Capital Market Types: Perfect Competition & Monopoly

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Questions and Answers

What is the main purpose of buying a bond?

To lend money while earning interest (correct)

To purchase stock in a company

To invest directly in real estate

To trade commodities in the market

Which of the following types of bonds are issued by corporations?

Corporate Bonds (correct)

Municipal Bonds

Treasury Bonds

Government Bonds

What is the certification received when lending money through a bond?

Certificate of Indebtedness (correct)

Certificate of Ownership

Bondholder Agreement

Loan Declaration

How are Treasury Bills characterized in terms of safety?

They are the safest debt instruments. Signup and view all the answers

What distinguishes the equity market from the capital market?

Equity market involves trading of company shares, whereas capital market deals primarily with bonds. Signup and view all the answers

What characterizes monopolistic competition?

Companies compete among themselves. Signup and view all the answers

Which agency is mentioned as having an oversight function in the financial market?

Central Bank of the Philippines Signup and view all the answers

What is the primary purpose of the capital market?

To facilitate expansion for companies. Signup and view all the answers

Which of the following is NOT a function of the financial market?

Control of inflation rates Signup and view all the answers

What does transparent pricing in financial markets imply?

Pricing is clear and evident to all participants. Signup and view all the answers

What does the statement 'there is no such thing as a free lunch' imply in financial transactions?

All transactions have hidden costs. Signup and view all the answers

Which of the following best describes the role of NGRAs in the financial market?

They regulate and enforce market regulations. Signup and view all the answers

What major economic concept is highlighted regarding transactions in the financial market?

Transactions carry associated costs. Signup and view all the answers

Which market structure is characterized by a single company being the sole seller of a product with no competitors?

Monopoly Signup and view all the answers

What distinguishes oligopoly from perfect competition?

Product differentiation Signup and view all the answers

In monopolistic competition, how do sellers typically compete?

Through quality and branding differentiation Signup and view all the answers

What is a key feature of perfect competition?

Large number of small companies competing Signup and view all the answers

Which example best illustrates oligopoly in the telecommunications industry?

Smart, Globe, and Sun Signup and view all the answers

What is the primary issue when a market has homogeneous products?

Difficulty in differentiating products Signup and view all the answers

In which market structure do companies typically face the risk of mergers if they fall behind competitors?

Oligopoly Signup and view all the answers

What role do competitive strategies play in oligopoly?

They are dependent on the actions of other firms Signup and view all the answers

What is the main characteristic of the cash market?

All transactions are settled in real-time. Signup and view all the answers

In what market are commodities delivered at a specified future date?

Futures Market Signup and view all the answers

Which of the following describes equity instruments?

They are shares of stock representing ownership. Signup and view all the answers

What distinguishes the primary market from other markets?

It issues new securities for the first time. Signup and view all the answers

What is the nature of claims in the debt market?

They represent fixed claims on assets. Signup and view all the answers

How does the exchange-traded market operate?

It features standardized procedures. Signup and view all the answers

Which financial instrument guarantees buyers a certificate of ownership?

Stocks from publicly listed companies Signup and view all the answers

What term is often used interchangeably with the cash market?

Spot market Signup and view all the answers

What distinguishes Treasury Bonds from Treasury Bills?

Treasury Bonds are long-term investments. Signup and view all the answers

What is a Certificate of Deposit (CD) primarily used for?

To offer fixed maturity and interest rates. Signup and view all the answers

What happens if a Certificate of Deposit is withdrawn before maturity?

It incurs a penalty for early withdrawal. Signup and view all the answers

What defines a Repurchase Agreement (Repo)?

An arrangement to sell security with a promise to repurchase later. Signup and view all the answers

What is a key feature of US Treasury Bills?

They are considered risk-free investments. Signup and view all the answers

How does the maturity period of a Certificate of Deposit usually range?

From three months to five years. Signup and view all the answers

What is the penalty associated with withdrawing from a Certificate of Deposit?

The interest earned is forfeited as a penalty. Signup and view all the answers

What is a common use for Repurchase Agreements among financial institutions?

