Essay on Discussion 1

918 Words Mar 21st, 2016 4 Pages
Chapter 2: Review Questions

3. Compare and contrast direct finance and indirect finance. Which is more likely to have a larger share of the total financial market in a mature economy? In a young economy? Why?

The financial system proposes two ways to finance. The first is direct finance through financial markets and the second is indirect finance through financial intermediaries, like banks finance companies and mutual funds. They both use financial securities and are managed in financial markets. Indirect finance is used more when the financial system is young then when the economy gradually increases it grows to indirect finance, this is so because when the financial system is young it depends on intermediaries. There is less of
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How do investors measure risk?

When making a financial investment decision you risk the amount of return because it is uncertain. There are several major risks to financial securities. First it is the investor’s duty to make sure that the issuer is able to make payments towards the interest or paying the interest on the payment date. If they to meet these obligations of the payments then it will default. An example would be poor or falling cash flow from businesses causing them to not be able to make the interest or principle payments. Also rising interest rates can affect them in affording payments.
Another risk faced is if the dividend payout changes. An example is because an investor does not know what they may be receiving from dividends, the price changes gradually causing them to stop paying if it becomes too much, which can possibly cause them to bankrupt. A third risk is a change in the price of the security. When this happens the price may either increase or decrease. The risk of these securities can also relate to other securities. Prices of different stocks may increase and decrease at the same time but each individual one has its own risk for example. For example the stock price of Telefonica increased from $24.50 to $33.00 in 2014 and another company may increase but they prices may be different.
A fourth risk is the inflation rate changing. Returns may be at risky price loss

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