Financial Market Environment Chapter 2

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary focus of the Securities Act of 1933?

Regulating the sale of securities in the primary market (correct)

Enforcing federal tax regulations

Regulating transactions in the secondary market

Creating the Securities and Exchange Commission

Which of the following acts created the Securities and Exchange Commission?

Securities Exchange Act of 1934 (correct)

Corporate Income Tax Act of 1933

Investment Company Act of 1940

Securities Act of 1933

What is the average corporate tax rate that corporations might pay?

30 to 50 percent

40 to 60 percent

5 to 10 percent

15 to 35 percent (correct)

How is a capital gain defined in the context of corporate income?

Profit made when an asset is sold for more than its initial purchase price Signup and view all the answers

What is one way that corporations can reduce their taxable income?

Claiming dividend income exclusions Signup and view all the answers

What is the primary market primarily known for?

Issuing new securities Signup and view all the answers

Which of the following is NOT a characteristic of bonds?

Equity instrument Signup and view all the answers

Which of these is considered a money market security?

U.S. Treasury bills Signup and view all the answers

What distinguishes preferred stock from common stock?

It has a higher claim on assets Signup and view all the answers

In financial markets, secondary markets deal primarily with which type of securities?

Preowned securities Signup and view all the answers

What type of payment do stocks provide to investors?

Capital gains Signup and view all the answers

Which characteristic is true of the money market?

Deals with short-term funds Signup and view all the answers

Which of the following types of securities typically does NOT have a maturity date?

Preferred stock Signup and view all the answers

What is the primary role of financial institutions?

To channel savings into loans or investments. Signup and view all the answers

Which of the following is NOT a major financial institution?

Stock exchanges Signup and view all the answers

How do individuals generally interact with financial institutions?

They maintain savings accounts without borrowing. Signup and view all the answers

What distinguishes capital markets from money markets?

Money markets focus on short-term securities, whereas capital markets deal with long-term securities. Signup and view all the answers

In what scenario would a private placement occur?

When a new security is sold directly to a single investor or group of investors. Signup and view all the answers

Which factor primarily differentiates financial markets from financial institutions?

Financial institutions channel funds, while markets provide a platform for fund transactions. Signup and view all the answers

What was one major consequence of the 2008 financial crisis?

Widespread lending practices to high-risk borrowers. Signup and view all the answers

Which of the following does not reflect the key customers of financial institutions?

Businesses as net suppliers of funds. Signup and view all the answers

What is the primary role of financial institutions in managerial finance?

To connect net suppliers of funds with net demanders. Signup and view all the answers

Which of the following correctly distinguishes financial institutions from financial markets?

Financial institutions collect savings to lend to borrowers. Signup and view all the answers

What characterizes the money market in contrast to the capital market?

The money market involves short-term deposits and borrowing. Signup and view all the answers

What major event contributed to the severity of the 2008 financial crisis?

Lowered lending standards by financial institutions. Signup and view all the answers

Which act was designed to protect depositors by separating commercial and investment banking?

The Glass-Steagall Act Signup and view all the answers

What was a significant outcome of the Gramm-Leach-Bliley Act?

Essentially repealed parts of Glass-Steagall regarding banking separation. Signup and view all the answers

Which of the following best describes the role of financial markets?

They facilitate direct transactions between savers and borrowers. Signup and view all the answers

What is one of the main functions of financial institutions?

To channel savings into loans and investments. Signup and view all the answers

Study Notes

Chapter 2: The Financial Market Environment

Learning Goals (LG1-LG6): The chapter outlines key learning objectives, including understanding financial institutions' role, contrasting financial institutions and markets, and describing capital and money markets. It also delves into the 2008 financial crisis, regulatory bodies, and the importance of business taxes in financial decisions.

Financial Institutions and Markets

External Funding Sources: Firms obtain external funds through financial institutions, financial markets, and private placements.

Financial Institutions

Intermediaries: These institutions channel savings from individuals, businesses, and governments into loans or investments.
Major Institutions: Commercial banks, savings and loans, credit unions, savings banks, insurance companies, mutual funds, and pension funds are examples of key financial institutions.
Key Customers: Individuals, businesses, and governments are the primary customers of financial institutions.
Net Suppliers/Demanders: Generally, individuals are net suppliers of funds (saving more than borrowing), while businesses and governments are net demanders (borrowing more than saving).

Financial Markets

Market Forums: Financial markets provide a platform for suppliers and demanders of funds to conduct transactions directly.
Money vs. Capital Markets: Money markets handle short-term marketable securities, while capital markets deal with long-term securities.
Private Placement: A private placement involves the sale of a new security directly to investors.
Public Offering: Typically, firms raise capital through public offerings of securities, which means selling bonds or stocks to the general public.

Primary vs. Secondary Markets

Primary Market: The initial sale of new securities takes place in the primary market (where the issuer participates).
Secondary Market: Securities are traded in secondary markets. These are transactions between buyers and sellers of securities that are not newly issued.

The Money Market

Short-Term Funds: The money market facilitates the exchange of short-term funds between suppliers and demanders.
Marketable Securities: Common money market instruments include U.S. Treasury bills, commercial paper, and negotiable certificates of deposit (CDs).

The Capital Market

Long-Term Funds: The capital market facilitates long-term financing transactions.
Key Securities: Bonds (long-term debt) and common and preferred stock (equity) are crucial capital market securities.
Bonds: Long-term debt instruments, mainly used by corporations and governments to raise capital from investors.
Stocks (Common Stock): Represent ownership interest in a corporation.
Stocks (Preferred Stock): A type of stock with preferential features to common stock but typically without voting rights.

Stocks vs. Bonds

Stocks: Equity instruments that pay dividends and potentially capital gains. Stocks do not have a maturity date.
Bonds: Debt instruments that pay interest payments. Bonds have a maturity date.

Review of Learning Goals

LG1: Financial institutions facilitate the flow of funds between savers and borrowers.
LG2: Institutions collect savings and channel them to borrowers; markets provide a platform for direct transactions between savers and borrowers.
LG3: Contrast between short-term money market transactions and long-term capital market transactions.
LG4: The 2008 financial crisis arose from lowered lending standards, heavy investment in mortgage-backed securities, and subsequent declines in asset values, causing banks to fail and credit flow to be restricted.
LG5: The Glass-Steagall Act separated commercial and investment banks to control risk; the Gramm-Leach-Bliley Act partially repealed this separation. Regulation of financial institutions continues to be a key issue.
LG6: Corporate income taxes impact financial decisions; corporations pay taxes on ordinary income and capital gains. Specific tax provisions, including deductions and exclusions, can affect corporate tax burden.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers Chapter 2 of the Financial Market Environment, focusing on the roles of financial institutions and the differences between financial institutions and markets. Additionally, it explores external funding sources, capital and money markets, and the impacts of the 2008 financial crisis on regulatory practices. Prepare to test your understanding of these essential concepts.