Podcast
Questions and Answers
Preventing emerging market financial crisis requires improving prudential regulation and supervision of ______.
Preventing emerging market financial crisis requires improving prudential regulation and supervision of ______.
banks
Regulators should ensure that banks hold ample ______ to cushion losses from economic shocks.
Regulators should ensure that banks hold ample ______ to cushion losses from economic shocks.
capital
To encourage disclosure, regulations are needed to ensure financial institutions hold more ______.
To encourage disclosure, regulations are needed to ensure financial institutions hold more ______.
capital
A collapse in domestic currency increases the burden of debt denominated in foreign ______.
A collapse in domestic currency increases the burden of debt denominated in foreign ______.
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Moving to a flexible exchange rate regime can help discourage borrowing in foreign ______.
Moving to a flexible exchange rate regime can help discourage borrowing in foreign ______.
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Sequence financial liberalization carefully to avoid ______ crises in emerging markets.
Sequence financial liberalization carefully to avoid ______ crises in emerging markets.
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Dividends are considered ______ securities because they have no maturity date.
Dividends are considered ______ securities because they have no maturity date.
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In primary markets, new issues of securities are sold to ______ buyers.
In primary markets, new issues of securities are sold to ______ buyers.
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A corporation only acquires new funds when securities are sold on the ______ market.
A corporation only acquires new funds when securities are sold on the ______ market.
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Secondary markets allow previously issued securities to be ______.
Secondary markets allow previously issued securities to be ______.
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Brokers serve as agents who match buyers with ______ of securities.
Brokers serve as agents who match buyers with ______ of securities.
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Dealers link buyers and sellers by ______ and selling securities at stated prices.
Dealers link buyers and sellers by ______ and selling securities at stated prices.
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Exchanges are where buyers and sellers meet in one ______ location to conduct trades.
Exchanges are where buyers and sellers meet in one ______ location to conduct trades.
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Increases in liquidity make financial instruments more ______.
Increases in liquidity make financial instruments more ______.
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Investment banks underwrite securities, guaranteeing a ______ for the corporation's securities.
Investment banks underwrite securities, guaranteeing a ______ for the corporation's securities.
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A conflict of interest can arise when a person or institution has multiple ______, some of which conflict with each other.
A conflict of interest can arise when a person or institution has multiple ______, some of which conflict with each other.
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Depository institutions primarily receive funds from ______.
Depository institutions primarily receive funds from ______.
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Commercial banks use deposits to provide ______ and consumer loans.
Commercial banks use deposits to provide ______ and consumer loans.
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Saving and loan associations primarily use their deposits for ______.
Saving and loan associations primarily use their deposits for ______.
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Mutual savings banks mainly deal with ______ as their primary liabilities.
Mutual savings banks mainly deal with ______ as their primary liabilities.
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Credit unions primarily provide consumer loans using funds from ______.
Credit unions primarily provide consumer loans using funds from ______.
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Life insurance companies receive premiums from policies to invest in ______ and mortgages.
Life insurance companies receive premiums from policies to invest in ______ and mortgages.
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China's financial liberalization is described as ______ and more restricted.
China's financial liberalization is described as ______ and more restricted.
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Fire and casualty insurance companies mainly deal with premiums from policies and invest in ______ bonds.
Fire and casualty insurance companies mainly deal with premiums from policies and invest in ______ bonds.
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The primary assets of commercial banks include U.S. government securities and ______.
The primary assets of commercial banks include U.S. government securities and ______.
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The Renminbi is pegged to the ______ and is not convertible for capital account transactions.
The Renminbi is pegged to the ______ and is not convertible for capital account transactions.
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The primary liabilities for contractual savings institutions include premiums from ______.
The primary liabilities for contractual savings institutions include premiums from ______.
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The Argentine government faced severe fiscal ______ which affected its economic stability.
The Argentine government faced severe fiscal ______ which affected its economic stability.
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A recession worsened the situation, leading to declining tax revenues and a widening ______ between government expenditures and taxes.
A recession worsened the situation, leading to declining tax revenues and a widening ______ between government expenditures and taxes.
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The deterioration of bank ______ sheets led banks to cut back on their lending.
The deterioration of bank ______ sheets led banks to cut back on their lending.
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The breakdown of negotiations between the central government and provinces led to a ______ on government bonds.
The breakdown of negotiations between the central government and provinces led to a ______ on government bonds.
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During the bank panic, the government imposed a restriction called ______, limiting cash withdrawals.
During the bank panic, the government imposed a restriction called ______, limiting cash withdrawals.
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The government could no longer allow interest rates to remain high to preserve the currency ______.
The government could no longer allow interest rates to remain high to preserve the currency ______.
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Adverse selection and moral hazard problems ______ during the economic decline.
Adverse selection and moral hazard problems ______ during the economic decline.
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China's economic policies after the crisis favored ______ liberalization to maintain control.
China's economic policies after the crisis favored ______ liberalization to maintain control.
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A dramatic rise in both actual and expected ______ is likely to follow.
