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Questions and Answers
Which of the following is NOT a type of security?
Stocks provide a fixed return through interest payments.
False
What is the primary purpose of trading securities in financial markets?
To address a need or desire, such as saving for retirement.
Bonds represent a claim on _______ future income or assets.
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Match the types of securities with their characteristics:
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Which market is referred to when trading currencies like the US Dollar or Euro?
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Financial markets have no impact on personal wealth.
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Securities can be broadly categorized into four types: Equity Securities, Debt Securities, Derivative Securities, and _______.
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What is one way financial intermediaries reduce transaction costs?
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Financial intermediaries eliminate the risk associated with transactions.
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What is adverse selection in the context of financial transactions?
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After a transaction is established, the borrower may engage in _____ activities due to moral hazard.
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Match the terms with their definitions:
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Which problem is associated with the situation where unhealthy individuals seek insurance for pre-existing conditions?
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Risk sharing allows investors to handle greater risks by acquiring riskier assets.
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How do financial intermediaries provide liquidity to customers?
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What is the primary purpose of an initial public offering (IPO)?
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Equity securities represent a loan made to a company.
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What are the two main types of equity securities?
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The distinction between primary and secondary markets is valid for all __________.
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Which of the following best describes asset transformation?
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Stockholders receive dividends regardless of a company’s earnings.
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Match the following types of markets with their correct descriptions:
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What factors primarily determine the price of a stock in the secondary market?
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Study Notes
Types of Securities
- Stocks do not provide a fixed return through interest payments.
- Bonds represent a claim on future income or assets.
- Securities can be broadly categorized into four types: Equity Securities, Debt Securities, Derivative Securities, and Money Market Instruments.
Financial Markets
- The primary purpose of trading securities in financial markets is to facilitate the flow of funds from savers to borrowers.
- The foreign exchange market is referred to when trading currencies.
- Financial markets significantly impact personal wealth by providing avenues for investment and wealth creation.
- Financial intermediaries reduce transaction costs by providing a platform for buyers and sellers to meet.
- Financial intermediaries do not eliminate risk associated with transactions.
Financial Intermediaries
- Adverse selection in the context of financial transactions occurs when one party in a transaction has more information than the other, leading to an imbalance in the deal.
- After a transaction is established, the borrower may engage in riskier activities due to moral hazard.
Risks and Problems in Markets
- Adverse selection is a problem associated with the situation where unhealthy individuals seek insurance for pre-existing conditions.
- Risk sharing allows investors to handle greater risks by acquiring riskier assets.
Liquidity and Intermediation
- Financial intermediaries provide liquidity to customers by buying and selling assets, connecting buyers and sellers, and facilitating transactions.
- The primary purpose of an initial public offering (IPO) is to raise capital for a company by selling shares to the public.
Equity Securities
- Equity securities represent ownership in a company, not a loan.
- The two main types of equity securities are common stock and preferred stock.
Primary and Secondary Markets
- The distinction between primary and secondary markets is valid for all securities.
- Asset transformation is the process of converting assets into different forms, for example, by a bank taking deposits and using them to make loans.
Stock Prices and Markets
- Supply and demand, company profitability, and investor expectations primarily determine the price of a stock in the secondary market.
- Stockholders do not receive dividends regardless of a company’s earnings.
Market Types
- Money markets trade short-term debt instruments with maturities of less than a year.
- Capital markets trade long-term debt instruments and equity securities.
- Primary markets are where new securities are issued and sold for the first time.
- Secondary markets are where existing securities are bought and sold.
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Description
This quiz covers key concepts in finance related to reducing transaction costs and the implications of asymmetric information in transactions. Explore important topics like financial intermediaries, adverse selection, and moral hazard as you test your understanding of these core principles. Understand how these elements impact the financial landscape and decision-making processes.