Financial Intermediaries Quiz
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Questions and Answers

What is the primary role of financial intermediaries in relation to borrower claims?

  • To transform risky long-term loans into risky short-term loans
  • To provide only short-term loans to all borrowers
  • To eliminate all risks associated with lending
  • To transform unacceptable claims on borrowers into acceptable claims for lenders (correct)

Which type of risk do banks assume when they turn short-term deposits into long-term loans?

  • Market risk
  • Interest rate risk
  • Liquidity risk (correct)
  • Operational risk

What kind of payments can be used to clear and settle transactions in the financial system?

  • Only credit and debit card payments
  • Bank notes, cheques, and electronic funds transfers (correct)
  • Only cash payments
  • Only electronic funds transfers

What kind of deposits do banks typically accept from lenders?

<p>Short-term deposits (B)</p> Signup and view all the answers

What is the relationship between lenders and banks regarding credit risk?

<p>Lenders are exposed to the bank’s creditworthiness (D)</p> Signup and view all the answers

What do market makers profit from in the financial markets?

<p>The spread between bid and offer prices (B)</p> Signup and view all the answers

What is the primary role of hedgers in financial markets?

<p>To mitigate the risk of adverse market price movements (D)</p> Signup and view all the answers

How do speculators operate in financial markets?

<p>By taking a position based on their view of the market (A)</p> Signup and view all the answers

What distinguishes arbitrageurs from other market participants?

<p>They exploit inefficiencies in market prices (C)</p> Signup and view all the answers

Which of the following is NOT a type of financial market mentioned?

<p>Regulatory market (D)</p> Signup and view all the answers

In which market are transactions executed for immediate delivery?

<p>Cash market (D)</p> Signup and view all the answers

What distinguishes the commodities market from financial markets?

<p>It involves physical goods rather than financial securities (A)</p> Signup and view all the answers

What types of instruments are traded in the money market?

<p>Short-term debt instruments (A)</p> Signup and view all the answers

Which sectors are typically classified as net users of funds?

<p>Government sector (A), Corporate sector (C)</p> Signup and view all the answers

What type of financial intermediaries move funds between lenders and borrowers?

<p>Banks (A)</p> Signup and view all the answers

Which of the following describes lenders in the financial system?

<p>Providers of savings (A)</p> Signup and view all the answers

In what form can companies choose to borrow funds?

<p>In various currencies including Euro and Yen (C)</p> Signup and view all the answers

Which of the following sectors typically includes non-profit organizations in South Africa?

<p>Household sector (D)</p> Signup and view all the answers

What are the four elements of a financial system?

<p>Lenders, borrowers, financial institutions, and financial instruments (D)</p> Signup and view all the answers

What role do lenders play in the financial system?

<p>Savers who provide funds (B)</p> Signup and view all the answers

Why might a business choose to lend excess funds instead of repaying loans?

<p>To utilize remaining capital efficiently (A)</p> Signup and view all the answers

What typically happens when firms expect continued increasing demand?

<p>Firms invest in capital goods such as machinery and equipment. (A)</p> Signup and view all the answers

What is a likely consequence of increasing investment demand during an economic expansion?

<p>Production reaches a ceiling due to constraints. (A)</p> Signup and view all the answers

During the contraction phase, what effect does increased unemployment have on the economy?

<p>Consumer spending decreases, affecting production. (B)</p> Signup and view all the answers

At the trough of the business cycle, what typically occurs regarding consumer demand?

<p>Consumer demand stabilizes due to essential services. (D)</p> Signup and view all the answers

What is the impact of slack demand for investment funds during economic downturns?

<p>Business investment becomes unprofitable. (D)</p> Signup and view all the answers

What primarily determines the actual exchange rate at any given time?

<p>Supply and demand conditions for the relevant currencies (C)</p> Signup and view all the answers

Which of the following is NOT a source of return when holding assets like stocks or property?

<p>Guaranteed bond interest (A)</p> Signup and view all the answers

What does the term 'holding period return' (HPR) measure?

<p>The total return on an asset over the holding period (B)</p> Signup and view all the answers

When calculating the holding period return for an asset, which factor is NOT considered?

<p>Reinvestment income between cash flows (C)</p> Signup and view all the answers

If a share is bought for R50, pays a dividend of R2.50, and is sold for R55, what is the capital gain?

<p>R5 (C)</p> Signup and view all the answers

What is the effect on the holding period return if a share is sold for a price lower than its purchase price?

<p>The holding period return will be negative (A)</p> Signup and view all the answers

In the context of sovereign debt, what is true within a country's borders?

<p>It pays a risk-free rate with no risk premium (D)</p> Signup and view all the answers

What is the formula for holding period return (HPR) when selling a share?

