ECON 202 Lecture Notes - Lecture 2: Toronto Stock Exchange

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blushworm378

24 Mar 2021

School

University of Waterloo

Department

Economics

Course

ECON 202

Professor

Saeed Rana

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Document Summary

Chapter 2 - an overview of the financial system a direct finance. When borrowers directly approach lenders or vice versa and they tend #arrow: indirect finance. There is some intermediate l party between lenders / borrowers (cid:8869) usually are intermediate trees , banks e. g . 2 types of direct a. finance : bonds. Debt instruments most common debt bonds 1 mortgage. A contract between borrowers lissner) and lenders owners ) = fixed amount c- regularly payments until maturity. { short - term intermediate - term i long - term i - 1 yr t - to yrs. Shares in a corporation or commonly known as stocks no maturity dates. May make dividends borne) equity holders are residual claimants (cid:8869) advantage : Asset value of the firm 9 if the firm is insolvent : ( paid after debt is charged ) assets (cid:195) all debts remaining s given to shareholders: 2 types of financial markets, primary market.

Related Questions

2. Suppose there are two types of potential borrowers. Half are Type A borrowers who have projects that require an investment of 1 unit. They have an equal probability of returning 3 or 0 gross in one year. The other half are Type B borrowers, who have projects that also require 1 unit investment and a gross return of 8 with probability 1/8 or 0 with probability 7/8 in one year. Lenders require one unit gross in one year on one unit loaned (i.e. they will lend if they receive a net interest rate of 0). Assume that there is perfect competition so that lenders must earn their minimum (0 net) in any equilibrium.

First, find the equilibrium interest rates on the loans to each in the case of symmetric information. (Note that they will differ.) Under asymmetric information, where the lenders cannot distinguish between types but know the distribution of potential borrowers, what equilibrium interest rate will be charged and who will borrow? Explain. Characterize the inefficiency that results from asymmetric information.

bronzefish745

Three students have each saved $\$$1,000. Each has an investment opportunity in which he or she can invest up to $\$$2,000. Here are the rates of return on the students' investment projects:

Harry $\quad$ 5 percent

Ron $\quad$ 8 percent

Hermione $\quad$ 20 percent

a. If borrowing and lending are prohibited, so each student uses only personal savings to finance his or her own investment project, how much will each student have a year later when the project pays its return?

b. Now suppose their school opens up a market for loanable funds in which students can borrow and
lend among themselves at an interest rate $r$. What would determine whether a student would choose to be a borrower or lender in this market?

c. Among these three students, what would be the quantity of loanable funds supplied and quantity
demanded at an interest rate of 7 percent? At 10 percent?

d. At what interest rate would the loanable funds market among these three students be in equilibrium? At this interest rate, which student(s) would borrow and which student(s) would lend?

e. At the equilibrium interest rate, how much does each student have a year later after the investment projects pay their return and loans have been repaid? Compare your answers to those you gave in part (a). Who benefits from the existence of the loanable funds market$-$the borrowers or the lenders? Is anyone worse off?

silverwolf680

7- What steps can be taken by both individuals and companies to generally reduce the cost of external Financing?

1-An inequality in knowledge between two financial parties is called ___________ __________.

symmetrical information ignorance asymmetric information asymmetric investing asymmetric lending

2-When bad credit risks are the ones who most actively seek out a loan they are also the ones most likely to produce an __________ ___________.

immoral outcome unexpected profit adverse outcome adverse rate of return adverse interest rate

3-Asymmetric information and the adverse selection and moral hazard concepts are also crucial problems for the ________________.

health industry professional sports industry automobile industry insurance industry technology industry

4-Important impediments to well-functioning financial markets are created by adverse selection and moral hazard and ___________________ can alleviate these problems.

stock markets financial advisors savants financial intermediaries

5-Improving _________________ is a key role for financial intermediaries because they help financial markets channel funds to people that are a better investment risk.

Economic growth economic expansion economic ineptitude the inflation rate economic efficiency

6-Lending to individuals; ________________ can be minimized because lenders can check the loan applicantâs credit files and credit scores, their employment history, and with the permission of the borrowers, lenders can even verify their income with the internal revenue service.

moral hazard adverse selection inverse selection prudent selection guessing

ECON 202 Lecture Notes - Lecture 2: Toronto Stock Exchange

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