Financial Assets and Markets: An Introduction

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Questions and Answers

Within the ambit of financial intermediation, what paramount function do financial assets directly serve in facilitating economic efficiency?

They standardize investment strategies, uniformly promoting specific asset classes irrespective of individual investor risk profiles.
They diminish information asymmetry by inherently providing complete transparency between borrowers and lenders, leading to optimal resource allocation.
They curtail speculative investment, directing capital exclusively towards established, low-risk sectors.
They streamline the reallocation of scarce resources from entities with surplus capital to those with productive investment opportunities, irrespective of geographical or temporal constraints. (correct)

A firm is evaluating a project with uncertain future cash flows. How does the presence of well-developed financial markets most directly improve the capacity of decision-makers to accurately and confidently assess the project's viability?

By providing a comprehensive mechanism for diversifying idiosyncratic risks, allowing the firm to focus exclusively on systematic factors.
By guaranteeing an increase in the firm's asset base, irrespective of the investment's actual performance.
By offering precise, real-time signals regarding discount rates and risk assessments, thereby refining the net present value calculation. (correct)
By eliminating agency costs associated with managerial discretion, ensuring decisions are always aligned with shareholder interests.

In a perfectly informationally efficient market, what is the expected impact on asset prices when previously undisclosed, material information is imminently expected to become public?

The asset price will gradually adjust, linearly reflecting the certainty of the impending information release.
The asset price will exhibit pre-emptive, non-linear adjustments, reflecting probabilistic assessments and risk preferences among investors. (correct)
The asset price will remain unchanged until the precise moment the information is released.
The asset price will instantaneously and fully adjust at the moment the information is released, with no anticipation prior.

What fundamental attribute distinguishes equity from debt instruments in the context of corporate finance?

Equity confers ownership rights and variable claims on residual earnings, whereas debt entails a pre-determined repayment schedule irrespective of the issuer's profitability. (D) Signup and view all the answers

How does the characteristic of divisibility in financial assets most directly influence market accessibility for retail investors?

By lowering the minimum required investment, enabling participation with limited capital. (B) Signup and view all the answers

What is the most accurate description of the significance of bid-ask spread, particularly in contexts of high-frequency trading or arbitrage strategies?

It signifies the profit margin captured by market makers for facilitating immediate transactions, thereby influencing profitability of rapid trading strategies. (B) Signup and view all the answers

Under what circumstances would a sovereign wealth fund's (SWF) investment in a distressed financial institution likely be perceived as a strategic advantage rather than a source of systemic risk?

When the SWF adopts a long-term investment horizon, coupled with governance structures promoting stability and discouraging moral hazard. (B) Signup and view all the answers

What inherent conflict arises from the 'originate-to-distribute' model in asset securitization, and how might this conflict compromise financial system stability?

It incentivizes originators to prioritize volume over credit quality, potentially disseminating toxic assets throughout the financial system while obscuring true risk profiles. (D) Signup and view all the answers

Considering the nuances of financial regulation, which of the following best describes the fundamental trade-off regulators face when designing policies to foster market efficiency and stability?

Balancing the benefits of standardized regulations to foster simplicity and reduce compliance costs with the need for tailored rules that address the unique characteristics of specific markets and institutions. (B) Signup and view all the answers

How do commercial banks simultaneously facilitate funds transfer and the reallocation of scarce resources?

By aggregating deposits from surplus units and channeling these funds, via loans and investments, towards productive uses, thereby optimizing capital allocation and economic activity. (D) Signup and view all the answers

In the context of a repurchase agreement (repo), what mechanism most directly mitigates the lender's credit risk?

The lender taking temporary ownership of the underlying security, providing recourse in case of default. (C) Signup and view all the answers

What nuanced influence does the imposition of restrictions on the types of banking activities commercial banks can undertake most directly have on systemic risk within the financial system?

It can moderate systemic risk by promoting specialization and reducing the likelihood of correlated failures across diverse business lines. (A) Signup and view all the answers

Given the unique operational characteristics of savings banks, what specific impact do their activities most directly have on monetary policy transmission mechanisms?

Savings banks operations dampen the impact of monetary policy due to their focus on long-term saving and limited engagement in credit creation. (C) Signup and view all the answers

In the nuanced landscape of financial institutions, how do credit unions distinguish themselves from commercial banks in terms of their core operational objectives and ownership structure?

Credit unions, being member-owned cooperatives, prioritize serving their members' financial needs over profit, typically operating with a narrower interest rate spread. (C) Signup and view all the answers

What crucial systemic risk arose from the liabilities of Savings and Loan Associations and the assets of the same institutions?

Interest Rate Risk (A) Signup and view all the answers

When considering the investment strategies of insurance companies, what most accurately explains their preference for holding a substantial portion of their assets in long-term, fixed-income securities?

To perfectly match the duration of their assets with the expected payout schedule of their insurance liabilities, ensuring long-term solvency and stability. (D) Signup and view all the answers

Within the framework of non-depository financial institutions, how does a defined contribution pension plan fundamentally differ from a defined benefit plan in terms of risk allocation between the employer and employee?

