Financial Markets: Introduction and Importance

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What is the primary obligation of the issuer in a bond investment?

To repay the principal at its face value on the maturity date (correct)
To provide capital appreciation
To make periodic interest payments only
To exchange currencies with banks

Which of the following markets is primarily concerned with the exchange of currencies?

Primary Securities Market
Derivatives Market
Capital Market
Foreign Exchange Market (correct)

What is a common feature of financial securities traded in the Derivatives Market?

They are backed by a primary security
Their payoffs are linked to other underlying securities or indexes (correct)
They are short-term investments
They are used to exchange currencies

What are the two main sources of return from bond investments?

Interest income and capital appreciation (A) Signup and view all the answers

What is the nature of a bond investment?

A long-term debt investment (D) Signup and view all the answers

What is the primary characteristic of a Treasury bill that makes it a risk-free investment?

Its payment is guaranteed by the government (D) Signup and view all the answers

What is the typical maturity period of a repurchase agreement?

1 to 2 weeks (A) Signup and view all the answers

What is the purpose of issuing commercial paper?

To meet short-term obligations (B) Signup and view all the answers

What is a common characteristic of commercial paper and negotiable certificates of deposit?

They are both money market securities (C) Signup and view all the answers

What is the primary difference between a Treasury bill and a commercial paper?

Issuing entity (B) Signup and view all the answers

What is the characteristic of a repurchase agreement that distinguishes it from a traditional sale?

It involves a commitment to repurchase (D) Signup and view all the answers

What is the primary function of financial intermediaries?

To reconcile conflicting interests of users and providers of funds (C) Signup and view all the answers

What is the main advantage of financial intermediaries?

They have cost advantages or economies of scale (D) Signup and view all the answers

What is the primary market involved in?

Issuing new securities by business firms, governmental bodies, or other organizations to raise new funds (C) Signup and view all the answers

What is the role of an investment banker?

To originate securities issues and negotiate between the officers of the issuing firm and officers of the investment bank (C) Signup and view all the answers

What is the function of financial markets?

To facilitate the smooth flow of capital from providers of funds to the users of capital (A) Signup and view all the answers

What is the role of financial intermediaries in diversification?

They diversify investments by spreading money/funds to different investments (C) Signup and view all the answers

What is the difference between primary and secondary markets?

Primary markets deal with new securities, while secondary markets deal with existing securities (C) Signup and view all the answers

What is the role of financial intermediaries in providing liquidity?

They provide liquidity to providers of funds (D) Signup and view all the answers

What is the characteristic of the money market?

It deals with short-term securities with a maturity of less than one year (A) Signup and view all the answers

What is the role of financial intermediaries in risk management?

They hire highly qualified people to assess risky investments (C) Signup and view all the answers