10 Questions
What is the primary function of financial instruments that transfer capital?
To provide a means of financing
What is a key characteristic of hybrid financial instruments?
They combine features of both capital and risk transfer
What is the primary purpose of a long position in a security?
To speculate on the security's future price
Which of the following is NOT a type of financial instrument that transfers capital?
Derivative instrument
What is the role of the second party in a financial instrument that transfers capital?
To receive financing from the first party
What is the primary goal of the money market?
To provide liquidity
Which of the following instruments is considered risk-free if held to maturity?
Treasury Bill
What is the main purpose of a Repo agreement?
To provide short-term loans at low rates
Which market segment is concerned with the trading of existing securities?
Secondary market
What is the main difference between interest-based and discount-based instruments?
Interest or discount rate
Study Notes
Financial Market
- A market where financial instruments are traded
- Financial instruments are contracts between two parties, regulating their financial relationship
Types of Financial Instruments
- Instruments transferring capital
- Instruments transferring risk (derivative instruments)
- Hybrid instruments (linking both features)
Instruments Transferring Capital
- One party provides capital to the second party
- The second party pays for capital (price is reflected by interest rate)
- Capital is paid back or is not
- Used in investing and financing
- Two types: Debt instrument and Equity instrument
Debt Instruments
- Basic debt instruments (non-tradable): Bank deposit, Bank loan
Instruments Transferring Risk
- Derivative instruments
- One party transfers risk to the second party and pays the price
- Two parties "exchange" risk
Financial Instruments Criteria
- Maturity: Short term (up to 1 year), Medium term (1-10 years), Long term (above 10 years)
- Some instruments have no maturity (issued for perpetuity)
Financial Market Segments
- Money market
- Capital market
- Derivatives market
- Foreign exchange market (FOREX)
Primary and Secondary Markets
- Primary market: Issued instrument is sold for the first time
- Secondary market: Instrument is traded many times
- Securitization: Converting non-tradable instrument into tradable security for which there is a secondary market
Money Market
- Debt instruments
- Maturity less than one year
- Main goal: Liquidity
- Liquidity: Ability to convert financial asset into cash in short time at expected price
Characteristics of Money Market Instruments
- Par value, face value
- Maturity
- Interest rate or discount rate
- Two basic types: Interest-based instruments and Discount-based instruments
Treasury Bill
- Issuer: State
- Goal: Financing budget deficit
- Basic characteristics: Par value, maturity, price, discount yield, yield
- Very liquid instrument, discount-based, large par value
- Treated as risk-free instrument (given held to maturity)
Central Bank Bill
- Issued by central bank
- Goal: Monetary policy – open market operations
- Very short-term risk-free instruments
Commercial Paper
- Issuer: Enterprise
- Agent: Bank
- Discount-based or (less often) interest-based
- Higher credit risk than treasury bill
- Lower price than comparable treasury bill
Repo
- Repo: Repurchase agreement
- Transaction between (usually) financial institutions
- One party sells financial instruments to the other party with the agreement to buy them back in (nearest) future at agreed price
- Overnight repo
- Similar transactions: Reverse repo, Buy/sell back, Sell/buy back
- Features: Liquid, risk-free short-term investment, Short-term loan at low rate
This quiz is about financial markets, where financial instruments are traded. Topics include long and short positions, securities, and different types of financial instruments, including those that transfer capital, risk, and hybrid instruments.
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