Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
Solution and Answer Guide
Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299; Chapter 1:
Role of Financial Markets and Institutions
TABLE OF CONTENTS
Outline ................................................................................................................................. 2
Key Concepts ...................................................................................................................... 3
Point/CounterPoint: ........................................................................................................... 3
Questions ............................................................................................................................ 4
Interpreting Financial News ..............................................................................................12
Managing in Financial Markets .........................................................................................12
Flow of Funds Exercise .....................................................................................................13
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
OUTLINE
ROLE OF FINANCIAL MARKETS
Accommodating Corporate Finance Needs
Accommodating Investment Needs
SECURITIES TRADED IN FINANCIAL MARKETS
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities
Securities Regulations on Financial Disclosure
International Financial Markets
ROLE OF FINANCIAL INSTITUTIONS
Role of Depository Institutions
Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Relative Importance of Financial Institutions
Consolidation of Financial Institutions
SYSTEMIC RISK AMONG FINANCIAL INSTITUTIONS
The Emergence of Fintech
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
KEY CONCEPTS
1. Explain the role of financial intermediaries in transferring funds from surplus
units to deficit units.
2. Introduce the types of financial markets available and their functions.
3. Introduce the various financial institutions that facilitate the flow of funds.
4. Describe some of fintech’s adoptions in financial institutions.
5. Provide a preview of the course outline. Emphasize the linkages between the
various sections of the course.
POINT/COUNTERPOINT:
WILL COMPUTER TECHNOLOGY CAUSE FINANCIAL INTERMEDIARIES TO BECOME
EXTINCT?
POINT: Yes. Financial intermediaries benefit from access to information. As
information becomes more accessible, individuals will have the information they need
before investing or borrowing funds. They will not need financial intermediaries to
make their decisions.
COUNTERPOINT: No. Individuals rely not only on information, but also on expertise.
Some financial intermediaries specialize in credit analysis so that they can make wise
choices when offering loans. Surplus units will continue to provide funds to financial
intermediaries rather than make direct loans, because they are not capable of credit
analysis even if more information about prospective borrowers is available. Some
financial intermediaries no longer have physical buildings for customer service, but
they still require agents who have the expertise to assess the creditworthiness of
prospective borrowers.
WHO IS CORRECT? Use the Internet to learn more about this issue and then
formulate your own opinion.
ANSWER: Computer technology may reduce the need for some types of
financial intermediaries, such as brokerage firms, because individuals can
make transactions on their own (if they prefer to do so). However, loans will
still require financial intermediaries because of the credit assessment that is
needed. With the emergence of fintech, many of the services traditionally done
by intermediaries are now handled by computers. The answers provided by the
students will vary, as long as they provide logical arguments to support the
position they are taking.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
QUESTIONS
1. Surplus and Deficit Units. Explain the meaning of surplus units and deficit
units. Provide an example of each. Which types of financial institutions do you
deal with? Explain whether you are acting as a surplus unit or a deficit unit in
your relationship with each financial institution. (LO1)
ANSWER: Surplus units provide funds to the financial markets while deficit
units obtain funds from the financial markets. Surplus units include
households with savings, while deficit units include firms or government
agencies that borrow funds.
This exercise allows students to realize that they constantly interact with
financial institutions, and that they often play the role of a deficit unit (on car
loans, tuition loans, etc.).
2. Types of Markets. Distinguish between primary and secondary markets.
Distinguish between money and capital markets. (LO2)
ANSWER: Primary markets are used for the issuance of new securities while
secondary markets are used for the trading of existing securities.
Money markets facilitate the trading of short-term (money market)
instruments while capital markets facilitate the trading of long-term (capital
market) instruments.
3. Imperfect Markets. Distinguish between perfect and imperfect security
markets. Explain why the existence of imperfect markets creates a need for
financial intermediaries. (LO3)
ANSWER: With perfect financial markets, all information about any securities
for sale would be freely available to investors, information about surplus and
deficit units would be freely available, and all securities could be unbundled
into any size desired. In reality, markets are imperfect, so that surplus and
deficit units do not have free access to information, and securities cannot be
unbundled as desired.
Financial intermediaries are needed to facilitate the exchange of funds
between surplus and deficit units. They have the information to provide this
service and can even repackage deposits to provide the amount of funds that
borrowers desire.
