Financial Markets and Direct Finance

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What is the function of financial markets?

To save surplus funds

To channel funds from borrowers to lenders

To channel funds from savers to those with a shortage of funds (correct)

To issue securities to individuals and firms

In direct finance, how do borrowers obtain funds from lenders?

By selling their future income or assets

By obtaining loans from financial intermediaries

By issuing securities in financial markets (correct)

By transferring funds through money markets

What is the nature of securities for the person who buys them?

Liabilities

Equity

Debts

Assets (correct)

How is finance carried out in the financial markets?

Through either direct finance or indirect finance Signup and view all the answers

What are the two classifications of financial markets mentioned in the text?

Debt vs. Equity Markets Signup and view all the answers

How can a firm obtain funds in a financial market?

By issuing securities in financial markets Signup and view all the answers

What is the defining characteristic of a debt instrument with a maturity between one and ten years?

It is considered intermediate-term Signup and view all the answers

In which market are only short-term debt instruments traded?

Money market Signup and view all the answers

What is the function of an investment bank in the primary market?

Guaranteeing a price for a corporation's securities Signup and view all the answers

What is the primary function of financial intermediaries as mentioned in the text?

Reduce asymmetric information, adverse selection, and moral hazard problems Signup and view all the answers

What type of securities are typically more liquid and less prone to price fluctuations?

Short-term securities Signup and view all the answers

In which market are longer-term debt and equity instruments traded?

Capital market Signup and view all the answers

What is a contractual agreement by the borrower to pay the holder fixed money amounts at regular intervals until a specified date called?

Debt instrument Signup and view all the answers

What is the primary function of an investment bank in the primary market?

Guaranteeing a price for a corporation's securities Signup and view all the answers

Which financial market has the characteristic that it is not well known to the public because initial sales occur behind closed doors?

Primary market Signup and view all the answers

What is the nominal interest rate?

The interest rate not adjusted for inflation Signup and view all the answers

According to the Fisher equation, how is the nominal interest rate related to the real interest rate and the expected rate of inflation?

$i = ir + ext{πe}$ Signup and view all the answers

What does the real interest rate reflect?

The cost of borrowing without inflation adjustment Signup and view all the answers

What is the primary function of the present value in finance?

To assess the current value of future cash flows Signup and view all the answers

In finance, what does a debt instrument involve?

Repaying the lender with additional payment for interest Signup and view all the answers

What do debt instruments have that makes them different from each other?

Different streams of cash payments with different timing Signup and view all the answers

What is the formula for calculating the future value of a loan after one year?

FV = PV (1+i) Signup and view all the answers

What does the term 'discounting the future' refer to?

Calculating the present value of dollars received in the future Signup and view all the answers

What is the nominal interest rate?

The interest rate not adjusted for inflation Signup and view all the answers

What is the Fisher equation used to calculate?

The nominal interest rate Signup and view all the answers

What is the primary function of financial intermediaries?

To facilitate the flow of funds between investors and firms Signup and view all the answers

What does the real interest rate reflect?

The true cost of borrowing adjusted for inflation Signup and view all the answers

Which market are longer-term debt and equity instruments typically traded in?

Capital market Signup and view all the answers

What is the cost of borrowing money known as?

Interest rate Signup and view all the answers

What does 'discounting the future' allow us to compare?

Values of different instruments in financial markets Signup and view all the answers

What does the nominal interest rate equal according to the Fisher equation?

Real interest rate plus expected inflation rate Signup and view all the answers

Financial Markets and Direct Finance

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Questions and Answers

What is the function of financial markets?

In direct finance, how do borrowers obtain funds from lenders?

What is the nature of securities for the person who buys them?

How is finance carried out in the financial markets?

What are the two classifications of financial markets mentioned in the text?

How can a firm obtain funds in a financial market?

What is the defining characteristic of a debt instrument with a maturity between one and ten years?

In which market are only short-term debt instruments traded?

What is the function of an investment bank in the primary market?

What is the primary function of financial intermediaries as mentioned in the text?

What type of securities are typically more liquid and less prone to price fluctuations?

In which market are longer-term debt and equity instruments traded?

What is a contractual agreement by the borrower to pay the holder fixed money amounts at regular intervals until a specified date called?

What is the primary function of an investment bank in the primary market?

Which financial market has the characteristic that it is not well known to the public because initial sales occur behind closed doors?

What is the nominal interest rate?

According to the Fisher equation, how is the nominal interest rate related to the real interest rate and the expected rate of inflation?

What does the real interest rate reflect?

What is the primary function of the present value in finance?

In finance, what does a debt instrument involve?

What do debt instruments have that makes them different from each other?

What is the formula for calculating the future value of a loan after one year?

What does the term 'discounting the future' refer to?

What is the nominal interest rate?

What is the Fisher equation used to calculate?

What is the primary function of financial intermediaries?

What does the real interest rate reflect?

Which market are longer-term debt and equity instruments typically traded in?

What is the cost of borrowing money known as?

What does 'discounting the future' allow us to compare?

What does the nominal interest rate equal according to the Fisher equation?

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