Financial Markets and Direct Finance
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Questions and Answers

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?

    <p>Through either direct finance or indirect finance</p> Signup and view all the answers

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

    <p>Debt vs. Equity Markets</p> Signup and view all the answers

    How can a firm obtain funds in a financial market?

    <p>By issuing securities in financial markets</p> Signup and view all the answers

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

    <p>It is considered intermediate-term</p> Signup and view all the answers

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

    <p>Money market</p> Signup and view all the answers

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

    <p>Guaranteeing a price for a corporation's securities</p> Signup and view all the answers

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

    <p>Reduce asymmetric information, adverse selection, and moral hazard problems</p> Signup and view all the answers

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

    <p>Short-term securities</p> Signup and view all the answers

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

    <p>Capital market</p> 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?

    <p>Debt instrument</p> Signup and view all the answers

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

    <p>Guaranteeing a price for a corporation's securities</p> 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?

    <p>Primary market</p> Signup and view all the answers

    What is the nominal interest rate?

    <p>The interest rate not adjusted for inflation</p> 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?

    <p>$i = ir + ext{πe}$</p> Signup and view all the answers

    What does the real interest rate reflect?

    <p>The cost of borrowing without inflation adjustment</p> Signup and view all the answers

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

    <p>To assess the current value of future cash flows</p> Signup and view all the answers

    In finance, what does a debt instrument involve?

    <p>Repaying the lender with additional payment for interest</p> Signup and view all the answers

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

    <p>Different streams of cash payments with different timing</p> Signup and view all the answers

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

    <p>FV = PV (1+i)</p> Signup and view all the answers

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

    <p>Calculating the present value of dollars received in the future</p> Signup and view all the answers

    What is the nominal interest rate?

    <p>The interest rate not adjusted for inflation</p> Signup and view all the answers

    What is the Fisher equation used to calculate?

    <p>The nominal interest rate</p> Signup and view all the answers

    What is the primary function of financial intermediaries?

    <p>To facilitate the flow of funds between investors and firms</p> Signup and view all the answers

    What does the real interest rate reflect?

    <p>The true cost of borrowing adjusted for inflation</p> Signup and view all the answers

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

    <p>Capital market</p> Signup and view all the answers

    What is the cost of borrowing money known as?

    <p>Interest rate</p> Signup and view all the answers

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

    <p>Values of different instruments in financial markets</p> Signup and view all the answers

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

    <p>Real interest rate plus expected inflation rate</p> Signup and view all the answers

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