Janice Claire Dulay Financial Management

BSBA 4.1A 02 Task Performance

1. What are the three (3) primary ways in which capital is transferred between savers and
borrowers? Describe each.

When a business decides to sell its stocks or bonds to investors directly and not through a
financial institution, this is known as a direct transfer. The investor immediately transfers the
money to the business. In when a transfer is made indirectly through an investment banker, the
banker acts as a middleman. A Financial Firm underwrites an issuance, which is as well-known as
the primary market transaction. The company sells its stocks or securities to a speculator broker,
who then trades the insurance to investors. Financial intermediaries include companies like
banks, insurance companies, and common assets. While savers hold the protections of the
delegate, the middleman uses this money to buy and hold the safeguards of organizations.

2. What is a market?

A system where assets can be bought, sold, or traded is called a market. Physical asset markets
are where consumers can buy tangible goods. Machines and products are a couple of examples
of physical goods. The core of a financial asset market is the buying and selling of assets, bonds,
notes, and mortgages. The people engaged are often buyers and sellers. The market could be
actual—like a real store where people can engage in person—or virtual—like an online
marketplace where there is no face-to-face interaction between buyers and sellers.

3. Differentiate the following types of markets:

a. The markets for physical assets, commonly referred to as "tangible" or "real" asset markets, deal
with derivative securities such as stocks, bonds, notes, mortgages, and other financial
instruments whose values are influenced by changes in the prices of other assets. While a
financial asset derives its value from a contractual claim and is an intangible asset. Value may be
entirely dependent on an underlying tangible or real asset, but market delivery and demand also
have an impact on its value.
b. The spot market, sometimes known as the coinage market, is a public financial marketplace
where financial goods or commodities are bartered for prompt delivery. In contrast, a futures
market is an auction market where participants trade items and futures contracts for delivery
later.
c. The financial markets are where very short-term debt investments are traded. At the wholesale
level, it involves large-volume transactions between businesses and traders. While exchanges of
money between individuals who offer capital and those who need it for usage take place in
capital markets.
 d. Securities are created and first issued on the primary market, and after that, they are traded
between shareholders on the secondary market. On the secondary market, investors can
purchase assets from other investors.
e. A private market is one where goods are sold by multiple vendors for retail sale to the public
and where it is run by someone other than a local or public body. Because public corporations
are traded openly on the stock market, anyone can invest in them.

4. Why are financial markets essential for a healthy economy and economic growth?

Capital is necessary for growth and expansion for businesses, governments, and individuals. In
response to shifting consumer wants and desires, capital is being used to construct a factory,
increase production, and develop new products. These kinds of improvements cannot be done
with the profit currently being used to operate the company. To raise new funds, financial
markets must be used. It encourages the effective direct flow of savings and investments into
the sector, which makes it easier for capital to accumulate and contribute to the production of
goods and services.

5. Briefly describe each of the following financial institutions: investment banks, commercial banks,
financial services corporations, pension funds, mutual funds, exchange-traded funds, hedge funds,
and private equity companies.
Commercial banks are the ones that carry out the fundamental duties of approving loans and
advances as well as taking deposits. Commercial banks provide their clients with a vast array of
financial services in addition to traditional banking services. Financial service corporations are
businesses in the financial sector that offer their customers any kind of financial service,
including factoring, stock brokerage, rental financing, and hire buy. A pension fund is a system
or fund that produces income for retirees. Employer and employee contributions into a variety
of investment vehicles are planned for by pension plans. Mutual funds are businesses that
aggregate money from small participants and invest it in a variety of different investment
opportunities to generate a respectable rate of return.

6. If Apple decided to issue additional common stock, and Juan purchased 100 shares of this stock
from Mac Lyn Don & Co., the underwriter, would this transaction be a primary or a secondary
market transaction?

Mac Lyn Don & Co. acts as the problem's investment banker, and Juan's payment is the primary
market transaction, in the case when Apple Computer concerns additional common stock. The
income statement and cash flow statements of Apple Computers will be impacted by this
transaction. A main market transaction will be the buying of shares from the underwriters. The
underwriters are permitted to sell the newest shares by the corporation granted permission to
issue the shares.
7. Would it make a difference if Juan purchased previously outstanding Apple stock in the dealer
market? Explain.

Apple has indeed issued stock that is presently available on the secondary market. Juan buys
100 of these stocks, resulting in a secondary market transaction. This transfer of funds has no
effect on Apple Computers' income statement

8. What does it mean for a market to be efficient? Explain why some stock prices may be more
efficient than others.
The degree to which security prices reflect all accessible and useful facts is referred to as market
efficiency. The concept was formalized by the efficient market hypothesis, a theory that holds
that security prices reflect all available information and barter at their valuation, making it
nearly impossible for shareholders to achieve the goal of buying cheap and selling high. If
markets are effective, investors can buy and sell stocks with confidence that they are gaining fair
value. The size of the company is the most important factor like the larger the firm, the more
experts tend to follow it, and thus the faster new knowledge is likely to be observed in the stock
price. Various companies communicate effectively with investors and analysts overall, the better
the communications, the more effective the stock market.

9. After your consultation with Pedro Juan, he wants to discuss these two (2) possible stocks
purchases:
a. It is most likely too late to capitalize on the information and there would be little if any,
profit on this action. The stock market is very efficient, so the prices of that stock would
have already contained this "hot" information
b. He should buy stock in the market, but it will likely be too late by the time she does, and her
shares might also underperform in the long run until she was among the first to buy stock in
the stock. Not every IPO is generally favored. Buying into the fundamental contribution is
unquestionably difficult, even if she had the choice to choose a "hot" subject. These kinds of
sought-after agreements are typically oversubscribed, which means that demand for shares
at the offered price frequently outpaces the number of bids made.

10. How does behavioral finance explain the real-world inconsistencies of the efficient markets
hypothesis (EMH)?
The efficient market hypothesis (EMH), commonly referred to as the effective market, contends
that share prices accurately reflect the information that is currently available and that it is
improbable that persistent alpha production will occur. The effective markets hypothesis is
straightforward because it makes the simple assumption that if stock prices are so low, rational
traders will swiftly seize the opportunity and acquire the shares in an effort to raise the prices to
a reasonable level. Although EMH's reasoning is compelling, there are many differences in the
real world. According to behavioral finance, not all trade is rational. To better understand how
irrational behavior might persist at all times, behavioral finance looks to psychology. Numerous
studies demonstrate that during a market decline as opposed to an active market, investors and
managers behave more negatively.