Principles of Business Finance

Principles of Finance I

WEEK 2: Discussion Prompt #1 – A financial system consists of both financial institutions and financial markets. Financial markets bring the “key players” together and their funds. For this discussion, choose one of the functions of the financial markets and discuss how financial institutions play a role in this process.

WEEK 2: Discussion Prompt #2 – The financial crisis was caused by several factors related to investments in real estate. This week, we have discussed a variety of reasons why the financial crisis occurred. For this discussion, choose one of these reasons and discuss why you believe this reason was at the root of 2008 financial crisis and recession. In addition, discuss what legislation has been enacted to prevent this event from taking place in the future and causing another financial crisis.


Financial Markets

Financial markets refer to where traders sell and buy assets like stocks, derivatives
foreign exchange, commodities, and bonds. In this places the investors make money and
companies reduce risks (Mishkin, 2016). Also in this financial markets business go there to seek
for funds.

One function of financial market

There are many functions that this market plays to the economy one of them is that they
create a regulated and open system for companies to get a huge amount of money or capital. This
role is commonly in the bond and stock exchange market. A bond is an investment debt that is
issued by the investors to an entity that borrows the fund at a fixed or variable rate for a
particular period. In this markets, the businesses are allowed to offset the risk, and they carry out
this with foreign exchange futures contracts, derivatives, and commodities (Mishkin, 2016).
These markets are public hence there is openness and transparency in the setting of prices on
every trader. Also, they display all the available information about everything traded. Since all
the information is incorporated in the prices, the cost of sourcing is significantly reduced. Also in
this markets, one is not required to struggle to look for someone who is willing to provide the

Primary cause of 2008 Financial Crisis

In the year 2008, the world experienced the biggest crisis on the economy mostly in the
finance sector, and one of the primary cause of this was Deregulation in the financial industry. It
Permitted the financial institutions to be involved in offsetting the risk in fund exchange with the
derivative. As a result, the financial institutions (like banks) claimed for more mortgages that
would support derivatives trade that was profitable (Scott, 2010).


Moreover, they generated loans that were based on interest which become acquirable to
the subprime that period; the foreign derivatives were offering firms from other
nations a competitive advantage as argued by Enron, an energy company in America that was
involved in the derivative trade. Therefore, big banks acquired resources and made a lot of
money from the complicated derivatives. The banks earned money power to buy out safer and
smaller banks making this banks too strong to collapse. Due to this, banks created a large amount
of new money through the lending of loans, and they doubled the sum of debts and money in the
economy. When the economy started to shrink, the banks reduced the lending rate as the public
continued to repay their debts causing the economy to slip into a debt-deflation leading to

Correction measure

After this economic crisis, the word bank instructed the governments of all countries
involved to regulate the bank rates and financial markets trade to avoid the occurrence of this



Mishkin, F. S. (2016). The economics of money, banking and financial markets. Boston:
Pearson Education Limited.
Scott, H. J. (2010). Global financial crisis.