4. Efficient Markets. Explain the meaning of efficient markets. Why might we
expect markets to be efficient most of the time? In recent years, several
securities firms have been guilty of using inside information when purchasing
securities, thereby achieving returns well above the norm (even when
accounting for risk). Does this suggest that the security markets are not
efficient? Explain. (LO2)
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
Chapter 1: Role of Financial Markets and Institutions
Solution and Answer Guide
Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299; Chapter 1:
Role of Financial Markets and Institutions
TABLE OF CONTENTS
Outline ................................................................................................................................. 2
Key Concepts ...................................................................................................................... 3
Point/CounterPoint: ........................................................................................................... 3
Questions ............................................................................................................................ 4
Interpreting Financial News ..............................................................................................12
Managing in Financial Markets .........................................................................................12
Flow of Funds Exercise .....................................................................................................13
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
OUTLINE
ROLE OF FINANCIAL MARKETS
Accommodating Corporate Finance Needs
Accommodating Investment Needs
SECURITIES TRADED IN FINANCIAL MARKETS
Money Market Securities
Capital Market Securities
Derivative Securities
Valuation of Securities
Securities Regulations on Financial Disclosure
International Financial Markets
ROLE OF FINANCIAL INSTITUTIONS
Role of Depository Institutions
Role of Nondepository Financial Institutions
Comparison of Roles among Financial Institutions
Relative Importance of Financial Institutions
Consolidation of Financial Institutions
SYSTEMIC RISK AMONG FINANCIAL INSTITUTIONS
The Emergence of Fintech
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
KEY CONCEPTS
1. Explain the role of financial intermediaries in transferring funds from surplus
units to deficit units.
2. Introduce the types of financial markets available and their functions.
3. Introduce the various financial institutions that facilitate the flow of funds.
4. Describe some of fintech’s adoptions in financial institutions.
5. Provide a preview of the course outline. Emphasize the linkages between the
various sections of the course.
POINT/COUNTERPOINT:
WILL COMPUTER TECHNOLOGY CAUSE FINANCIAL INTERMEDIARIES TO BECOME
EXTINCT?
POINT: Yes. Financial intermediaries benefit from access to information. As
information becomes more accessible, individuals will have the information they need
before investing or borrowing funds. They will not need financial intermediaries to
make their decisions.
COUNTERPOINT: No. Individuals rely not only on information, but also on expertise.
Some financial intermediaries specialize in credit analysis so that they can make wise
choices when offering loans. Surplus units will continue to provide funds to financial
intermediaries rather than make direct loans, because they are not capable of credit
analysis even if more information about prospective borrowers is available. Some
financial intermediaries no longer have physical buildings for customer service, but
they still require agents who have the expertise to assess the creditworthiness of
prospective borrowers.
WHO IS CORRECT? Use the Internet to learn more about this issue and then
formulate your own opinion.
ANSWER: Computer technology may reduce the need for some types of
financial intermediaries, such as brokerage firms, because individuals can
make transactions on their own (if they prefer to do so). However, loans will
still require financial intermediaries because of the credit assessment that is
needed. With the emergence of fintech, many of the services traditionally done
by intermediaries are now handled by computers. The answers provided by the
students will vary, as long as they provide logical arguments to support the
position they are taking.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Solution and Answer Guide: Madura, Financial Markets and Institutions 14e, © 2025, 9780357988299;
Chapter 1: Role of Financial Markets and Institutions
QUESTIONS
1. Surplus and Deficit Units. Explain the meaning of surplus units and deficit
units. Provide an example of each. Which types of financial institutions do you
deal with? Explain whether you are acting as a surplus unit or a deficit unit in
your relationship with each financial institution. (LO1)
ANSWER: Surplus units provide funds to the financial markets while deficit
units obtain funds from the financial markets. Surplus units include
households with savings, while deficit units include firms or government
agencies that borrow funds.
This exercise allows students to realize that they constantly interact with
financial institutions, and that they often play the role of a deficit unit (on car
loans, tuition loans, etc.).
2. Types of Markets. Distinguish between primary and secondary markets.
Distinguish between money and capital markets. (LO2)
ANSWER: Primary markets are used for the issuance of new securities while
secondary markets are used for the trading of existing securities.
Money markets facilitate the trading of short-term (money market)
instruments while capital markets facilitate the trading of long-term (capital
market) instruments.
3. Imperfect Markets. Distinguish between perfect and imperfect security
markets. Explain why the existence of imperfect markets creates a need for
financial intermediaries. (LO3)
ANSWER: With perfect financial markets, all information about any securities
for sale would be freely available to investors, information about surplus and
deficit units would be freely available, and all securities could be unbundled
into any size desired. In reality, markets are imperfect, so that surplus and
deficit units do not have free access to information, and securities cannot be
unbundled as desired.
Financial intermediaries are needed to facilitate the exchange of funds
between surplus and deficit units. They have the information to provide this
service and can even repackage deposits to provide the amount of funds that
borrowers desire.
4. Efficient Markets. Explain the meaning of efficient markets. Why might we
expect markets to be efficient most of the time? In recent years, several
securities firms have been guilty of using inside information when purchasing
securities, thereby achieving returns well above the norm (even when
accounting for risk). Does this suggest that the security markets are not
efficient? Explain. (LO2)
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