<p>HPR = (End Price - Begin Price) / Begin Price (B)</p> Signup and view all the answers

What is regarded as the most important factor in determining the level of aggregate demand?

<p>Consumer spending (A)</p> Signup and view all the answers

Which economic objective aims to avoid undue inflation and deflation?

<p>Stable general price level (D)</p> Signup and view all the answers

What term describes the fiscal policy action of lowering tax rates or increasing public expenditure?

<p>Loosening (C)</p> Signup and view all the answers

What occurs when government receipts exceed its payments for goods and services?

<p>Budget surplus (A)</p> Signup and view all the answers

Which entity is responsible for executing fiscal policy in South Africa?

<p>National Treasury (C)</p> Signup and view all the answers

What is the term for reduced taxation and increased government spending?

<p>Expansionary fiscal policy (D)</p> Signup and view all the answers

What is typically associated with contractionary fiscal policy?

<p>Increased taxation (B)</p> Signup and view all the answers

Which of the following is a form of state intervention in the economy?

<p>Monetary policy (B)</p> Signup and view all the answers

Flashcards

Financial Intermediation

The process of channeling funds from savers to borrowers through financial intermediaries like banks and pension funds.

Flow of Funds

Movement of funds from saving sectors to investment sectors, in an economy. This involves using intermediaries like banks.

Lenders

Economic entities that save and provide funds.

Borrowers

Economic entities using savings for investment. They typically have a need for funds.

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Sectors (Economy)

Categories like Household, Business, Government & Foreign involved in lending and borrowing.

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Household Sector

Consists of individuals, families and some small businesses. Typically a net saver.

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Corporate Sector

Non-financial companies that produce and sell goods or services. Typically net borrowers for investment.

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Investment

Spending money on financial assets or tangible assets to get a return/profit.

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Market Makers

Market participants who quote bid and offer prices, profiting from the spread and price changes.

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Hedgers

Participants who use derivatives to reduce risk from unfavorable market price fluctuations.

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Speculators

Investors who aim to profit from market price predictions.

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Arbitrageurs

Participants who exploit price discrepancies across markets to make risk-free profits.

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Cash Market

Market for immediate exchange of assets.

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Derivatives Market

Market for contracts whose value is derived from an underlying asset.

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Primary Market

Market where new securities are issued and sold to investors for the first time.

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Secondary Market

Market for the trading of existing securities among investors.

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Payment Clearance

The process of efficiently settling payments for goods, services, or assets, using methods like bank notes, cheques, debit cards, and credit cards.

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Liquidity Risk

The risk that a financial institution may not be able to meet its short-term obligations due to insufficient liquid assets.

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Credit Risk

The risk that a borrower will not repay a loan.

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Financial Intermediaries

Organizations that transfer funds from savers to borrowers, managing risk in the process.

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Intermediation Role of Banks

Banks transform short-term deposits into long-term loans, managing liquidity and credit risk while connecting lenders and borrowers.

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Investment Cycle

A repeating pattern of economic activity with peaks and troughs, resulting from changes in investment demand.

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Capital Goods

Machinery, factories, and equipment. Firms invest in capital goods during expansion phases.

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Interest Rates in Expansion

Interest rates rise due to increase in demand for investment funds.

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Economic Contraction

A period of declining economic activity. Investment decreases, leading to job losses and lower consumer spending.

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Trough of Business Cycle

The lowest point in a business cycle. characterized by low production and minimum employment.

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Aggregate Demand

Total demand for goods and services in an economy.

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Aggregate Supply

Total supply of goods and services produced in an economy.

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Fiscal Policy

Using government spending and taxes to influence the economy.

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Budget Surplus

Government's income exceeds its spending.

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Budget Deficit

Government's spending exceeds its income.

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Expansionary Fiscal Policy

Increasing government spending or reducing taxes to boost the economy.

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Contractionary Fiscal Policy

Reducing government spending or increasing taxes to cool down an overheating economy.

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Economic Growth

Positive change in the level of economic activity in an economy.

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Sovereign Debt Risk Premium

Within a country, sovereign debt typically doesn't have a risk premium, meaning it often has a risk-free rate.

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Country Risk Premium

When considering sovereign debt from outside a country's borders, a risk premium might be added.

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Inflation Premium

Lenders require a premium to compensate for expected inflation during the investment's lifespan.

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Exchange Rate

The price at which one currency is exchanged for another.

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Holding Period Return (HPR)

The total return on an asset over a certain time period, not accounting for reinvestment of cash flows.

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Capital Appreciation

Gain in the market price of an asset.

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Cash Flow

Income generated by an asset, like dividends from stock or rent from property.

