Financial Markets and Institutions
Ch 2. Q4 if I can buy a car today for $5000 and it is worth $10000 next year in extra income to me because it enable me to get a job as a traveling anvil seller, should I take out a loan from Larry the Loan Shark at a 90% interest rate if no one else will give me a loan? Will I be better or worse off as a result of taking out this loan? Can you make a case of legalizing loan-sharking?
You would in this scenario be better to take the Larry the loan shark deal at 90% interest. The total interest would be $4500.00 plus the original $5000 making the grand total $9500 for a car with the value of $10000. Therefore I would have more value in the car than what would be paid in principle and interest.
Yes, you could make a case for legalizing loan-sharking however in most cases the people going to a loan shark don’t have an opportunity such as this and are taken advantage of in the process.
Ch 2. Q6
If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
Bonds, for the fact that if they do go bankrupt you have a better chance at getting some money back where as equity holders will only get back money if bondholders have been paid in full and there is excess funds.
Ch 2 Q12
“In the world without information and transaction costs, financial intermediaries would not exist.” Is this statement true, false, or uncertain? Explain your answer.
Uncertain. I can see this question in two ways, individuals could loan out money to each other at no cost if there were no information and transaction cost. On the other hand we would still have some sort of currency or accepted trading and people are greedy so they would want extra for a loan, due to the fact someone else needs it and they can charge an extra amount thus creating a financial intermediary.
Ch 7 Q1
How can economies of scale help explain the existence of financial intermediaries?
An example of
You would in this scenario be better to take the Larry the loan shark deal at 90% interest. The total interest would be $4500.00 plus the original $5000 making the grand total $9500 for a car with the value of $10000. Therefore I would have more value in the car than what would be paid in principle and interest.
Yes, you could make a case for legalizing loan-sharking however in most cases the people going to a loan shark don’t have an opportunity such as this and are taken advantage of in the process.
Ch 2. Q6
If you suspect that a company will go bankrupt next year, which would you rather hold, bonds issued by the company or equities issued by the company? Why?
Bonds, for the fact that if they do go bankrupt you have a better chance at getting some money back where as equity holders will only get back money if bondholders have been paid in full and there is excess funds.
Ch 2 Q12
“In the world without information and transaction costs, financial intermediaries would not exist.” Is this statement true, false, or uncertain? Explain your answer.
Uncertain. I can see this question in two ways, individuals could loan out money to each other at no cost if there were no information and transaction cost. On the other hand we would still have some sort of currency or accepted trading and people are greedy so they would want extra for a loan, due to the fact someone else needs it and they can charge an extra amount thus creating a financial intermediary.
Ch 7 Q1
How can economies of scale help explain the existence of financial intermediaries?
An example of