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Questions and Answers
Securities firms act as brokers between surplus units and deficit units in transactions.
Securities firms act as brokers between surplus units and deficit units in transactions.
True (A)
Pension funds do not play a role in influencing the management of publicly traded firms.
Pension funds do not play a role in influencing the management of publicly traded firms.
False (B)
Depository institutions convert deposits from deficit units into loans for surplus units.
Depository institutions convert deposits from deficit units into loans for surplus units.
False (B)
Mutual funds use the money from shares purchased to buy securities for deficit units.
Mutual funds use the money from shares purchased to buy securities for deficit units.
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Insurance companies primarily finance large deficit units through premiums paid by policyholders.
Insurance companies primarily finance large deficit units through premiums paid by policyholders.
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Treasury bills are long-term obligations issued by the U.S. government.
Treasury bills are long-term obligations issued by the U.S. government.
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Commercial mortgages are used by real estate developers to finance the purchase of commercial properties.
Commercial mortgages are used by real estate developers to finance the purchase of commercial properties.
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Federal funds are typically transferred between financial institutions for long-term periods.
Federal funds are typically transferred between financial institutions for long-term periods.
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Repurchase agreements involve the sale of securities without a promise to repurchase.
Repurchase agreements involve the sale of securities without a promise to repurchase.
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Commercial paper is a long-term secured financial instrument used by companies.
Commercial paper is a long-term secured financial instrument used by companies.
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A negotiable certificate of deposit can be sold by its holder to another party.
A negotiable certificate of deposit can be sold by its holder to another party.
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Mortgage-backed securities are debt obligations backed by a package of mortgages.
Mortgage-backed securities are debt obligations backed by a package of mortgages.
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Banker's acceptances are time drafts payable to a seller of goods, guaranteed by a buyer.
Banker's acceptances are time drafts payable to a seller of goods, guaranteed by a buyer.
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Capital Market Securities help in the sale of short-term securities to surplus units.
Capital Market Securities help in the sale of short-term securities to surplus units.
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Financial institutions primarily reduce transaction costs due to their relatively small size.
Financial institutions primarily reduce transaction costs due to their relatively small size.
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Liquidity attributes in financial institutions offer higher price risk to household savers.
Liquidity attributes in financial institutions offer higher price risk to household savers.
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Maturity intermediation allows financial institutions to effectively manage the mismatching of asset and liability maturities.
Maturity intermediation allows financial institutions to effectively manage the mismatching of asset and liability maturities.
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Depository institutions are the main channel for monetary policy to affect the economy.
Depository institutions are the main channel for monetary policy to affect the economy.
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Mutual funds primarily serve large investors by requiring high minimum denomination sizes.
Mutual funds primarily serve large investors by requiring high minimum denomination sizes.
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Financial institutions are often the only source of financing for specific sectors like farming and residential real estate.
Financial institutions are often the only source of financing for specific sectors like farming and residential real estate.
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Intergenerational wealth transfers are facilitated by commercial banks and credit unions.
Intergenerational wealth transfers are facilitated by commercial banks and credit unions.
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Payment services provided by depository institutions have no significant impact on the economy's efficiency.
Payment services provided by depository institutions have no significant impact on the economy's efficiency.
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Securities firms are included as the primary institutional investors in most financial systems.
Securities firms are included as the primary institutional investors in most financial systems.
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The relatively large size of financial institutions helps in reducing the average cost of information production.
The relatively large size of financial institutions helps in reducing the average cost of information production.
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The degree of financial market development is the only factor that varies across financial markets worldwide.
The degree of financial market development is the only factor that varies across financial markets worldwide.
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Limited information can lead to uncertainty in the valuation of securities.
Limited information can lead to uncertainty in the valuation of securities.
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Higher uncertainty about a security's valuation decreases the risk associated with investing in that security.
Higher uncertainty about a security's valuation decreases the risk associated with investing in that security.
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Asymmetric information refers to the situation where investors have more information than managers about a firm's financial condition.
Asymmetric information refers to the situation where investors have more information than managers about a firm's financial condition.
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International integration of financial markets can lead to easier access to funding during favorable economic conditions.
International integration of financial markets can lead to easier access to funding during favorable economic conditions.
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Under unfavorable economic conditions, one country's financial difficulties can impact other countries due to integrated financial markets.
Under unfavorable economic conditions, one country's financial difficulties can impact other countries due to integrated financial markets.
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The foreign exchange market is essential for making domestic transactions without currency exchange.
The foreign exchange market is essential for making domestic transactions without currency exchange.