Defined contribution plans shift investment risk to the employee, as retirement income depends on the plan's performance, whereas defined benefit plans place the risk with the employer, assuring a pre-determined payout. (C) Signup and view all the answers

You observe that the CPF ordinary account as a legislated minimum interest of 2.5% or the 3 month average of major local banks' interest rates (whichever is higher). The special account, Medisave account, retirement account is the (4.00%) or 12-month average yield of 10YSGS + 1 % (whichever is higher). In periods of low interest rates, what is the impact on retirement savings and financial planning strategies?

CPF members may seek strategies to enhance yields, such as topping up their Special and Retirement Accounts to benefit from higher interest rates, while being mindful of withdrawal restrictions. (A) Signup and view all the answers

Examine the strategic role of investment banks in facilitating mergers and acquisitions (M&A). What intrinsic agency conflicts arise when these banks advise both the acquiring and target companies simultaneously, and how are such conflicts typically mitigated?

Investment banks may exploit private information to favor one client over another. They should use ethical walls, enhanced disclosure practices, and secure client consent to mitigate. (B) Signup and view all the answers

You have the opportunity to invest in a closed end fund and another open ended fund. What are the redemption/ liquidity implications?

The open-ended scheme provides greater liquidity and redemption flexibility as shares can be bought and sold at NAV without limit. (B) Signup and view all the answers

Given their unique structure and operational mandates, which of the following best captures the distinctive role hedge funds play within the broader financial ecosystem?

They enhance market efficiency by exploiting arbitrage opportunities and providing liquidity, albeit with potentially elevated risk profiles and regulatory arbitrage. (D) Signup and view all the answers

Considering the multifaceted objectives of sovereign wealth funds (SWFs), how might a nation’s geopolitical priorities most significantly influence the investment decisions made by its SWF?

Bilateral or political relations may indirectly influence sector allocations and investment locations, potentially prioritizing strategic alliances or resource security over pure financial returns. (A) Signup and view all the answers

What mechanisms are employed to validate a financial transaction and ensure governmental oversight in financial markets?

Stamp duty fees. (C) Signup and view all the answers

Within financial instruments, how do financial markets determine which assets must follow a fixed payment schedule?

Debt Instruments. (D) Signup and view all the answers

Many financial products can be termed both 'negotiable' and 'non-negotiable' such as certificates of deposit. Is this a correct statement? Analyze.

Most jumbo CDs are structured to be a negotiable instrument and trading will take place only in the secondary market. (B) Signup and view all the answers

Determine what the difference is if an interested party fails to deposit security funds into exchange for default risk.

If there is a lot of default this can bring down the whole exchange. (A) Signup and view all the answers

Using the context of the 2008 Financial Crisis, explain how can you reconcile the importance of regulation Q, and the S&L Crisis.

The lifting of the deposit rate ceiling (Regulation Q) contributed to the increased risk of loan portfolios during the S&L crisis. (C) Signup and view all the answers

Which of the following statements best defines a 'unit trust'?

Specific collection of assets that are mostly not managed actively. (D) Signup and view all the answers

What are the main differences between Growth Capital and Venture Capital?

Venture capital involves major stakes that are less mature, growth capital involves minor stakes in more major firms. (A) Signup and view all the answers

Explain the effects of the 1933 Glass Steagall Act that were repealed by the November 12, 1999 Gramm Leach Bliley Act.

The 1933 Glass Steagall Act curbed conflict of interest. The Glass Steagall Act is no more. (B) Signup and view all the answers

A regulator has discovered that a major financial institution has become an originator of a sizable number of subprime loans. Which of the following actions would be the most helpful?

Monitoring and Filtering of such customers (C) Signup and view all the answers

The concept of "term to maturity" is often discussed in debt instruments. Which type of product never has such a date?

Both B and C are correct. (D) Signup and view all the answers

Financial assets are an important and powerful tool. However, what may prevent money to getting into the economy's money cycle?

Cash idling at home. (C) Signup and view all the answers

One of the biggest features of assets is that possess a degree of risk. What measurement serves as an indicator of the price risk?

Standard deviation and beta. (B) Signup and view all the answers

Formal financial structures can perform important functions. What is one of them?

Reducing waiting time. (D) Signup and view all the answers

Which of the following is an accurate list of asset classes that are traded in financial markets?

Debt, equity, foreign exchange, and derivatives. (D) Signup and view all the answers

What is one of the characteristics of commercial banks?

Impose restriction to certain types of banking activities. (A) Signup and view all the answers

There are different types of Singapore banks such as retail and wholesale. Which would you prefer to have if you have zero savings?

None of the above (D) Signup and view all the answers

The amount payable at retirement is not guaranteed. Which plan involves that? Defined benefit or defined contribution?

Defined contribution. (A) Signup and view all the answers

The Central Provident Fund in the nation of Singapore has both an ordinary and other accounts. For the accounts that are 'other', what are the interest rates?

4.0% (B) Signup and view all the answers

Non-depository institutions have different varieties. From the choices below, select what is the closest equivalent to 'equity investments'.

LBOs (Leveraged Buyouts). (A) Signup and view all the answers

Explain the strategy and approach of a hedge fund in relation to other investment vehicles.

Will maintain significant profits while other funds go down with the market. (D) Signup and view all the answers

Flashcards

What is Finance?

Moving funds from those who have more than they need to those who need them.

What is an Asset?

Any possession that has value in an exchange.