Financial Markets and Institutions Quiz

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What is one of the primary roles of financial institutions in the foreign exchange market?

To eliminate currency fluctuations entirely

To serve as intermediaries by matching participants who want to exchange currencies (correct)

To provide complete transparency in all financial transactions

To regulate all securities trading in international markets

How do regulations in financial markets primarily aim to affect information asymmetry?

By eliminating all types of market risks

By restricting the number of trading participants

By supporting only domestic investors

By increasing the amount of available information (correct)

What factor influences the level of liquidity in a country's financial markets?

The speed of technology adoption in trading

The number of international investors present

The political stability of the country

Local securities laws regarding financial disclosure (correct)

What can be said about the development of financial markets across different countries?

They differ significantly in development and liquidity from one country to another Signup and view all the answers

What impact do fluctuations in exchange rates have on investors in international financial markets?

They can significantly affect the returns earned by investors Signup and view all the answers

What is the main purpose of secondary markets?

To facilitate the trading of existing securities Signup and view all the answers

What characteristic of securities traded in secondary markets is particularly important?

Liquidity Signup and view all the answers

Which of the following is NOT a type of capital market security?

Options Signup and view all the answers

What do corporations typically seek to achieve through issuing capital market securities?

Obtain new funds Signup and view all the answers

What does having an active secondary market imply about a security?

It can be easily sold at a stable price Signup and view all the answers

What type of financing is commonly associated with capital market securities?

Capital assets Signup and view all the answers

Which types of investments are considered capital assets that might be financed through capital market securities?

Buildings and equipment Signup and view all the answers

Which factor does NOT contribute to a security's liquidity in the secondary market?

Market sentiment Signup and view all the answers

What is the primary purpose of financial markets?

To facilitate the flow of funds between surplus and deficit units. Signup and view all the answers

Why might some businesses prefer equity securities over debt securities?

Equity securities do not require interest payments. Signup and view all the answers

What are deficit units in the context of financial markets?

Participants that spend more money than they earn. Signup and view all the answers

How do financial markets accommodate corporate finance activity?

By allowing corporations to issue various types of securities. Signup and view all the answers

Which of the following best describes surplus units?

Participants that have excess funds they can invest. Signup and view all the answers

What happens if funds are not supplied by financial markets?

Corporations would struggle to finance their operations. Signup and view all the answers

What is corporate finance primarily concerned with?

Funding corporate expenditures and decisions. Signup and view all the answers

What role do investors play in financial markets?

Investors provide net savings to financial markets. Signup and view all the answers

What is one way that financial institutions can reduce the average cost of providing services?

By increasing the volume of services produced with a given infrastructure Signup and view all the answers

What is an effect of financial institutions expanding into a financial conglomerate?

Capitalizing on economies of scope Signup and view all the answers

What occurred when financial institutions purchased mortgages from other firms shortly before the crisis?

They experienced large losses Signup and view all the answers

Which financial instruments did many institutions invest in that suffered during the mortgage crisis?

Mortgage-backed securities Signup and view all the answers

How did the reliance on short-term debt affect certain financial firms during the crisis?

It led to volatility when collateral value dropped Signup and view all the answers

What organizational structure is depicted in Exhibit 1.5?

A financial conglomerate Signup and view all the answers

What happened to payments received by institutions that invested in mortgage-backed securities during the crisis?

Payments were reduced due to mortgage defaults Signup and view all the answers

What is a primary reason financial institutions expanded internationally?

To capitalize on their expertise Signup and view all the answers

What is the primary function of securities firms acting as brokers?

To execute securities transactions between parties for a commission. Signup and view all the answers

How does the commission for securities transactions typically vary?

It is higher for less common transactions and smaller amounts. Signup and view all the answers

What role do pension funds play in the financial system?

Managing funds contributed by employees and employers until withdrawal. Signup and view all the answers

Which financial institutions serve as monitors of publicly traded firms?

Pension funds, insurance companies, and some mutual funds. Signup and view all the answers

What do pension funds primarily do with the contributions made to them?

Manage the money until individuals withdraw it for retirement. Signup and view all the answers

What is one way institutional investors influence publicly traded firms?

By exerting corporate control over management decisions. Signup and view all the answers

What is a consequence of securities firms acting as brokers in less common transactions?

They may charge a higher commission for execution. Signup and view all the answers

In the financial ecosystem, what do surplus units typically provide?

Deposits that are transformed by financial institutions. Signup and view all the answers