futures markets, money
markets versus capital markets, primary markets versus secondary markets, and public
markets versus private markets.
- A "market" is a system in which assets may be purchased, sold, or traded. Tangible
items are purchased and sold in a physical asset market. Products and machines are
examples of tangible goods. A financial asset market deals with the purchase and sale
of stocks, bonds, notes, and mortgages (Brigham & Houston, 2009, p 30). Assets are
purchased for "on-the-spot" delivery in a spot market. A futures market is an
agreement to acquire or sell an asset at some point in the future. Money markets are
concerned with the purchase and sale of "short-term, highly liquid debt assets," such
as treasury bills (Brigham & Houston, 2009, p. 30). Long-term debt securities, such
as shares of a company's stock, are traded in capital markets. Companies offer fresh
shares of stock to the public in a primary market. When outstanding shares that were
previously acquired by investors are resold, a secondary market is formed.
Transactions in a private market are done directly between investors and borrowers.
Standardized contracts are used in a public market to enable transactions between
many buyers and sellers. A private market transaction is a bank loan, whereas a
public market transaction is the exchange of stocks and bonds (Brigham & Houston,
2009, p. 31).

3. Why are the financial markets essential for a healthy economy and growth?
- Businesses, governments, and individuals all require finance to expand and flourish.
Capital is used to create factories, expand businesses, and develop new goods in
response to changes in customer wants and desires. These types of advancements
cannot be done with the money that is already being used to run the business. The
 University of Santo Tomas
Alfredo M. Velayo College of Accountancy
Financial Management
utilization of financial markets is required to raise new funds. According to Brigham
and Houston (2009), "a healthy economy is based on efficient cash transfers from net
savers to enterprises and individuals in need of capital" (p. 31). An effective economy
cannot operate without the transfer of capital from savers to borrowers.

4. What are derivatives? How can it reduce risk? Can it be used to increase risk? Explain.
- A derivate is defined as "any financial asset whose value is derived from the value of
another underlying asset" (Brigham & Houston, 2009, p. 33). The value of a contract
to buy a country's currency, for example, is determined by the exchange rate between
the foreign currency and the US dollar. Brigham and Houston present an example of
how derivatives might be utilized to decrease risk (2009). When the market price of
wheat rises, it has a negative influence on a wheat processor. To mitigate this type of
risk, the processor might purchase derivatives such as wheat futures. Although the
net revenue of the wheat processor would decrease as wheat prices rise, the value of
wheat futures will rise as well. When derivatives are employed for speculative
purposes, they increase risk. When an individual or institution purchases derivatives
with the belief that their value will rise in the future, this is referred to as speculation.
However, the derivatives' value may fall instead.

5. Explain investment banks

- An investment bank is a company that assists businesses in obtaining the capital they
want to fund new initiatives. This is accomplished through underwriting and
distributing new investment securities (p. 34).

6. Explain commercial banks

- A commercial bank is the classic "financial department store" (Brigham & Houston,
2009, p. 34). It offers a variety of services to customers and organizations that are
saving or borrowing money.

7. Explain financial services

- A financial service is not the financial good itself—for example, a mortgage loan to
buy a house or a vehicle insurance policy—but rather the process of attaining the
financial good. In other terms, it refers to the transaction necessary to achieve
financial good. The financial sector encompasses a wide range of activities, including
real estate, consumer finance, banking, and insurance. It also includes a wide range
of investment funding options, including securities.

8. Explain pension funds

- Pension funds are collections of monetary contributions from pension plans
established by businesses, unions, or other organizations to offer retirement benefits
to their employees or members. In most countries, pension funds are the biggest
investment blocks and dominate the stock markets in which they invest.

9. Explain mutual funds

- Mutual funds are companies that invest savers' money in stocks, bonds, and other
financial products. This is done to diversify the money and, as a result, minimize risk.
 University of Santo Tomas
Alfredo M. Velayo College of Accountancy
Financial Management

10. Explain exchange-traded funds

- An exchange-traded fund (ETF) is a collection of investments such as equities or
bonds. ETFs allow you to invest in a large number of securities at once, and they
frequently have cheaper costs than other forms of funds. ETFs are also more easily
traded.