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HPR Calculation

HPR is calculated by adding capital gain (loss) and cash flow, divided by the beginning price of the asset

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Study Notes

Introduction to Financial Markets

  • SAI FM is the South African Institute of Financial Markets
  • The document is an introduction to financial markets
  • The qualification has eight modules
  • The Regulation and Ethics of the South African Financial Markets (compulsory)
  • Introduction to the Financial Markets (compulsory)
  • The Equity Market (elective)
  • The Bond Market (elective)
  • The Derivatives Market (elective)
  • The South African Money Market (elective)
  • The South African Foreign Exchange Market (elective)
  • Agricultural Products Market Dealers Examination (elective)

Table of Contents

  • The financial system (page 8)
  • The economy (page 30)
  • Time value of money (page 58)
  • Introduction to statistical concepts (page 73)
  • The foreign exchange market (page 94)
  • The money market (page 102)
  • The bond and long-term debt market (page 113)
  • The equity market (page 123)
  • The derivatives market (page 137)
  • The commodities market (page 158)
  • Investment Instruments (page 168)
  • Introduction to portfolio theory(page 184)
  • Portfolio Management (page 218)
  • Glossary (page 229)
  • Bibliography (page 234)
  • Appendix A: Formula sheet Introduction to the financial markets (page 236)

Detailed Table of Contents

  • Detailed table of contents with page numbers for each topic
  • Covers financial systems, the economy, time value of money, statistics, foreign exchange, the money market, the bond market, equity market, commodities markets, investment instruments, portfolio theory and portfolio management.

Financial System

  • The financial system is a set of institutions, arrangements, mechanisms and conventions that exist for the issuing and trading of financial instruments.
  • Consists of financial markets, financial intermediaries and other financial institutions
  • Executes the financial decisions of households, firms and governments
  • Channels funds from surplus to deficit economic units
  • Plays an important role in efficient allocation of funds
  • Functions globally, with extensive international communication networks

Flow of Funds and Financial Intermediation

  • Flow of funds reflects movement of funds from capital sources to sectors that use capital to acquire assets.
  • Four major elements: lenders, borrowers, financial institutions, financial instruments and financial markets
  • Household sector, business sector, government, and foreign sector

Financial Intermediaries

  • Expedite flow of funds from lenders to borrowers.
  • Examples are banks, insurance companies, pension & provident funds, and collective investment schemes

Financial Instruments

  • Are promises to pay money in the future for money today.
  • Marketable instruments can be traded in secondary markets, while non-marketable instruments cannot be.

Financial Markets

  • Institutional arrangements for issuing & trading financial instruments.
  • Characteristics of good financial markets: timely & accurate price/volume info, liquidity, price continuity & market depth
  • Participants: lenders, borrowers, intermediaries, brokers, advisors, dealers, hedgers, speculators, and arbitrageurs

Types of Financial Markets

  • Cash and derivative markets (with sub-divisions)
  • Spot and forward markets
  • Primary and secondary markets
  • Financial exchanges and over-the-counter (OTC) markets
  • Interbank markets
  • Focuses on the trading of financial instruments for immediate delivery (cash markets/spot market) and in the future (forward markets).

Equity Market Instruments

  • Equity represents ownership in a business or company.
  • Shareholders own the company through the purchase of shares.
  • Shares are equal portions of the company's capital giving shareholders certain rights, incl. profit sharing, voting rights and right to assets in liquidation.

Money Market

  • Defined as the market for short-term debt instruments.
  • Most common maturity is 3 months.
  • Trading is OTC, with no specific location but takes place in large financial centres.
  • Instruments include bankers' acceptances, commercial paper, negotiable certificates of deposit (NCDs), Treasury bills, and repurchase agreements.
  • Key Participants: Banks, private/public corporations, money market funds, hedge funds, mutual funds, and individuals

Bond Market

  • The bond market is a market for long-term debt instruments.
  • Bonds are fixed-income securities obligating the issuer to repay the principal and interest over a defined period.
  • Principal types: bonds, debentures, and floating-rate notes
  • Participants include governments, corporations, and banks

Additional Topics

  • The text also contains information on various topics including detailed descriptions of different financial instruments, risks involved, and participants in the different financial markets.
  • Includes statistical concepts, like measures of central tendency and dispersion (variance, standard deviation), probability, and expected returns.
  • Includes analyses of the factors influencing price & rate movements in multiple markets

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Introduction to Financial Markets PDF

Description

Test your knowledge on the role of financial intermediaries, particularly banks, in the economy. Explore key concepts like borrower claims, risk management, and the types of deposits they accept. This quiz will enhance your understanding of the financial system and the relationships between lenders and financial institutions.

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