Please see the case under http://cws.cengage.co.uk/palepu_peek/students/weblinks

Question

Please see the case under http://cws.cengage.co.uk/palepu_peek/students/weblinks_sample_ch/sample_ch1.pdf

Please answer each of the below questions. Thanks

Case #1

Assignment questions for “the Role of Capital Market Intermediaries in the Dot-Com Crash of 2000”

List all the major players that play an intermediation role between individual investors and entrepreneurs/managers. What is the intended function of each of the intermediaries?

How is each of the intermediaries you identified compensated for performing its respective function? Is the compensation arrangement likely to lead any dysfunctional incentives?

Identify the role each intermediary might have played in the creation of the dot-com bubble. Was this behavior related to the potential dysfunctional behavior identified in question 2?

How do you fix these problems?

Explanation / Answer

Financial intermediaries are those entities with "low-cost" money (banks, credit unions, savings& loan associations, mutual and pension funds and insurance companies) that act as providers of money (as loans or investments) to those needing funding. They have developed a sophisticatednetwork to allow them to have these funds available and deliver them as quickly and efficientlyas electronically possible.

Finding innovative ways to provide financial services to the poor so that they can improve theirproductive capacity and quality of life is the role of the financial intermediaries in the 21st century

1.Function

Financial intermediaries perform as provider of funds to those who need money.From banks, credit unions, savings & loans, mutual funds, insurance companiesand pension funds, financial intermediaries provide funds for all manner of borrowers and investors. Whether it's a bank providing a personal loan, amortgage lender or financial entities creating investment markets, financialintermediaries keep the flow of funds moving.

Benefits:Individuals and businesses often need funds for working capital, asset purchases(homes, cars, equipment, buildings and computer systems) and the financialintermediary network serves as the source of this money. Borrowing from savers(depositors in banks and credit unions), financial intermediaries provide monies ata reasonable cost to those who need them. Their network, a finely tuned moneymachine, eliminates most difficulties for those needing funds.

Financial intermediaries exercise great power and control over the country's economy.While always necessary components to the economy, the sophistication of computers and the Internet has allowed financial intermediaries to become evenmore efficient and important. Those needing funds can often be anywhere in theworld and receive the money they need electronically. The risk of transferringfunds, the time delay and the need for "hard cash" have all been effectivelyeliminated. This has allowed financial intermediaries to serve just asprofessionally as banking institutions. For example, mutual and pension fundseffectively offer financial intermediary services to individuals and businesses atreasonable rates.

The key distinguishing feature between the money and capital markets is the maturity period of the securities traded in them. The money market refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings. By financial convention, short-term means maturity periods of one year.

N o this behavior is not related to dysfunctional behavior.

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