Financial Markets and Institutions
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Questions and Answers

Which of the following is NOT a type of private banking institution?

  • Rural Banks
  • Government Banks (correct)
  • Thrift Banks
  • Commercial Banks

What is typically the biggest monthly expense for most people when buying a house?

  • Mortgage payment (correct)
  • Homeowners insurance
  • Property taxes
  • Utilities

Which institution provides retirement income and medical care?

  • Social Security System (correct)
  • Thrift Banks
  • Private Development Banks
  • Investment Banks

For what purpose do mortgage brokers primarily serve?

<p>To access funds for mortgages (B)</p> Signup and view all the answers

Which of the following categories falls under Non-bank Financial Institutions?

<p>Pawnshops (A)</p> Signup and view all the answers

Which of the following is NOT considered a money market instrument?

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

What is one essential characteristic of a well-run financial market?

<p>Accurate and widely available information (D)</p> Signup and view all the answers

Which type of capital market instrument does not represent a claim on a business's profits?

<p>Corporate bonds (C)</p> Signup and view all the answers

Which of the following roles do financial institutions primarily play in the market?

<p>Reducing transaction costs (B)</p> Signup and view all the answers

Which type of derivative instrument involves an agreement to buy or sell an asset at a predetermined price at a future date?

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

What aspect of financial markets does government enforcement of rules primarily enhance?

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

Which is a common feature of banker’s acceptance?

<p>Represents a promise by the bank to pay a debt (B)</p> Signup and view all the answers

What does the process of screening and monitoring borrowers aim to reduce?

<p>Asymmetries in information (D)</p> Signup and view all the answers

What is the primary difference between direct and indirect finance?

<p>Direct finance occurs through market securities, whereas indirect finance uses institutions. (B)</p> Signup and view all the answers

What role do financial instruments play in the economy?

<p>They serve as a written legal obligation for transferring value. (A)</p> Signup and view all the answers

Which of the following does NOT describe a function of financial instruments?

<p>Providing collateral for loans. (D)</p> Signup and view all the answers

What is a key characteristic of financial instruments that makes them enforceable?

<p>They must specify conditions for payment at a future date. (A)</p> Signup and view all the answers

How does financial development relate to economic growth?

<p>It aids in the efficient flow of resources for production and consumption. (A)</p> Signup and view all the answers

What are financial markets primarily used for?

<p>Facilitating the trading of financial instruments. (A)</p> Signup and view all the answers

What defines an asset in financial terminology?

<p>Something of value that you own. (B)</p> Signup and view all the answers

What is a common use of financial instruments in the workplace?

<p>Employees take stock options as a form of payment. (B)</p> Signup and view all the answers

What is the primary purpose of financial markets?

<p>To enable the trade of financial instruments (B)</p> Signup and view all the answers

Which of the following is NOT a feature of financial markets?

<p>They only operate in primary markets (D)</p> Signup and view all the answers

How do financial markets enhance economic efficiency?

<p>By allocating productive resources efficiently (A)</p> Signup and view all the answers

What characterizes primary markets?

<p>Where new financial instruments are sold for the first time (A)</p> Signup and view all the answers

What is the function of risk sharing in financial markets?

<p>To provide individuals a platform to buy and sell risk (C)</p> Signup and view all the answers

What is the key role of liquidity in financial markets?

<p>To facilitate the easy transfer of ownership of financial instruments (C)</p> Signup and view all the answers

What does the maturity date of a debt instrument signify?

<p>The last payment date of principal and interest (B)</p> Signup and view all the answers

Which of the following is a consequence of financial markets improving economic welfare?

<p>They allow consumers to time their purchases better. (C)</p> Signup and view all the answers

Which of the following describes shadow banks?

<p>They provide banking services without accepting deposits. (A)</p> Signup and view all the answers

What is a primary characteristic of depository institutions?

<p>They accept deposits and make loans. (A)</p> Signup and view all the answers

What role do finance companies typically fulfill?

<p>They specialize in making loans to individuals and firms. (D)</p> Signup and view all the answers

How do pension funds function?

<p>They invest contributions to provide payments to retirees. (C)</p> Signup and view all the answers

What is a key feature of securities firms?

<p>They trade stocks and bonds and provide investment advice. (B)</p> Signup and view all the answers

What characteristics define government-sponsored enterprises?

<p>They provide loans for farmers and homebuyers. (B)</p> Signup and view all the answers

What effect did the relaxation of rules for traditional banks have on the financial system?

<p>It allowed for greater leverage and risk in the system. (C)</p> Signup and view all the answers

Which statement correctly describes the investment behavior of hedge funds?

