29 Questions
In a financial market, who are the agents that have money but lack investment opportunities?
Lenders-Savers
What is the primary function of the debt market?
To allow governments, corporations, and individuals to borrow
In the primary market, what do companies initially sell to raise money?
Stock
What is one of the main reasons for regulating financial institutions?
To ensure the soundness of financial intermediaries
Why are well-functioning financial markets important for the economy?
To produce high economic growth
Who are the agents that have investment opportunities but need money?
Borrowers-Spenders
Why may depositors want to pull their funds out of financial institutions?
Because they have doubts about the overall health of financial intermediaries
What is a consequence of financial panics?
Serious damage to the economy
What is the cost of borrowing in the debt market?
Interest rate
What is one of the types of financial institution regulation implemented by governments?
Disclosure restrictions
What is the purpose of deposit insurance?
To protect depositors from losses
What is the main goal of regulating financial institutions?
To protect the public and the economy from financial panics
What is one of the primary functions of the secondary market?
To provide liquidity to the securities of a company
What is the main purpose of derivatives for financial and nonfinancial companies?
To hedge risks
What is a characteristic of exchanges in modern financial markets?
Most trades are conducted electronically
What is the main difference between the primary and secondary markets?
The primary market is for new securities, while the secondary market is for existing securities
What are the main classes of derivatives?
Forwards, futures, swaps, and options
What is one of the primary goals of regulating banks?
To improve control over the money supply
What is the purpose of speculators in the derivatives market?
To make profits by taking positions in the market
What is the purpose of reserve requirements?
To help the central bank exercise more precise control over the money supply
What type of securities can be found in an Over-the-Counter Market?
Government bonds, corporate bonds, swaps, and foreign exchange
What is the role of depository institutions in relation to the central bank?
They keep a certain fraction of their deposits with the central bank
What is the main characteristic of the Money Market?
It is a market for trading short-term securities with a maturity of less than 1 year
What is the consequence of banks having a significant influence on the economy?
Regulation of banks is crucial for maintaining control over the money supply
What is the term for bonds issued by a foreign company in a domestic country and denominated in that country's currency?
Foreign bonds
What is the term for bonds issued by a U.S. company in the Eurozone and denominated in euros?
Reverse Yankee bonds
What is the primary reason for regulating banks' reserve requirements?
To improve control over the money supply
What are the three elements of international financial markets?
Foreign bonds, domestic bonds, and international bonds
What is the main difference between the domestic market and the international financial market?
The location of the issuer
Study Notes
Financial Markets
- Over-the-Counter (OTC) markets involve dealers at different locations who have an inventory of securities and are ready to buy and sell.
- OTC markets involve government bonds, corporate bonds, swaps, and foreign exchange.
Classification of Financial Markets
- Markets can be classified by the maturity of the securities:
- Money Market: Short-Term (maturity < 1 year)
- Capital Market: Long-Term (maturity > 1 year) plus equities (no maturity)
International Financial Markets
- In international financial markets, borrowers issue securities in their home country and denominated in their own currency → domestic market.
- Three elements in international financial markets:
- Foreign bonds: bonds sold in a foreign country and denominated in that country’s currency.
- Yankee bonds: bonds issued by a foreign company in the U.S. in USD.
- Reverse Yankee bonds: bonds issued by a U.S. company in the Eurozone in EUR.
Financial Markets Channel
- Financial markets channel funds from:
- Agents with money but without investment opportunities (lenders-savers) to agents who have investment opportunities but need money (borrowers-spenders).
- Lenders-savers include households, companies, government, and foreigners.
- Borrowers-spenders include companies, government, households, and foreigners.
Importance of Financial Markets
- Well-functioning financial markets are key factors in producing high economic growth.
- Two primary financial markets:
- Debt market: allows governments, corporations, and individuals to borrow.
- Stock market: allows companies to raise equity capital.
Regulation of Financial Institutions
- Main reasons for regulating financial institutions:
- Ensure the soundness of financial intermediaries.
- Improve monetary control (monetary policy).
- Regulation of financial institutions includes:
- Restrictions on Entry
- Disclosure
- Restrictions on Assets and Activities
- Deposit Insurance
- Limits on Competition
- Restrictions on Interest Rates
Derivatives Markets
- Derivatives provide payoffs that depend upon the value of an underlying asset (equity, interest rates, foreign exchange rates, commodities, etc.).
- Derivatives are used by financial and nonfinancial companies to hedge risks and by speculators to make profits.
- Main classes of derivatives:
- Forward/futures contracts
- Swaps
- Options
Structure of Financial Markets
- Markets can be further classified as:
- (Regular, Regulated) Exchanges: trades conducted in central locations (now mostly electronic).
- Stocks
- Futures
- Options
- Commodities
- Over-the-Counter (OTC) markets
Test your knowledge of financial markets, international payments, and banking systems with this quiz. Evaluate your understanding of key concepts and terminology related to finance and economics. Prepare to learn and improve your skills!
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