Brandon Groce

Financial Markets

1. Does it make sense that the typical household is a surplus spending unit (SSU)
while the typical business firm is a deficit unit (DSU)? Explain
Yes this makes great sense. Households at times need money to borrow to make
large purchases, but do not make as near as many large purchases as businesses.
Businesses
7. Explain the differences between the money markets and the capital markets.
Which market would General Motors use to finance a new vehicle assembly plant?
Why?
Capital markets are different in where capital market instruments are less
marketable; the risk of default levels vary between the issuers and have maturities
ranging anywhere from 5 to 30 years. General Motors would want to use capital
markets to finance with stock and/or long term debt instruments. Money market
would be really only be used to adjust the liquidity position for short periods of time.

10. Explain the statement, A financial claim is someones asset and someone elses
liability.
The asset could be defined as borrowed money for the borrower and a liability for
the lender due to the fact that the borrower may not pay back what he or she
promised. This can result in total loss or can be collected through liquidation of the
borrowers assets or garnishment. There is also opportunity cost with the fact that
the lender is lending money that could be used for something else, possibly of
greater value.
15. What is the difference between marketability and liquidity?
Marketability and liquidity are closely related. Marketability is defined by how easy a
security can be sold and then converted into cash. Liquidity is that ability to convert
that asset quickly without any loss of value. Liquidity implicates that when the
security is sold on the market, that the value will be preserved. Marketability does
not have this implication.
16. Municipal bonds are attractive to what type of investors?
Municipal bonds are attractive to people that fall in the highest income tax brackets.
This is because their coupon income is exempt from federal income taxes. They are
used to finance capital expenditures for governmental operations.
17. Why do corporations issue commercial paper?
Corporations issue commercial paper as an unsecured promissory note that a
borrower can redeem from a few days to 120. This allows corporations to raise the
capital and funds required for operating.

Brandon Groce

Financial Markets

19. Explain the adverse selection problem. How can lenders reduce its effect?
Adverse selection is one of two problems that occur with asymmetric information.
Adverse selection happens before a financial transaction can take place. Lenders
can reduce effect by gathering more information. If this information is not reliable
and available at a reasonable cost, the lender may decide not to make any loans to
any potential borrowers in a given market.