Essay on Chapter 1: an Overview of Financial Markets and Institutions

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CHAPTER 1: An Overview of Financial Markets and Institutions

Answers to End-of-Chapter Questions

1. Does it make sense that the typical household is a surplus spending unit (SSU) while the typical business firm is a deficit spending unit (DSU)? Explain.

The typical household begins as a SSU, has a deficit moments in the period when a home is purchased, autos are purchased, and tuition payments are made. For the most quarters (the typical flow of funds time unit) the household sector is an SSU. The non-financial corporate business sector varies from a SSU when internal cash flows exceeds real investment to a DSU when real investment exceeds internal cash flow, typically late in the expansion phase of the business cycle.
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Metropolitan Nashville and Davidson County issue $25 million of municipal bonds to finance a new domed stadium for the Tennessee Titans. The bonds have a face value of $10,000 each, are somewhat risky, and mature in 20 years. Enterprise Bank of Nashville buys one of the