30 Questions
What is the primary financial goal of a firm?
To maximize shareholders' wealth or value
Explain the importance of financial markets for financial managers.
Financial managers should make sound decisions keeping in mind how financial markets work and operate.
Describe the capital allocation process in an efficient economy.
Capital flows efficiently from those with excess capital to those who need it.
What are direct transfers in the capital allocation process?
When a business sells its sticks or bonds directly to savers.
Explain indirect transfers through an investment bank.
An underwriter facilitates the issuance of securities from a business to savers.
What risk do investment banks face in indirect transfers?
The risk that they may not be able to resell the securities to savers.
What is the main role of firms in financial markets?
To fund their operations, planned expansion, and other business-related necessities.
What is the key role of investors in financial markets?
To allocate their savings to productive investment opportunities.
What is the primary responsibility of the government in financial markets?
To ensure market integrity, protect investors, and ensure prices reflect fair value.
What is the relationship between firms and financial institutions in terms of funds?
Firms are net demanders of funds, borrowing more money than they save.
What is the financial behavior of individuals in terms of savings and borrowing?
Individuals save more money than they borrow.
How do governments indirectly borrow funds from financial institutions?
By selling their debt securities to various institutions.
What role do financial markets play in making the economy more efficient?
Financial markets move prices towards a uniform level, making the entire economy more efficient.
How do financial markets help firms raise capital?
Financial markets provide firms with the opportunity to issue shares, bonds, and other financial instruments to raise capital.
Explain how financial markets support commercial transactions.
Financial markets provide working capital and assist in arranging payments for commercial transactions.
What is the purpose of stock, bond, and money markets?
These markets provide opportunities to earn returns on funds not needed immediately and accumulate assets for future income.
How do derivatives contracts help in risk management?
Derivatives contracts, like futures and options, provide protection against various risks and help in attaching a price to risk.
In what way do financial markets help individuals in making purchases like homes or cars?
Financial markets provide capital for individuals to make credit-card purchases, buy homes, or cars.
What are physical asset markets also known as?
Tangible or real asset markets
Define future markets.
Markets in which participants agree today to buy or sell an asset at some future date.
Explain money markets.
Markets for short-term highly liquid debt securities.
What are capital markets?
Markets for intermediate or long-term debt and corporate stocks.
Differentiate between primary markets and secondary markets.
Primary markets are where corporations raise new capital, while secondary markets involve trading existing securities.
What is the purpose of international capital markets?
To facilitate global trading of debt and equity securities.
What type of financial institution serves a variety of services to savers and borrowers, including checking services that significantly influence the money supply?
Commercial banks
Which large conglomerate combines many different financial institutions within a single corporation, such as Citibank, an investment bank, and insurance companies?
Financial services corporations
What type of cooperative associations provide funds to borrowers and are often the cheapest source of funds available?
Credit unions
What are retirement plans funded by corporations or government agencies for the benefit of their employees?
Pension funds
Which financial institutions take savings from clients' annual premiums and invest these funds in various assets to make payments to beneficiaries?
Life insurance companies
What type of corporations accept money from individual or corporate savers and then use these funds to buy stocks, bonds, or debt instruments?
Mutual funds
Test your knowledge on how financial markets help firms raise capital for various activities like building new facilities, replacing machinery, and expanding businesses. Learn about how shares, bonds, and other financial instruments facilitate capital raising for individuals as well.
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