Q1: According to the textbook, a moral hazard is described as being “the problem created by asymmetric information after a transaction occurs” (Mishkin & Eakins, 2012, p. 26). As far as financial markets are concerned, a moral hazard exists when a lender understands the risk that a borrower might engage in activities that would hinder their ability to repay a loan. As the threat of a moral hazard increases, the likelihood that a borrower will repay a loan decreases (Mishkin & Eakins, 2012). The concept of moral hazards is important to financial institutions because being aware of its existence allows those institutions to implement measures aimed at minimizing the potential threats posed by moral hazards. In a case where a business is in
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20). More directly, organizations were no longer restricting themselves to relying on just their home country to secure the funds needed for the operation of their business. Internationalization also meant that organizations could seek or take advantage of investment opportunities abroad. One of the investment opportunities available in the international bond market comes in the form of a foreign bond. To be considered a foreign bond, the issuing company residing in one country must have issued the bond in a foreign country in a currency that is native to that foreign country (Mishkin & Eakins, 2012). As an example provided by the textbook, early railroads built in the United States were financed by foreign bonds sold in Britain during the nineteenth century (Mishkin & Eakins, …show more content…
The higher an organization can sell its shares for, the higher the amount of funds it can generate to support its operating activities (Mishkin & Eakins, 2012). Likewise, the price at which an organization is able to sell its shares for serves as a reflection of how profitable it is seen to be (Bramble, n.d.). The foreign exchange market is yet another of the markets that plays an important role in the financial market. The foreign exchange market is important because it allows organizations to sell their products and services in a foreign currency amount that equals the selling price in their native currency (Mishkin & Eakins, 2012). The knowledge gained from the foreign exchange market adds to its importance because it tells organizations if there is any profitability in selling their goods and or services in a foreign
20). More directly, organizations were no longer restricting themselves to relying on just their home country to secure the funds needed for the operation of their business. Internationalization also meant that organizations could seek or take advantage of investment opportunities abroad. One of the investment opportunities available in the international bond market comes in the form of a foreign bond. To be considered a foreign bond, the issuing company residing in one country must have issued the bond in a foreign country in a currency that is native to that foreign country (Mishkin & Eakins, 2012). As an example provided by the textbook, early railroads built in the United States were financed by foreign bonds sold in Britain during the nineteenth century (Mishkin & Eakins, …show more content…
The higher an organization can sell its shares for, the higher the amount of funds it can generate to support its operating activities (Mishkin & Eakins, 2012). Likewise, the price at which an organization is able to sell its shares for serves as a reflection of how profitable it is seen to be (Bramble, n.d.). The foreign exchange market is yet another of the markets that plays an important role in the financial market. The foreign exchange market is important because it allows organizations to sell their products and services in a foreign currency amount that equals the selling price in their native currency (Mishkin & Eakins, 2012). The knowledge gained from the foreign exchange market adds to its importance because it tells organizations if there is any profitability in selling their goods and or services in a foreign