Finance Unit 1 - Introduction to Financial Markets

Questions and Answers

Who are the main borrowers within the financial system?

Banks

Households

Insurance companies

Government and companies (correct)

What is a major benefit of pooled investment products?

They eliminate all forms of investment risk.

They allow for diversified investments reducing risk exposure. (correct)

They simplify the process of investing individually.

They guarantee high returns.

What role do banks play in the payment and settlement services?

They act as insurance companies.

They create laws governing financial transactions.

They solely manage savings accounts.

They are the main providers of payment systems. (correct)

How do derivatives assist investors?

They help manage risk exposures. Signup and view all the answers

In the context of managing wealth, what does portfolio management offer to investors?

Specialist advice and investment management services. Signup and view all the answers

What is a characteristic of insurance in risk management?

It requires a premium in exchange for risk transfer. Signup and view all the answers

What is the primary role of financial intermediation?

To facilitate the transfer of funds from savers to borrowers Signup and view all the answers

Which of the following is NOT considered a financial intermediary?

Stock exchanges Signup and view all the answers

What is one of the benefits of financial intermediation?

Reduces information costs Signup and view all the answers

How do financial intermediaries typically raise capital?

Using securities markets Signup and view all the answers

Who are the typical surplus agents in financial intermediation?

Households Signup and view all the answers

Which of the following best describes deficit agents?

Firms and governments seeking funds Signup and view all the answers

What is one way financial intermediation benefits savers?

By allowing them to access a range of investing options Signup and view all the answers

Which statement about financial intermediaries is false?

They only serve large corporations. Signup and view all the answers

Study Notes

Introduction to Financial Markets

The Financial Services Industry supports the economy through four primary functions.

Financial Intermediation

Transfers funds from savers (surplus agents) to borrowers (deficit agents).
Financial intermediaries act as middlemen in financial transactions.
Surplus agents typically include households, while deficit agents mainly consist of firms and governments.
Types of financial intermediaries include:
- Banks (e.g., commercial banks)
- Credit institutions
- Building societies
- Insurance companies
- Pension funds
- Other investment vehicles like Open-ended Investment Companies (OEICs) and unit trusts.
Benefits of financial intermediation involve:
- Reduction of transaction costs.
- Decrease in information costs.
Financial intermediaries facilitate services that convert savers into investors by providing crucial information.
Banks and credit institutions serve as key funding sources.
They connect savers with borrowers, enhancing the finance flow in the economy.
Main lenders are households, while governments and corporations are the primary borrowers.

Pooling and Managing Risk

Pooled funds combine money from multiple investors for effective risk management.
Pooled investment products enable diversification, reducing individual risk exposure.
Insurance transfers individual risk to insurance companies in exchange for premiums.
Derivatives serve as tools for investors to manage risk exposure efficiently.

Payment and Settlement Services

Financial assets can be managed, transmitted, and received through established systems.
Banks primarily provide payment systems for money exchange and debt settlement.
Clearing houses offer settlement services to ensure transactions between buyers and sellers of securities are completed.

Portfolio Management

Portfolio management enables investors to oversee their wealth effectively.
Provides access to markets alongside specialist advice and investment management services.

Description

This quiz explores the foundations of financial markets, focusing on the financial services industry's role in the economy. It covers key concepts like financial intermediation and its functions. Prepare to test your knowledge on how funds transfer between savers and borrowers.