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Questions and Answers
What is one of the principal economic functions of financial assets?
What is one of the principal economic functions of financial assets?
How do financial intermediaries contribute to the financial system?
How do financial intermediaries contribute to the financial system?
What are surplus units in financial markets?
What are surplus units in financial markets?
What type of securities do deficit units typically issue?
What type of securities do deficit units typically issue?
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Which statement best describes financial markets?
Which statement best describes financial markets?
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What defines deficit units in the financial system?
What defines deficit units in the financial system?
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Which of the following is NOT a characteristic of financial assets?
Which of the following is NOT a characteristic of financial assets?
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What primarily dictates tax rates on financial assets?
What primarily dictates tax rates on financial assets?
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Who are the surplus units that purchase debt securities?
Who are the surplus units that purchase debt securities?
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What do equity securities represent?
What do equity securities represent?
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Which function of financial markets refers to determining the price of traded assets?
Which function of financial markets refers to determining the price of traded assets?
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What do financial markets provide that allows investors to sell financial assets?
What do financial markets provide that allows investors to sell financial assets?
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What type of costs are classified as search costs in financial transactions?
What type of costs are classified as search costs in financial transactions?
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Which of the following is a reason businesses might issue equity securities instead of debt securities?
Which of the following is a reason businesses might issue equity securities instead of debt securities?
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What is the benefit of liquidity in financial markets?
What is the benefit of liquidity in financial markets?
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How do financial markets reduce the cost of transacting?
How do financial markets reduce the cost of transacting?
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What is meant by 'self-insuring' in the context of financial markets?
What is meant by 'self-insuring' in the context of financial markets?
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How does the financial system assist in risk sharing?
How does the financial system assist in risk sharing?
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What role does the financial system play in government economic policy?
What role does the financial system play in government economic policy?
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What function does the financial system serve regarding price-related information?
What function does the financial system serve regarding price-related information?
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In what way does the transfer function of a financial system operate?
In what way does the transfer function of a financial system operate?
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What are financial assets primarily characterized by?
What are financial assets primarily characterized by?
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What is one function of financial markets in information dissemination?
What is one function of financial markets in information dissemination?
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What does the reformatory function of a financial system involve?
What does the reformatory function of a financial system involve?
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What does the debt market primarily deal with?
What does the debt market primarily deal with?
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Which financial market is characterized by the trading of instruments with maturities longer than ten years?
Which financial market is characterized by the trading of instruments with maturities longer than ten years?
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What is a key characteristic of equity instruments?
What is a key characteristic of equity instruments?
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How are money market instruments typically described?
How are money market instruments typically described?
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What ensures that prices in an efficient market reflect collective information?
What ensures that prices in an efficient market reflect collective information?
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Which of the following describes short-term financial instruments in the money market?
Which of the following describes short-term financial instruments in the money market?
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Which market primarily deals with fixed payment contracts?
Which market primarily deals with fixed payment contracts?
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What is the main purpose of the capital market?
What is the main purpose of the capital market?
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Which market is described as where new issues of a security are sold to initial buyers?
Which market is described as where new issues of a security are sold to initial buyers?
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What role do brokers play in the secondary market?
What role do brokers play in the secondary market?
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Which of the following would represent a characteristic of an exchange-traded market?
Which of the following would represent a characteristic of an exchange-traded market?
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What is a defining feature of the cash or spot market?
What is a defining feature of the cash or spot market?
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What do secondary markets primarily increase for the instruments traded?
What do secondary markets primarily increase for the instruments traded?
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Which type of market involves delivery at a pre-determined time in the future?
Which type of market involves delivery at a pre-determined time in the future?
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Who typically underwrites new securities in the primary market?
Who typically underwrites new securities in the primary market?
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Which of the following is an example of a secondary market?
Which of the following is an example of a secondary market?
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What does a deficit budget unit (DBU) indicate about the relationship between current revenue and expenditures?
What does a deficit budget unit (DBU) indicate about the relationship between current revenue and expenditures?
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What action can a surplus budget unit (SBU) take when its current receipts exceed current expenditures?
What action can a surplus budget unit (SBU) take when its current receipts exceed current expenditures?
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If current revenue (R) equals current expenditures (E), which of the following best describes the economic unit?
If current revenue (R) equals current expenditures (E), which of the following best describes the economic unit?
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What does the equation $R - E = \Delta FA - \Delta D$ represent in the financial system?
What does the equation $R - E = \Delta FA - \Delta D$ represent in the financial system?
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Which group is generally classified as a net lender of funds?
Which group is generally classified as a net lender of funds?
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What happens if an economic unit chooses to issue debt or stock?
What happens if an economic unit chooses to issue debt or stock?
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In what circumstance would a household likely draw money out of its savings account?
In what circumstance would a household likely draw money out of its savings account?
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Which of the following scenarios best describes a net borrower of funds?
Which of the following scenarios best describes a net borrower of funds?
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Study Notes
Introduction
- Financial systems are crucial for economic development, providing essential financial resources for production and improving the standard of living.
- Efficient allocation of resources is a key function, directing funds to their most profitable use.
- Financial systems enable the collection and distribution of funds from savers to investors.
Financial System Components
- The financial system encompasses markets and intermediaries used by households, firms, and governments for financial decisions.
- Markets for stocks, bonds, and other securities are included, along with intermediaries like banks and insurance companies.
- It facilitates a smooth, efficient, and effective link between depositors and investors.
- The financial system is a complex network of interconnected institutions, markets, and transactions.
Roles of Financial System
- Mobilizing Savings: The system channels savings into productive activities and ventures.
- Promoting Liquidity: Facilitates the ability of investors to convert financial assets into cash quickly.
- Payment Function: Provides means for conducting transactions and payments for goods and services.
- Protection Function (Risk Management): Offers mechanisms for managing various uncertainties and risks, including insurance.
- Information Function: Provides price and other information to help make financial decisions.
- Transfer Function: Facilitates the transfer of funds across geographical boundaries.
- Reformatory function: develops and introduces new assets and practices to cater for growing needs of the market.
Financial Assets
- Real assets generate goods and services over time. Tangible assets like land, buildings, and machinery are examples of real assets.
- Financial assets are legal contracts that represent a claim to payments derived from real assets. Examples include stocks, bonds, bank loans.
Financial Markets
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Types by Financial Claim:
- Debt market: involves debt instruments (e.g., bonds) with fixed payments.
- Equity market: involves ownership claims (e.g., stocks) with variable returns.
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Types by Maturity:
- Money market: for short-term debt.
- Capital market: for long-term debt and equity.
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Types by Organization:
- Exchange-traded market: centralized trading.
- Over-the-counter market: decentralized trading.
Financial Institutions & Participants
- Various entities participate in the financial markets, including households, businesses, governments, and supranational organizations.
- Participants include individuals, businesses, and governments needing funds and those needing to invest.
- Intermediaries play a crucial role in transforming liabilities into assets to make available to the public.
Lending and Borrowing
- Businesses, households, and governments can be borrowers and lenders in the financial system.
- Financial institutions facilitate these transactions.
Important Concepts in Lending and Borrowing
- Surplus units: Those with more funds than needed.
- Deficit units: Those who need more funds than they have available.
- Identity Equation: demonstrates the relationship between financial inflows and outflows for individuals and businesses. Income minus expenses (current or future) determines funding needs.
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Description
Test your knowledge about the functions and characteristics of financial markets and assets. This quiz covers essential topics such as financial intermediaries, surplus and deficit units, equity securities, and market liquidity. Dive into the intricacies of how financial markets operate and their significance in the economy.