Question One a.

Describe what are the Financial Markets and how do they operate

b. Describe five roles provided by financial markets to any economy

Answer a) Describe what are the Financial Markets and how do they operate Financial markets is a mechanism of transfer of funds from people who have excess fund to those who doesnt have or experiencing deficit. Financial market used to link the buyer and seller of fund, example bonds markets, stock (equity markets), exchange markets and derivatives. As firm grows they need capital so as to expand, raising fund from investors through issue of shares, bonds and securities. When the company issue share to the public at the first is called Initial public offer while issue share to the public at second, third or more than that is called Seasoned Offer. There Various way of financial market depend on mode of operation, nature and maturity of financial instruments operating in the particular economy. Financial markets can be classified as follows; o Debt verses Equity market Debt markets are the markets whereby debt instruments are traded. Debt is financial agreement between lender and borrower, where borrower pay Interest and principal amount to the lender. Example of Debt instruments are o Bonds, Preferred stocks, Debentures, Loans and Convertible Securities. Equity markets are markets of selling and buying of shares. Primary versus Secondary markets Primary markets are mechanism through which Government and Companies raise fund from other economic unit. The company can Issue share at first time which is called Initial Public Offer, or Issue at second, third etc which is called Seasoned Offer. Initial Public Offer can be done under Private placement where by company sells shares to few people or certain group in society, under writing where by Company sells share to few companies which used to selling those shares to the public or Public

Offer where by company issue share to the public and any person can buy shares of that company. Secondary markets refers to selling and buying of already existing shares, Example one person having shares in certain company decide to sell them to another person or to Dar Es Salaam Stock Exchange (DSE). o Money versus Capital market Capital market is a market for securities (debt or equity) where business enterprises/companies and Governments can raise long-term funds. It is a market which money is provided for period longer than a one year Example Stock markets and Bond. Money market is a component of financial market for assets involved in short-term borrowing and lending with original maturities of one year or short time frames Example Treasury Bills, commercial paper, certificate of deposit and short lived mortgage. Financial markets they operate under the following The financial markets operate based on nature or classification of the market such as Equity/stock market; under stock market the financial markets used to sell issued shares to the public based on price set by the company and roles governing the Investment. Bonds and securities; the financial markets are the ones deal with selling and buying of bonds and Government securities to the public. Financial market is the link between the Investor (individual person) and the Government or Company at the time of selling securities.

b) Describe five roles provided by financial markets to any economy Determination of financial assets prices traded through the interaction of buyers and sellers, is a process of price discovery. Done based on the forces of demand and supply.

Provide a mechanism of selling and buying of Financial Assets; through the financial market is where sellers send their securities where liquidity problem is solved, at the same time buyers also buy securities from financial markets. Reduce cost of financial transaction; by bringing sellers and buyers of financial assets together and reduce cost that would spend be to identify a seller and buyer of an asset, and information cost incurred in assessing investment merits of financial assets also reduced because specialized Institutions emerge to produce information more efficiently. Transfer of risk; financial markets provide facilities for those who fear risk of investing then they may send money to financial market through buying of financial assets and money is invested by those who doesnt fear risk. Financial markets help the Government in Tax collection and to obtain important information about the companies concerning their type of business activities. Question 2 Based on definition, types of instruments traded and sub-types if they exist describe the following types of financial markets a) Capital Markets Capital market is a market for securities (debt or equity) where business enterprises/companies and Governments can raise long-term funds. It is a market which money is provided for period longer than a one year Example Stock markets and Bond b) Commodity Markets Is a type of market whereby goods are exchanged. Is a market which applied in the world in many years ago before the knowledge of money come into existence, the major problem of this type of market is Coincidence of wants whereby someone who is in need of something has to find another person who is selling such item to exchange. Example Mr. X is having maize and is in need of cooking oil, then Mr. X has to find someone who is in need of maize while having cooking oil and make exchange.

c) Derivative Market Is a financial instrument like future contracts or options which are derives from other forms of assets, is a market derives in future due to the current agreement between two parties.

d) Money markets Money market is a component of financial market for assets involved in shortterm borrowing and lending with original maturities of one year or short time frames Example Treasury Bills, commercial paper, certificate of deposit and short lived mortgage. e) Foreign exchange markets Foreign exchange market is the largest and most liquid financial market in the world for the trading of currencies. These are markets whereby foreign money are traded and determines the relative values of different currencies. This type of market is purposely for assist International Trade and investments, by allowing businesses to convert from one currency to another. Question 3 Short description of the following terminologies as applied in financial markets a) Stocks Stock is a financial asset of a business entity represents the original capital paid into or invested in business by its owners or founder also it is known as share since stock of the business obtained from shareholders, stocks can be categorized in two types; preferred stock these are shares bought by any person in the public who is interested with particular organization, they have fixed rate of dividend and given priority on payment after calculating Earning After Interest and Tax and common stock which are shares bought by the owners of the business and are the last on payment of dividend and other profit obtained from business only because they are risk bearers so they obtain high return compare to preferred stock shareholders. b) Bonds

