1. The U.S. financial system is composed of: (1) policy makers, (2) a monetary system, (3) financial institutions, and (4) financial markets. Indicate which of these components is associated with each of the following roles:
a. accumulate and lend/invest savings: (3) financial institutions
b. create and transfer money: (2) a monetary system,
c. pass laws and set fiscal and monetary policies: (1) policy makers
d. market and facilitate transfer of financial assets: (4) financial markets
2. Financial markets may be categorized as: (1) debt securities markets, (2) equity securities markets, (3) derivative securities markets, and (4) foreign exchange markets. Indicate in which of these markets the following securities trade:
a. residential mortgages: : (1) debt securities markets
b. corporate bonds: (3) derivative securities markets
c. corporate stocks: (2) equity securities markets
d. currencies: (4) foreign exchange markets
3. In business, ethical dilemmas or situations occur frequently. Laws and regulations exist to define what unethical behavior is. However, the practicing of high-quality ethical behavior often goes beyond just meeting laws and regulations. Indicate how you would respond to the following situations.
a. Your boss has just told you that tomorrow the Federal Drug Administration will announce its approval of your firm’s marketing of a new breakthrough drug. As a result of this information, you are considering purchasing shares of stock in your firm this afternoon. What would you do?
While I would love the quick score, I would not purchase this stock because of the tip I received. It’s unethical to get insider information from any company. The financial personal gain through using non public information would be abusing my position in the company and is illegal. It is a violation of federal securities laws. If this truly is a good deal, then I should purchase after it is known to the public officially and legally.
b. In the past, your firm has been in compliance with regulatory standards relating to product safety. However, you have heard through the company grapevine that recently some of your firm’s products have failed resulting in injuries to customers. You are considering quitting your job due to personal moral concerns. What would you do?
Regardless of the information from the grapevine, I need to look at my heart and measure my motives. If I am working in an environment where I feel ashamed, guilty, or unethical, I need to measure my feelings against my morals. In this case I would most likely resign. I would keep my resignation healthy and formal citing my reasons for leaving are personal and motivated by some changes I need to make in my life. I would neither bad mouth the company, nor stoop to the gossip level of the grapevine. This would allow me to leave with a clear conscious and not have to look over my shoulder at a burnt bridge.
I agree with your answers. You're an idealist -- and good luck!
c. You discover that a competitor has developed a new product that is expected to capture a significant portion of your firm's market share. You are considering spreading false information about the competitor's product to tarnish their reputation. What would you do?
Spreading false information about a competitor's product is unethical and can have legal consequences. It goes against principles of fair competition and can harm not only the competitor but also the industry as a whole. Instead, I would focus on strengthening my own products and services, bringing innovation and value to customers, and finding ways to differentiate my firm from the competitor. It is important to compete ethically and within the boundaries of the law to build a sustainable and reputable business.
To answer question 1, we need to understand the components of the U.S. financial system. The system is composed of policy makers, a monetary system, financial institutions, and financial markets.
a. To determine which component is associated with the role of accumulating and lending/investing savings, we can infer that financial institutions such as banks, credit unions, and investment firms would perform this function. Therefore, the answer is (3) financial institutions.
b. To identify the component associated with creating and transferring money, we know that this is a function of the monetary system, which includes the Federal Reserve and other institutions responsible for managing the country's money supply. Therefore, the answer is (2) a monetary system.
c. For the role of passing laws and setting fiscal and monetary policies, it is evident that policy makers, such as government officials and regulatory bodies, fulfill this responsibility. Hence, the answer is (1) policy makers.
d. Lastly, to determine the component associated with marketing and facilitating the transfer of financial assets, we can infer that financial markets, including stock exchanges and bond markets, perform this function. Thus, the answer is (4) financial markets.
Moving on to question 2, we need to categorize various securities according to the types of financial markets in which they trade.
a. Residential mortgages are debt instruments, so they would be traded in debt securities markets. Therefore, the answer is (1) debt securities markets.
b. Corporate bonds are also debt instruments and would be traded in debt securities markets. The term "derivative" refers to financial instruments that derive their value from an underlying asset or benchmark, which is not the case with corporate bonds. Hence, the answer is (1) debt securities markets.
c. Corporate stocks or shares represent ownership in a company and are traded in equity securities markets, where investors buy and sell ownership stakes in public companies. Therefore, the answer is (2) equity securities markets.
d. Currencies are traded in foreign exchange markets, where individuals, corporations, and governments exchange one currency for another. Thus, the answer is (4) foreign exchange markets.
Lastly, question 3 presents ethical situations that require a thoughtful response based on personal morals and ethical considerations.
a. The situation involves insider information and potential insider trading. As an ethical response, it is crucial not to act on the non-public information and refrain from purchasing the stock. Insider trading is illegal and unethical, as it involves taking advantage of privileged information for personal gain. Instead, the stock should be purchased legally and after the information is publicly known.
b. In this situation, personal moral concerns are arising due to product safety issues. If the individual feels that their work environment is unethical or involved in practices that go against their personal values, they could choose to resign. It is important to handle the resignation professionally, without badmouthing the company or spreading rumors. By resigning for personal reasons and not compromising one's ethics, a clear conscience and peace of mind can be maintained.
In summary, understanding the components of the U.S. financial system and the categorization of securities in financial markets, along with considering personal ethics and morals, helps answer the given questions.