<p>They focus on investments for small groups of wealthy investors. (A)</p> Signup and view all the answers

Flashcards

Financial System

The system that enables the design, sale, and exchange of financial contracts.

Direct Finance

Borrowers sell securities directly to lenders.

Indirect Finance

Loans are facilitated by intermediaries (like banks).

Financial Instruments

Legal obligations to pay a specific amount in the future.

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Financial Markets

Platforms for buying and selling financial instruments.

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Resource Allocation

How resources (money) are distributed in the economy.

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Liquidity

Ease of buying and selling financial instruments.

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Primary Market

Market for new financial instruments.

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Secondary Market

Market for trading existing financial instruments.

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Debt Instruments

Require payment of interest and principal.

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Maturity Date

The date when debt must be repaid.

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Capital Market

Market for long-term financing.

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Stocks

Ownership shares in a company.

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Mortgages

Loans to buy property.

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Bonds

Debt securities.

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Financial Intermediaries

Connect savers with borrowers.

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Transaction Costs

Fees and expenses involved in financial transactions.

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Information Asymmetries

Differences in information between parties.

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Depository Institution

Accepts deposits and makes loans.

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Non-depository Institution

Institutions that don't accept deposits.

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Commercial Banks

Offer various financial services.

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Investment Banks

Help companies raise capital.

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Risk Management

Protecting against losses.

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Insurance

Protection against financial losses.

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Study Notes

Introduction to Financial Systems

  • The international financial system enables design, sale, and exchange of contracts with specific characteristics.
  • Financing comes from markets (direct) and institutions (indirect).
  • Indirect finance involves intermediaries like banks that facilitate loans, while direct finance involves borrowers selling securities directly to lenders.

Financial Instruments

  • Financial instruments are legal obligations for one party to pay another party a specified amount under defined conditions in the future.
  • They function as a means of payment and stores of value, similar to money.
  • Essential for risk management; insurance against disability is vital for protecting earning capacity.

Financial Markets

  • Financial markets are platforms for buying and selling financial instruments, acting as the economy's central nervous system.
  • They ensure resource allocation, enhance economic efficiency, and lower transaction costs.

Roles of Financial Markets

  • Provide liquidity, enabling easy buying and selling of instruments.
  • Aggregate and share information about issuers, aiding in informed decision-making.
  • Facilitate risk-sharing, allowing individuals to hedge against uncertainties.

Structure of Financial Markets

  • Primary markets sell new financial instruments; secondary markets deal with reselling/trading instruments.
  • Markets can be classified by trading methods: centralized exchanges or over-the-counter markets.
  • Instrument types categorize markets as stores of value or risk transfer mechanisms.

Functions of Financial Markets

  • Allow for fund transfers from those without investment opportunities to those with them.
  • Improve economic welfare by enabling better timing of consumer purchases.

Debt and Equity Markets

  • Debt instruments require issuers to pay back fixed amounts (interest and principal) at intervals until maturity.
  • Maturity date is when the debt must be repaid.

Capital Market Instruments

  • Include stocks, mortgages, bonds (corporate and convertible), and government securities.
  • Derivative instruments comprise futures and options contracts.

Characteristics of Financial Markets

  • Well-functioning markets maintain low transaction costs and share accurate information.
  • Credibility in borrower promises is essential for market stability and investor protection.

Financial Institutions

  • Institutions connect savers with borrowers, functioning as financial intermediaries (e.g., banks, insurance companies).
  • Key roles include lowering transaction costs, reducing information asymmetries, and enhancing resource allocation efficiency.

Structure of Financial Institutions

  • Divided into depository institutions (accept deposits, provide loans) and non-depository institutions (insurance companies, mutual funds).
  • Banks, credit unions, and finance companies specialize in various financial services.

Types of Financial Institutions

  • Depository institutions include commercial banks and savings institutions.
  • Non-depository institutions encompass investment banks, insurance firms, pension funds, and hedge funds.

Philippine Financial System

  • Categorized under "The New Central Bank Act" by Banko Sentral ng Pilipinas.
  • Banking institutions include private banks (universal, commercial, thrift, rural) and government banks (e.g., Land Bank).
  • Non-bank financial institutions include investment firms, credit unions, and government-sponsored entities like GSIS and Social Security System.

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Financial Markets & Instruments PDF

Description

This quiz covers the fundamentals of financial markets, institutions, and instruments. You'll explore how these components interact within the international financial system to facilitate resource exchange. Test your understanding of direct and indirect financial resources.

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