Bond is a financial asset which describe party of lending money to organization for some time in future, is a debt security in which the authorized person owes the holders a debt and depending on the terms of the bond required to pay interest and the principal at a maturity date. It is a formal contract to repay borrowed money with interest at fixed time.

c) Futures Future is a standardize contract between two parties to buy or sell specified asset example Oil and Gold of standardize quantity and quality at a specified future date of a price agreed today. Futures are securities though they are not direct like bonds and stock. d) Derivatives Derivatives are financial instruments (or an agreement between two parties) that has value based on expected future price movement of the asset to which it is linked known as underlying asset such as shares or currency. Derivatives are form of alternative investment, the most common kinds of derivatives are swaps, futures and options. e) Commercial papers Is an unsecured promissory note with a fixed maturity of 1 to 270 days. Is a money market security sold by large Banks and Corporations so as to get money to meet short term debt obligation example payroll and is only returned or settled by an issuing bank or corporations promise to pay the face amount on the maturity date specified on the note. Promissory note refers to negotiable instrument where in one part (marker or user) makes an unconditional promise in writing to pay sum of money in the other (payee) at a determinable future time or on demand of payee under specific terms. Question 4 a) What do you understand by the concept Global Financial Crisis b) What were the reasons of the last year Financial Crisis? c) What lesson(S) did we learn from such crisis?

Answers a) Global Financial Crisis Global Financial Crisis refers to the situation whereby world economy is experiencing liquidity problem. Financial problem which affect the whole words economy occurred at the time when developed countries experiencing the problem them from there it may affect other developing and poor countries since they much depend on the economy of developed countries. This financial crisis which began in industrialized countries and spread to market and developing economies countries. Investors pulled capital from countries, even those with small levels of investment, and caused values of stocks and domestic currencies to fall. Also, poor operating market have pushed economies world wide either into recession or into a period of slower economic growth. The global crisis now seems to be played out on two levels. The first is among the industrialized nations of the world where most of the losses from extreme mortgage debt, excessive leveraging of investments, and inadequate capital backing credit default swaps (insurance against defaults and bankruptcy) have occurred. The second level of the crisis is among emerging market and other economies who may be innocent bystanders to the crisis but who also may have less flexible economic systems that can often be disturbed by actions in global markets. Most industrialized countries (except for Iceland) have been able to finance their own rescue packages by borrowing domestically. The effect of Global financial crisis are increase in fuel price, high cost of transportation, high cost of imported goods, decline in total countrys Gross Domestic Product, fall in tourism industry, experiencing deficit budget and fall in value of USA Dollar. These effect are still experienced in less developed countries until this period. b) The reasons of the last years Financial crisis

o The bursting of the house bundle; many people found that they have
invested in houses which at last many left ideal with no customers, therefore resources were under utilized hence result into liquidity problem.

Many money lenders fail to repay their debt at the required time; this make the Banks and other financial institutions to fail operate because of liquidity problem.

o Poor lending control system; the banks on previously was having no

control on money lending which caused consequences when debtors fail to settle their balances. Because of lack of control then Banks run into bankrupt because many people failed pay back money. o High rate of unemployment; at that time the developed countries was suffering problem of increasing rate of unemployment so due to this many resources was underutilized hence lead to many sectors operate poorly.

o Problem of stagflation; This is a situation where the economy is

experiencing high rate of unemployment and persistent increase in general price level Example Fuel, this situation caused increase in cost of production because of raise in transportation cost while many people was unemployed at that time hence lead the Worlds economy to shake. c) Lesson(s) learnt from such crisis

o The key to risk control is diversification; each countrys economy has

required not to depend only on one side of the economy such as Industry and companies but also concentrate much on agriculture as a base of economy of the country, good example is Tanzania which has decided to concentrate on agriculture sector and come with a policy of KILIMO KWANZA which solve the problem of unemployment and single economy dependent.

o The financial institutions has to apply new system of control over the
credits lend to customers so as could not be excessive to the extent that, customers fail to pay the institution fail to operate. But even if the creditors fail to repay the loan also could not affect the operation of financial institution. o Investors has to conduct research before making decision on type of investment planned, research to look on marketability of the investment and number of investors so as to avoid resources to be left ideal in future where it could happen Supply exceed Demand.

o Government need to have forecasting point so as to look on countys

economy early and consider it at the time of budget preparation based on important issues such as level of employment, level of investment and how to rescue the existing large companies if they are in danger of bankrupt and any other economic changes that seem to occur in future.

o Establishment of strong economic base, the Global Financial Crisis started

in developed countries but its effect mostly experienced in less developed countries because of dependent than in developing countries only because they had strong economic base, therefore less developed countries has to establish strong economic base through full utilization of resources available. REFERRENCES The Global Financial Crisis: Causes and Consequences * Warwick J. McKibbin** CAMA, Australian National University & The Brookings Institution-PDF The Global Financial Crisis: Analysis and Policy Implications Dick K. Nanto, Coordinator Specialist in Industry and Trade October 2, 2009-PDF www.en.wikipedia.org/wiki/commercial-paper www.en.wikipedia.org/wiki/financial-markets www.en.wikipedia.org/wiki/forein-exchange-markets