11. Explain hedge funds

- Hedge funds, like mutual funds, are intended to invest your money. However, hedge
funds vary from mutual funds in that they are not rigorously regulated and attract
high-net-worth people and institutions (p. 35).

12. What are the 2 leading stock markets?

- There are several stock exchanges in the United States and across the world. The New
York Stock Exchange (NYSE) and the Nasdaq Stock Market are the two most
important marketplaces in the United States (Brigham & Houston, 2009, p. 39). The
NYSE and the Nasdaq Stock Market are the two most common forms of stock
exchanges. The New York Stock Exchange is a "physical location exchange,"
meaning it is housed in a facility on Wall Street and overseen by a governing council
of officials. The NYSE also has a floor where active trading occurs. In contrast to the
New York Stock Exchange, the Nasdaq Stock Exchange is an "over-the-counter
market" or "dealer market," as it does not have a physical address. A dealer market
is made up of multiple dealers and brokers who communicate with one another via
telephones and computers (Brigham & Houston, 2009, p. 40). Electronic connections
are also used for bids and sell of Nasdaq shares.

13. If Apple Computer decided to issue additional common stock and Varga purchased 100
shares of this stock from Smyth Barry, the underwriter, would this transaction be a
primary or a secondary market transaction? Would it make a difference if Varga
purchased previously outstanding Apple stock in the dealer market? Explain.
- An initial public offering occurs when a firm first makes its shares available for
purchase by the general public. A secondary market transaction happens when
people purchase shares of stock that are already owned by other investors. A primary
market transaction happens when an investor purchases stock after a firm has opted
to issue more shares following its first public offering (Brigham & Houston, 2009, p.
41). As a result, if Apple Computer issues extra common stock and Michelle Varga
purchases 100 shares of the stock, thisthe maintain market transaction. A different
issue would arise if Ms. Varga acquired previously outstanding Apple shares on the
dealer market. In this case, the purchase of stock would be considered a secondary
market transaction.

14. What is an initial public offering?

- An initial public offering (IPO) is stock offered by a private business when its
managers decide to "go public." An IPO is the first time the firm's shares are
available for purchase.
 University of Santo Tomas
Alfredo M. Velayo College of Accountancy
Financial Management
15. What does it mean for a market to be efficient?
- The intrinsic worth of the stocks in a market determines its efficiency. In contrast to
market pricing (the actual cost of the shares), intrinsic value refers to a business's
stock's predicted future worth, which is based on a variety of variables including the
firm and its rivals (Brigham & Houston, 2009, p. 46). When prices in the market are
in balance or steady, the market is said to be efficient. An efficient market, according
to Brigham and Houston (2009), is "a market in which prices are close to intrinsic
values and stocks appear to be in equilibrium" (p. 47). An efficient market boosts
investor confidence and stimulates aggressive stock buying and selling. An efficient
market boosts investor confidence and stimulates aggressive stock buying and selling.
Because of the inefficiency of the market, investors try to save their money instead.
As a result, money is not transferred from savers to borrowers, and the economy
enters a slump. The size of the various firms in the market influences because certain
stock prices may be more efficient than others. Stock prices in larger businesses tend
to be more efficient since analysts spend more time researching these organizations
than in smaller firms. Furthermore, larger company executives are more likely to
engage with analysts and investors, adding to the efficiency of their stock prices
(Brigham & Houston, 2009, p. 48).
 University of Santo Tomas
Alfredo M. Velayo College of Accountancy
Financial Management

References

https://www.imf.org/external/pubs/ft/fandd/2011/03/basics.htm

https://www.thewritinghelper.com/new-post-2102/

Exchange-traded fund (ETF) definition. (2017, May 3).

NerdWallet. https://www.nerdwallet.com/article/investing/what-is-an-etf

Pension funds. (n.d.). CFA

Institute. https://www.cfainstitute.org/en/advocacy/issues/pension-

funds#sort=%40pubbrowsedate%20descending