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Questions and Answers
What type of businesses are typically handled by retail banks?
Which financial institution offers finance for assets through hire purchase agreements and leasing?
In which market do short-term financial instruments like treasury bills trade?
What type of markets deal with corporate bonds, gilt, Eurobonds, and debentures?
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Which type of bank typically deals with large organizations and earns commissions?
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Where do spot and forward foreign exchange transactions take place?
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What is the primary function of the capital market?
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What is the main characteristic of the primary market?
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Which sector of society typically prefers high liquidity and low risk in their investments?
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What is the role of financial managers in terms of raising finance?
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Which sector needs large amounts of cash for long-term investments and is willing to take high risks?
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What does liquidity refer to in financial markets?
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Why does money have a time value according to the text?
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Which of the following is NOT a reason for the time value of money as per the text?
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How is the bond market mainly characterized according to the text?
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What is the primary purpose of the Forex Market as mentioned in the text?
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Which financial market is involved in short-term borrowing and lending for less than 1 year?
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What distinguishes the Derivatives Market from other markets according to the text?
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Study Notes
Financial Institutions
- Retail banks: accept small deposits from the public, high volume, low value businesses, and have branch networks (e.g. HSBC, Barclays)
- Wholesale banks: deal with large organizations, earn commission, and have low volume, high value transactions (e.g. merchant/investment banks, commercial banks)
- International banks: borrow and lend in foreign currency, conduct transactions in sterling with non-UK residents by UK banks
- Finance houses: offer finance for assets, hire purchase agreements, leasing, and credit finance
- Building societies: owned by its members, specialize in mortgages (e.g. Nationwide)
- Pension funds: set up to provide pensions for members, invest large sums, and receive tax relief
- Insurance funds: hold premiums as short-term liquid assets, life assurance, and pool risk (e.g. Prudential)
Financial Markets
- Money market: short-term borrowing and lending (less than 1 year), interbank lending
- Bond market: buying and selling bonds (primary and secondary), mainly over-the-counter (OTC)
- Share market: buying and selling shares (primary and secondary), stock exchange (e.g. LSE, NYSE, AIM)
- Capital market: a financial market for securities (debt and equity) for raising money in the long term (more than 1 year)
- Foreign exchange market: exchanging currencies, assisting international trade, spot market, and forward market
- Derivatives market: hedging, speculation, exchange-traded, and over-the-counter (OTC)
Primary Investors vs. Ultimate Borrowers
- Primary investors: households, savers, prefer high liquidity, low risk, and exchange cash for financial assets
- Ultimate borrowers: businesses, need large amounts of cash for long periods, take high risk
Time Value of Money
- An important issue in financial decision making is to determine the value of a series of future cash flows
- The value of a stream of future cash flows is linked to the time value of money
- Money has a time value because money received today is worth more than the same amount received in the future
- Reasons for time value of money: potential for earning interest, impact of inflation, and effect of risk
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Description
This quiz covers the basics of different financial markets and products, including money market, stock market, bond market, derivatives market, and forex market. It also touches upon key concepts like hedging, speculation, exchange-traded, over-the-counter trading, and more.