A dramatic rise in both actual and expected ______ is likely to follow.
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The increase in adverse selection and moral hazard problems then leads to a reduction in ______ and economic activity.
The increase in adverse selection and moral hazard problems then leads to a reduction in ______ and economic activity.
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The collapse in ______ activity and the deterioration of cash flow and firm and household balance sheets means many debtors are no longer able to pay off their debts.
The collapse in ______ activity and the deterioration of cash flow and firm and household balance sheets means many debtors are no longer able to pay off their debts.
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The sharp increase in the value of their foreign-foreign-currency-denominated ______ creates more problems for banks.
The sharp increase in the value of their foreign-foreign-currency-denominated ______ creates more problems for banks.
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Large family-owned conglomerates known as ______ dominated the South Korean economy.
Large family-owned conglomerates known as ______ dominated the South Korean economy.
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The increase in uncertainty and a decrease in net worth resulting from a stock market decline will exacerbate ______ problems.
The increase in uncertainty and a decrease in net worth resulting from a stock market decline will exacerbate ______ problems.
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Speculators pulled out of the South Korean currency, leading to a speculative ______.
Speculators pulled out of the South Korean currency, leading to a speculative ______.
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A 50% decrease in the value of the won increases the value of foreign ______ by 50%.
A 50% decrease in the value of the won increases the value of foreign ______ by 50%.
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The bank pursued ______ monetary policy in line with recommendations from the international Monetary Fund.
The bank pursued ______ monetary policy in line with recommendations from the international Monetary Fund.
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Government responded aggressively to the crisis by implementing a series of financial ______ that helped restore confidence.
Government responded aggressively to the crisis by implementing a series of financial ______ that helped restore confidence.
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Study Notes
Common Stocks
- Dividends are periodic payments to shareholders and are classified as long-term (LT) securities due to no maturity date.
- Shareholders are residual claimants, meaning debt holders must be paid before equity holders.
Primary and Secondary Markets
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Primary Markets:
- New security issues are sold to initial buyers by corporations or government agencies.
- Transactions often occur behind closed doors, lacking public awareness.
- Investment banks underwrite securities, guaranteeing prices and then selling to the public.
- Corporations gain new funds only when securities are sold in this market.
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Secondary Markets:
- Securities that have been previously issued are resold, enhancing liquidity.
- Increased liquidity makes securities more attractive, aiding issuing firms in primary market sales.
- Prices in the secondary market influence the price of new securities issued in the primary market.
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Brokers and Dealers:
- Brokers act as agents matching buyers with sellers.
- Dealers facilitate trade by buying and selling securities at stated prices, crucial for market efficiency.
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Market Structures:
- Exchanges: Centralized locations for buyers and sellers to conduct trades.
- Over-the-Counter Markets (OTC): Trades conducted outside of formal exchanges.
Financial Intermediaries
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Depository Institutions:
- Commercial Banks: Funded by deposits; provide loans and invest in government securities.
- Savings and Loan Associations: Collect deposits and primarily offer mortgages.
- Credit Unions: Non-profit institutions providing consumer loans.
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Contractual Savings Institutions:
- Life Insurance Companies: Funded by policyholder premiums; invest in corporate bonds and mortgages.
- Fire and Casualty Insurance Companies: Invest in municipal and corporate bonds.
Economic Impacts of Financial Crises
- Economic downturns cause banks to face deteriorating cash flows, leading to increased asymmetric information problems.
- Adverse selection and moral hazard often escalate, leading to decreased investment and economic activity.
South Korea Crisis (1997-1998)
- Financial liberalization led to excessive lending and inadequate regulation.
- Chaebols, large family-owned conglomerates, influenced financial markets and banks, often obtaining government support.
- As external debt rose, investor confidence declined, leading to a currency crisis as the South Korean won depreciated by 50%.
- GDP contracted by 6%, contributing to a rise in unemployment and inflation pressures.
Argentine Crisis (2001-2002)
- Severe fiscal imbalances and a recession worsened government budget deficits.
- A breakdown in negotiations over fiscal situations triggered a bank panic.
- The government implemented corralito, restricting cash withdrawals which adversely affected the poor.
- The inability to maintain interest rates led to a currency crisis as foreign capital exited.
Recommendations to Prevent Financial Crises
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Strengthen Banking Regulation:
- Ensure banks hold sufficient capital and adopt prudent risk management practices.
- Ban commercial entities from owning banks to prevent self-serving lending practices.
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Promote Disclosure and Market Discipline:
- Encourage financial institutions to disclose risk and capital positions to assure depositors and investors.
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Limit Currency Mismatch:
- Regulate the issuance of foreign-denominated debt while promoting domestic currency borrowing.
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Sequence Financial Liberalization:
- Implement policies gradually, establishing a solid institutional framework before full liberalization to mitigate potential crises.
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Description
This quiz explores the concepts of common stocks, dividends, and the roles of primary and secondary markets in finance. Understand the implications of being a residual claimant in a corporation and how these factors influence investor decisions. Dive into the basics of securities and their characteristics.