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Like securities, most currencies are priced based on supply and demand in the foreign exchange market.
Like securities, most currencies are priced based on supply and demand in the foreign exchange market.
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Investors consider risk as the potential deviation of a security's actual return from what was expected.
Investors consider risk as the potential deviation of a security's actual return from what was expected.
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Volume of funds transferred only affects surplus units in financial markets.
Volume of funds transferred only affects surplus units in financial markets.
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Asset transformers issue financial claims that are less attractive to investors than those issued directly by corporations.
Asset transformers issue financial claims that are less attractive to investors than those issued directly by corporations.
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Etrade refers to the process of buying and selling shares in physical markets only.
Etrade refers to the process of buying and selling shares in physical markets only.
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Commercial banks typically focus on offering a narrower range of loans compared to other depository institutions.
Commercial banks typically focus on offering a narrower range of loans compared to other depository institutions.
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A primary market is where corporations can raise funds through the issuance of new securities.
A primary market is where corporations can raise funds through the issuance of new securities.
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Derivatives are financial securities whose payoffs are independent of other previously issued securities.
Derivatives are financial securities whose payoffs are independent of other previously issued securities.
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Diversification allows an economic agent to increase risk by holding a number of different securities in a portfolio.
Diversification allows an economic agent to increase risk by holding a number of different securities in a portfolio.
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The secondary market facilitates the trading of financial instruments that have already been issued.
The secondary market facilitates the trading of financial instruments that have already been issued.
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Study Notes
Financial Markets and Institutions
- Financial markets are arenas where funds flow.
- Primary markets facilitate the raising of funds through new security issues (e.g., Initial Public Offerings).
- Secondary markets facilitate trading of existing securities.
- Derivative securities are agreements to exchange an asset at a predetermined price on a specified date.
- Money markets trade securities with maturities of one year or less.
- Capital markets trade securities with maturities longer than one year.
- Financial institutions channel funds from surplus units (investors) to deficit units (borrowers).
- Direct transfer occurs when a corporation sells its securities (e.g., stocks or debt) directly to investors without intermediary.
- Indirect transfer occurs through financial intermediaries.
- Liquidity is the ease of converting an asset to cash at its fair market value.
- Price risk is the chance of an asset's sale price being less than its purchase price.
- Financial institutions include commercial banks, savings institutions, credit unions, insurance companies, securities firms, and finance companies.
- Financial institutions can act as asset transformers by providing more attractive investment vehicles.
- Economies of scale occur when the cost reduction are achieved with increased efficiency as FIs perform a broad range of financial services.
- E-trade is an example of an online trading system.
- Commercial banks primarily issue consumer, commercial, and real estate loans.
- Thrifts concentrate loans on specific segments (often real estate or consumer).
- Insurance companies manage risk from death, disability or other unforeseen events.
- Securities firms assist with issuance of securities, brokerage, and securities trading.
- Finance companies lend to individuals and businesses.
- Mutual Funds gather funds from many and invest in diversified assets, for investors.
- Hedge Funds are focused on wealthy investors.
Primary vs. Secondary Markets
- Primary markets handle the issuance of new securities.
- Secondary markets facilitate trading of existing securities.
- Liquidity in secondary markets is crucial; otherwise, securities may be difficult to sell at fair value if illiquid.
Securities Traded in Financial Markets
- Money market securities (short-term): Treasury bills, commercial paper.
- Capital market securities (long-term): Bonds, corporate stocks, mortgages.
- Equity securities represent ownership in a corporation.
- Derivative securities (value derived from other assets): Futures, options, swaps.
Role of Financial Institutions
- Depository institutions (banks) accept deposits and make loans, provide credit
- Non-depository institutions (e.g., insurance companies, mutual funds) don't accept deposits yet play a significant role in capital markets.
- Financial institutions often provide liquidity, diversify risk, and facilitate payment systems.
- Financial regulation safeguards investors and stability of the financial system.
Systemic Risk
- Systemic risk is the risk of the financial system collapsing due to interconnectedness among institutions.
- The 2008/2009 financial crisis highlighted this risk, emphasizing the importance of financial regulation and institution stability.
- Financial institutions' interconnectedness is a major concern, as problems in one institution can spread across the system if not managed closely by regulatory bodies.
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Description
This quiz provides an overview of financial markets and institutions, including the distinctions between primary and secondary markets, as well as concepts like liquidity, price risk, and securities. Test your understanding of how funds are raised and traded in various market segments. Ideal for students and professionals interested in finance.
