Capital Markets and Secondary Markets Overview
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Capital Markets and Secondary Markets Overview

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Questions and Answers

What is the primary purpose of capital market securities?

  • To limit liquidity in the market
  • To regulate secondary market transactions
  • To trade stocks exclusively
  • To finance capital assets (correct)
  • What does liquidity refer to in the context of secondary markets?

  • The ability to issue new securities
  • The amount of securities available for purchase
  • The ease of selling securities without loss of value (correct)
  • The regulation of trading hours
  • Which of the following is a type of capital market security?

  • Stocks (correct)
  • Derivatives
  • Cryptocurrencies
  • Commodities
  • What characterizes an active secondary market for a security?

    <p>Many willing buyers and sellers</p> Signup and view all the answers

    What does selling securities in a secondary market allow investors to do?

    <p>Change their investments</p> Signup and view all the answers

    Which of the following is NOT a capital market security?

    <p>Treasury bills</p> Signup and view all the answers

    Why are secondary markets important for investors?

    <p>They allow for the easy liquidation of investments</p> Signup and view all the answers

    Primary capital markets are distinguished from secondary markets by their focus on what?

    <p>Issuing new funds</p> Signup and view all the answers

    What is the primary function of financial markets regarding surplus units?

    <p>To allow surplus units to invest their excess funds.</p> Signup and view all the answers

    What do deficit units access from financial markets?

    <p>Funds by issuing securities.</p> Signup and view all the answers

    What marks the time when surplus units can redeem debt securities?

    <p>The maturity date.</p> Signup and view all the answers

    What do surplus units receive periodically from debt securities they purchase?

    <p>Interest payments based on the maturity rate.</p> Signup and view all the answers

    Who typically incurs debt by issuing debt securities?

    <p>Deficit units that borrow funds.</p> Signup and view all the answers

    What is a key characteristic of capital markets?

    <p>They facilitate the issuance of new long-term securities.</p> Signup and view all the answers

    How do financial institutions function within financial markets?

    <p>They act as intermediaries channeling funds between surplus and deficit units.</p> Signup and view all the answers

    What is represented by debt securities issued by a deficit unit?

    <p>A legal obligation to repay borrowed funds.</p> Signup and view all the answers

    What is the primary benefit of increased financial disclosure in a country?

    <p>It improves the liquidity of financial markets.</p> Signup and view all the answers

    What type of institution is primarily responsible for providing credit to deficit units?

    <p>Depository institutions</p> Signup and view all the answers

    What is one function of depository institutions?

    <p>Accepting deposits and offering credit</p> Signup and view all the answers

    How does international integration of financial markets benefit governments and corporations?

    <p>It provides easier access to funding.</p> Signup and view all the answers

    Why are financial institutions necessary in addressing market imperfections?

    <p>They help assess the creditworthiness of borrowers.</p> Signup and view all the answers

    What is a characteristic of depository institutions in relation to investors?

    <p>They can offer investment opportunities across different countries.</p> Signup and view all the answers

    What factor contributes to the willingness of investors to participate in financial markets?

    <p>The availability of comprehensive information about firms.</p> Signup and view all the answers

    How does the enforcement of securities laws differ among countries?

    <p>Enforcement can vary significantly, affecting market practices.</p> Signup and view all the answers

    What role do commercial banks play in relation to surplus and deficit units?

    <p>They act as intermediaries, providing loans to deficit units.</p> Signup and view all the answers

    How does international financial market integration impact countries?

    <p>It allows one country’s problems to impact others.</p> Signup and view all the answers

    What is a key advantage of commercial banks in evaluating creditworthiness?

    <p>They can absorb defaulted loans better than individuals.</p> Signup and view all the answers

    What is necessary for a bank to meet regulatory requirements?

    <p>They must maintain a minimum level of capital.</p> Signup and view all the answers

    Which is a primary function of the federal funds market?

    <p>It enables short-term lending between banks.</p> Signup and view all the answers

    How do commercial banks typically gather funds relative to their loan requirements?

    <p>Some banks have more deposits than they need for loans.</p> Signup and view all the answers

    What happens when depository institutions do not exist for surplus and deficit unit transactions?

    <p>Deficit units will have to find direct lending opportunities.</p> Signup and view all the answers

    What is a characteristic of how banks manage loan diversification?

    <p>They diversify loans among numerous deficit units.</p> Signup and view all the answers

    What is the role of savings institutions in the financial system?

    <p>They channel deposits from surplus units to deficit units.</p> Signup and view all the answers

    Which of the following distinguishes a loan from a debt security?

