Financial Markets and Institutions: Chapter 2 Quiz
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Questions and Answers

What is the process called when a business sells its stocks or bonds directly to savers, without going through any type of financial institution?

  • Financial intermediation
  • Direct transfers (correct)
  • Investment banking
  • Primary market facilitation

Which entity acts as an 'underwriter' and facilitates the issuance of securities in the primary market?

  • Savers
  • Investment banks (correct)
  • Insurance companies
  • Banks

When a corporation receives the sales proceeds after new securities are involved, the transaction is called a:

  • Direct transfer transaction
  • Financial intermediation transaction
  • Pass through transaction (correct)
  • Secondary market transaction

Which type of financial institution obtains funds from savers in exchange for its securities?

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

In which type of transaction does an investment bank buy and hold the securities for a period of time, taking a risk?

<p>Primary market transaction (C)</p> Signup and view all the answers

What is the primary method used by small firms for transferring capital between savers and borrowers?

<p>Direct transfers (B)</p> Signup and view all the answers

In the capital allocation process, who are the key suppliers of funds?

<p>Individuals and institutions with excess funds (A)</p> Signup and view all the answers

What is a financial market?

<p>A place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds (B)</p> Signup and view all the answers

What types of assets are dealt with in Financial Asset Markets?

<p>Stocks, bonds, notes, mortgages, and derivative securities (C)</p> Signup and view all the answers

Who are the demanders or users of capital in the capital allocation process?

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

What do individuals and institutions with 'excess funds' look for?

<p>A rate of return on their investment (A)</p> Signup and view all the answers

What distinguishes Physical Asset Markets from Financial Asset Markets?

<p>'Tangible' or 'Real' nature of assets in Physical Asset Markets (D)</p> Signup and view all the answers

In general, are individuals net suppliers or net demanders of funds?

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

What do businesses and governments represent in the capital allocation process?

<p>'Net demanders' (B)</p> Signup and view all the answers

What is the primary function of a financial market?

<p>To bring together individuals wanting to borrow funds with those having a surplus of funds (C)</p> Signup and view all the answers

What types of assets are dealt with in Physical Asset Markets?

<p>Goods such as wheat, autos, real estate, computers, and machinery (D)</p> Signup and view all the answers

Flashcards

Direct Security Issuance

Businesses sell stocks/bonds directly to investors, skipping financial institutions.

Underwriter Role

Investment bank facilitates security issuance in the primary market.

Primary Market Transaction

Corporation receives funds for new securities; part of initial sale.

Financial Institution Funding

Mutual funds/unit trusts get funds from investors in exchange for securities.

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Risk-taking Investment Banks

Banks buy and hold new securities, taking on risk.

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Small Firm Capital Transfer

Primary market is main way small firms get capital.

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Capital Allocation

Process of transferring funds from savers to borrowers.

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Financial Markets

Platforms for transferring capital between savers and borrowers.

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Financial Asset Markets

Deals with intangible assets (stocks, bonds, and derivatives).

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Demanders of Capital

Businesses and governments who need funds.

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Investment Objectives

Investors seek returns, liquidity, and risk management.

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Physical vs Financial Asset Markets

Physical markets deal with tangible, financial with intangible assets.

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Net Suppliers/Demanders of Funds

Individuals are usually suppliers (savers). Businesses/gov't are demanders.

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Primary Function of Financial Markets

Facilitating the transfer of capital between savers and borrowers.

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Physical Asset Markets

Markets dealing with tangible assets (commodities, real estate, etc).

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Study Notes

Direct Security Issuance

  • When a business sells its stocks or bonds directly to savers, without going through any financial institution, it's called direct security issuance.

Underwriter Role

  • In the primary market, an investment bank acts as an 'underwriter' and facilitates the issuance of securities.

Primary Market Transaction

  • When a corporation receives the sales proceeds after new securities are involved, the transaction is called a primary market transaction.

Financial Institution Funding

  • Mutual funds and unit trusts are types of financial institutions that obtain funds from savers in exchange for their securities.

Risk-taking Investment Banks

  • In a primary market transaction, an investment bank buys and holds the securities for a period of time, taking a risk.

Small Firm Capital Transfer

  • The primary method used by small firms for transferring capital between savers and borrowers is the primary market.

Capital Allocation

  • Households and governments are the key suppliers of funds in the capital allocation process.

Financial Markets

  • A financial market is a platform that enables the transfer of capital between savers and borrowers.

Financial Asset Markets

  • Financial Asset Markets deal with intangible assets such as stocks, bonds, and derivatives.

Demanders of Capital

  • Businesses and governments represent the demanders or users of capital in the capital allocation process.

Investment Objectives

  • Individuals and institutions with 'excess funds' look for returns, liquidity, and risk management.

Physical vs. Financial Asset Markets

  • Physical Asset Markets deal with tangible assets such as commodities, real estate, and goods, distinguishing them from Financial Asset Markets.

Net Suppliers/Demanders of Funds

  • In general, individuals are net suppliers of funds, while businesses and governments are net demanders of funds.

Capital Allocation Process

  • Businesses and governments represent the demanders or users of capital in the capital allocation process.

Primary Function of Financial Markets

  • The primary function of a financial market is to facilitate the transfer of capital between savers and borrowers.

Physical Asset Markets

  • Physical Asset Markets deal with tangible assets such as commodities, real estate, and goods.

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Test your understanding of the capital allocation process, financial markets, financial institutions, stock markets and returns, and stock market efficiency as covered in Chapter 2 of Financial Markets and Institutions.

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