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Questions and Answers
What is the primary purpose of money markets?
What is the primary purpose of money markets?
Which of the following instruments is considered the safest in money markets?
Which of the following instruments is considered the safest in money markets?
What characteristic is NOT typically associated with money market instruments?
What characteristic is NOT typically associated with money market instruments?
Which of the following is a type of money market instrument specifically designed to protect against inflation?
Which of the following is a type of money market instrument specifically designed to protect against inflation?
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Which of the following statements best describes the role of financial markets?
Which of the following statements best describes the role of financial markets?
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Which money market instrument involves borrowing and lending securities with a promise to repurchase them later?
Which money market instrument involves borrowing and lending securities with a promise to repurchase them later?
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What defines the maturity of instruments traded in money markets?
What defines the maturity of instruments traded in money markets?
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Which of the following best describes commercial paper?
Which of the following best describes commercial paper?
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What is a primary function of money market instruments?
What is a primary function of money market instruments?
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Which of the following risks is typically lowest for money market instruments?
Which of the following risks is typically lowest for money market instruments?
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What characterizes the secondary market in capital markets?
What characterizes the secondary market in capital markets?
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Which statement about capital markets is accurate?
Which statement about capital markets is accurate?
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What is the correct formula for Yield to Maturity (YTM) of a bond?
What is the correct formula for Yield to Maturity (YTM) of a bond?
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Which of the following best describes the role of investment banks in capital markets?
Which of the following best describes the role of investment banks in capital markets?
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What differentiates preferred stock from common stock?
What differentiates preferred stock from common stock?
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Which of the following best encompasses the definition of enterprise value?
Which of the following best encompasses the definition of enterprise value?
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In the context of capital markets, what is the purpose of market indices?
In the context of capital markets, what is the purpose of market indices?
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Which of the following accurately reflects a characteristic of bonds?
Which of the following accurately reflects a characteristic of bonds?
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Which approach is less pertinent when valuing common stock?
Which approach is less pertinent when valuing common stock?
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What factor least affects the liquidity risk of money market instruments?
What factor least affects the liquidity risk of money market instruments?
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What is the underlying principle of the primary market?
What is the underlying principle of the primary market?
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Which regulatory body is responsible for overseeing the capital markets in the United States?
Which regulatory body is responsible for overseeing the capital markets in the United States?
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Study Notes
Financial Markets
- Financial markets are platforms for trading financial assets including stocks, bonds, commodities, currencies, and derivatives.
Money Markets
- Money markets are where short-term debt instruments (maturity of one year or less) are traded.
- Treasury bills (T-bills) are short-term debt instruments issued by the government.
- Certificates of deposit (CDs) are time deposits with a fixed maturity and interest rate.
- Commercial paper is unsecured promissory notes issued by corporations to meet short-term financing needs.
- Repurchase agreements (repos) involve selling securities with an agreement to repurchase in the future (typically used by financial institutions to meet short-term funding needs).
- Treasury Inflation-Protected Securities (TIPS) are bonds that adjust the principal based on changes in the Consumer Price Index (CPI).
- Money market instruments are known for being highly liquid (easily converted to cash) and relatively low risk.
- Money markets help manage short-term cash needs, provide liquidity to financial institutions, and serve as a benchmark for interest rates.
- Risks associated with money market instruments include credit risk, interest rate risk, and liquidity risk.
Capital Markets
- Capital markets are where long-term financial instruments, such as stocks, bonds, and other securities are traded.
- Primary markets are where newly issued securities are sold for the first time (e.g., IPO).
- Secondary markets are where previously issued securities are traded between investors.
- Stocks represent ownership shares in a company.
- Bonds are fixed income instruments representing loans made by investors to a borrower.
- Capital markets are essential for economic growth, investment, and resource allocation.
- Capital markets provide opportunities for individuals and organizations to optimize investment returns, diversify portfolios, and manage risk.
- Regulation of capital markets is important to ensure fairness, transparency, investor protection, and market stability.
- Investment banks play a crucial role in capital markets by facilitating the issuing and underwriting of securities.
- Market indices (e.g., PSE Index, S&P 500) provide a benchmark of overall market performance.
Basic Valuation
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Bond Valuation
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YTM (Yield to Maturity) = (I + (F-P)/N) / ((F+P)/2)
- Where I = coupon rate, F = face value, P = price, N = number of years to maturity
- Bond Price = PV of Principal + PV of Interest
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YTM (Yield to Maturity) = (I + (F-P)/N) / ((F+P)/2)
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Preferred Stock Valuation
- Value of Preferred Stock = Preferred dividend / Required return
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Common Stock Valuation
- Value of Common Stock = Expected dividend / (Required return - Growth rate)
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Enterprise Value
- Enterprise Value = Expected free cash flow / (WACC - Growth rate)
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Description
Explore the key concepts of financial markets and the specific instruments within money markets. This quiz covers topics such as treasury bills, certificates of deposit, and commercial paper, providing a solid foundation in understanding short-term debt instruments. Test your knowledge and see how well you grasp the various aspects of these crucial financial areas.
