Financial Markets Overview

What is a primary risk associated with mortgage backed securities?

Which financial institution primarily makes mortgage loans and creates mortgage backed securities?

How do companies generally use the funds obtained from selling stocks?

What are Treasury bills primarily issued for?

What is one defining characteristic of financial institutions in financial markets?

What is primarily measured by the difference between gross investment and depreciation?

In which of the following markets are bonds primarily traded?

What term refers to the funds used by businesses and firms to finance the purchase of physical capital goods?

Which of the following statements is true regarding depreciation?

What characterizes the money supply in financial markets?

What describes a mortgage agreement?

In finance, what does the term 'wealth' refer to?

What is the main purpose of loan markets?

Which type of financial asset represents a loan made by an investor to a borrower?

What is the role of financial markets in the economy?

Financial Markets

Financial markets play a crucial role in facilitating the flow of funds from savers to borrowers.
They are interconnected with the real economy, providing capital for investment expenditure.
Investment expenditure: Acquiring capital goods to produce future goods and services.
Financial investment: Purchasing financial assets like stocks and bonds.
Financial capital: Funds used by businesses to finance the acquisition of physical capital goods that expand productive capacity.
Depreciation: The decrease in the value of capital stock over time, reflecting the need for saving to maintain productive capacity.
Net investment: The difference between gross investment and depreciation.
Wealth: The total value of assets owned by individuals.
Income: Earnings from work or use of owned resources.
Saving: Portion of income not spent on goods and services, contributing to wealth accumulation.
Financial markets facilitate the allocation of funds for various purposes:
- Loan markets: Provide short-term (inventory, machinery) and long-term (mortgage) financing for individuals and businesses.
- Bond markets: Bonds are debt instruments representing loans made by investors to borrowers (corporations or governments) that pay interest, and can be traded in markets.
  - Types of bonds: Treasury bills (government promises of payments), mortgage-backed securities (derived from mortgage payments).
- Stock markets: Markets for trading company shares (equity) to finance investment expenditure.

Financial Institutions

Financial institutions act as both borrowers and lenders in financial markets.
Key institutions:
- Commercial banks: Provide money and finance through loans, deposits, and other financial services.
- Pension funds: Collect contributions from workers and invest in assets to provide retirement benefits.
- Insurance companies: Provide protection against risks by pooling funds and paying out claims.

This quiz explores the key concepts of financial markets, including the flow of funds, investment expenditure, and the importance of financial capital. Learn about how financial markets affect the real economy and the concepts related to wealth, income, and saving. Test your understanding of these foundational elements that drive financial decision-making.