    <p>A loan agreement is personalized and not easily marketable.</p> Signup and view all the answers

    What might cause surplus units to refrain from lending their funds to deficit units?

    <p>Unsatisfactory credit evaluations of potential borrowers.</p> Signup and view all the answers

    What is the significance of the federal funds market for savings institutions?

    <p>It enables them to borrow or lend excess funds on a short-term basis.</p> Signup and view all the answers

    What type of institution is classified as a credit union?

    <p>A member-owned financial cooperative lending primarily to its members.</p> Signup and view all the answers

    Which statement accurately describes commercial banks?

    <p>They are the most dominant type of depository institution.</p> Signup and view all the answers

    What is a key feature of the loan agreement provided by savings institutions?

    <p>It contains specific provisions that can vary between borrowers.</p> Signup and view all the answers

    What might lead to a surplus unit's decision to hold their funds tightly?

    <p>Uncertainty regarding the general economic climate.</p> Signup and view all the answers

    Study Notes

    Capital Markets

    • Capital markets facilitate the issuance of long-term securities by deficit units such as corporations and governments.
    • Capital markets provide a means for investors to invest surplus funds.
    • Capital markets allow corporations to obtain new funds.
    • Securities traded in capital markets are referred to as capital market securities.
    • Examples of capital market securities include bonds, mortgages, and stocks.

    Secondary Markets

    • Secondary Markets facilitate the trading of existing securities, allowing investors to change their investments by selling their securities and buying different ones.
    • Liquidity is a key characteristic of securities traded in secondary markets, meaning that securities can be readily sold without a significant loss of value.
    • In active secondary markets, many buyers and sellers of the security are present at any given moment.

    Role of Financial Markets

    • Financial markets accommodate surplus units who want to invest their funds in debt or equity securities.
    • Financial markets act as intermediaries between surplus units and deficit units, channeling funds from surplus to deficit.
    • Financial institutions serve as intermediaries in financial markets.
    • As shown in Exhibit 1.1, financial institutions also act as investors and channel their own funds to corporations.

    Market Imperfections

    • Countries with lower financial disclosure tend to have less liquid financial markets because investors are less willing to invest in securities without adequate information about the issuing corporations.
    • Financial institutions bridge the gap between investors and deficit units, offering expertise in assessing the creditworthiness of borrowers.
    • This ensures that deficit units are able to access funding that may be otherwise difficult due to a lack of information or risk aversion.

    Depository Institutions

    • Depository institutions accept deposits from surplus units and provide credit to deficit units through loans and the purchase of securities.
    • Depository institutions offer deposit accounts that meet the needs of most surplus units in terms of amount and liquidity.
    • They repackage deposit funds to offer loans in amounts and maturities desired by deficit units.
    • They assume the risk of default on the loans they provide to deficit units.
    • Depository institutions have more expertise than individual surplus units in evaluating the creditworthiness of borrowers.
    • These institutions use their expertise to diversify their loans among multiple deficit units.
    • This diversification helps them absorb defaults better than individual surplus units.

    Federal Funds Market

    • The federal funds market facilitates the flow of funds between depository institutions, including banks.
    • Commercial banks with excess funds can lend to institutions in need of funds for short-term periods (typically 1 to 5 days).
    • Commercial banks are subject to regulations aimed at limiting their exposure to the risk of failure.
    • These regulations include requirements for minimum levels of capital relative to their size to protect against loan defaults.

    Savings Institutions

    • Savings institutions, also known as thrift institutions, are a type of depository institution.
    • Savings and loan associations (S&Ls) and savings banks are examples of savings institutions.
    • Similar to commercial banks, they accept deposits from surplus units and lend these funds to deficit units.
    • Savings institutions rely on the federal funds market to lend excess funds or borrow funds short-term.

    Credit Unions

    • Credit unions are financial cooperatives that are owned and controlled by their members.
    • Credit unions offer financial services to members who share a common bond (e.g., employment, geographic location, or membership in a particular organization).
    • They often offer more favorable interest rates on loans and savings accounts compared to commercial banks.
    • Credit unions are not-for-profit institutions, so any profits are distributed to members.
    • Credit unions play a crucial role in delivering financial services to underserved communities and promoting financial inclusion.

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    Description

    This quiz covers the fundamental concepts of capital markets, including their role in issuing long-term securities and the features of secondary markets that facilitate trading existing securities. Test your understanding of how these markets function and their importance to investors and corporations alike.

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