To manage liquidity on a short-term basis. Signup and view all the answers

Study Notes

Capital Market - Perfect Competition

Perfect competition refers to: many small compnaies competing, selling similar products.
The market comprises numerous small companies, each with limited market power
The products sold are identical or highly similar, making it difficult for individual companies to differentiate themselves
Companies in perfect competition operate in a highly competitive environment where no single firm can influence market prices.

Capital Market - Monopoly

A single company controls the entire market
The company faces no competition, enjoying a dominant position
The firm has the power to set prices for its products without fear of competitors undercutting them
Examples include Meralco (electricity distribution) and Maynilad (water distribution) in the Philippines.

Capital Market - Monopolistic Competition

Combines elements of both monopoly and competitive markets
A significant number of firms compete, each differentiating their products through branding, quality, or features
Although products are similar, there are enough differences to allow companies to control their prices to some extent.
Examples: Shampoo brands like P&G (Head & Shoulders, Pantene), Unilever (Clear, Sunsilk), and Jack & Jill

Capital Market - Oligopoly

Small number of large companies dominate a market
Products are either differentiated or identical
Companies are highly interdependent; the actions of one company have a notable impact on the others.
Philippines major telecommunication companies (Smart, Globe, and Sun)

Capital Market - Debt Instruments

Commercial Paper
A short-term debt instrument used by companies to raise funds
Maturity period typically ranges from one to 270 days
Companies use it for short-term financing needs.
Banker's Acceptance
A short-term debt issued by a company but guaranteed by a bank
Typically used for international trade transactions
The bank guarantees payment, making it a safe investment
Certificate of Deposit (CD)
Issued directly by a commercial bank
Investors lend money to banks for a fixed period at a fixed interest rate
Typically used for short-term savings and considered relatively low-risk
Repurchase Agreements (Repo)
A short-term borrowing method where a security is sold with an agreement to repurchase it at a higher price at a later date.
A form of short-term lending primarily used by dealers in government securities.
The agreement's maturity can range from overnight to 30 days or more.

Capital Market - Equity Instruments

Treasury Bills (T-Bills)
Short-term debt instruments issued by governments
Considered highly safe investments due to the government's backing
Maturity periods are usually 91 days, 182 days, or 364 days
The US T-Bill (USTB) is considered the safest T-Bill globally.
Treasury Bonds
Long-term debt instruments issued by governments
Maturity periods are typically longer than one year, ranging from 5 to 30 years or more
Carry slightly higher risk compared to Treasury Bills, but still considered safe investments.

Capital Market - Financial Market

Functions of the Financial Market
Price Determination: Market forces, involving investors, industries, and the overall economy, determine prices.
Mobilization of Savings: The financial market channels funds from savers to borrowers, making capital available for investment.
Ensures Liquidity: Facilitates the buying and selling of financial instruments, ensuring an active market for investors who need to access their funds quickly.
Saves Time and Money: Provides a platform for transactions to occur efficiently, reducing the time, costs, and effort required for individuals and institutions to raise and allocate funds.

Capital Market - Structures of Financial Market

By Nature of Claim
Debt Market: Debt instruments are traded, representing fixed claims or loans.
Equity Market: Shares of ownership in companies are traded, representing ownership claims.
By Timing of Delivery
Cash Market: Transactions settle immediately or within one or two business days.
Futures Market: Agreements to deliver future cash flows of commodities or financial instruments at a predetermined future date.
By Organizational Structure
Exchange-Traded Market: A centralized market with standardized procedures and listed companies.
Over-the-Counter Market: Decentralized, allowing for customized procedures and direct trading of instruments like bonds.

Key Definitions

NGRAs (National Government Regulatory Agencies)
SEC (Securities and Exchange Commission)
BSP (Bangko Sentral ng Pilipinas)
Corporate Bonds: Bonds issued by companies
Treasury Bonds: Bonds issued by governments
Certificates of Ownership for Equity Instruments
Certificates of Indebtedness for Debt Instruments

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Description

This quiz explores the different types of capital market structures including perfect competition, monopoly, and monopolistic competition. You'll learn how each structure operates, the number of companies involved, and how these companies set prices in the market. Test your understanding of these fundamental economic concepts.