Financial Markets Quiz

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Questions and Answers

In a financial market, who are the agents that have money but lack investment opportunities?

  • Government
  • Foreigners
  • Lenders-Savers (correct)
  • Borrowers-Spenders

What is the primary function of the debt market?

  • To allow governments, corporations, and individuals to borrow (correct)
  • To allow companies to raise equity capital
  • To provide investment opportunities for households
  • To facilitate international trade

In the primary market, what do companies initially sell to raise money?

  • Stock (correct)
  • Futures
  • Bonds
  • Options

What is one of the main reasons for regulating financial institutions?

<p>To ensure the soundness of financial intermediaries (D)</p> Signup and view all the answers

Why are well-functioning financial markets important for the economy?

<p>To produce high economic growth (B)</p> Signup and view all the answers

Who are the agents that have investment opportunities but need money?

<p>Borrowers-Spenders (B)</p> Signup and view all the answers

Why may depositors want to pull their funds out of financial institutions?

<p>Because they have doubts about the overall health of financial intermediaries (B)</p> Signup and view all the answers

What is a consequence of financial panics?

<p>Serious damage to the economy (B)</p> Signup and view all the answers

What is the cost of borrowing in the debt market?

<p>Interest rate (B)</p> Signup and view all the answers

What is one of the types of financial institution regulation implemented by governments?

<p>Disclosure restrictions (B)</p> Signup and view all the answers

What is the purpose of deposit insurance?

<p>To protect depositors from losses (A)</p> Signup and view all the answers

What is the main goal of regulating financial institutions?

<p>To protect the public and the economy from financial panics (D)</p> Signup and view all the answers

What is one of the primary functions of the secondary market?

<p>To provide liquidity to the securities of a company (C)</p> Signup and view all the answers

What is the main purpose of derivatives for financial and nonfinancial companies?

<p>To hedge risks (B)</p> Signup and view all the answers

What is a characteristic of exchanges in modern financial markets?

<p>Most trades are conducted electronically (B)</p> Signup and view all the answers

What is the main difference between the primary and secondary markets?

<p>The primary market is for new securities, while the secondary market is for existing securities (B)</p> Signup and view all the answers

What are the main classes of derivatives?

<p>Forwards, futures, swaps, and options (B)</p> Signup and view all the answers

What is one of the primary goals of regulating banks?

<p>To improve control over the money supply (B)</p> Signup and view all the answers

What is the purpose of speculators in the derivatives market?

<p>To make profits by taking positions in the market (C)</p> Signup and view all the answers

What is the purpose of reserve requirements?

<p>To help the central bank exercise more precise control over the money supply (A)</p> Signup and view all the answers

What type of securities can be found in an Over-the-Counter Market?

<p>Government bonds, corporate bonds, swaps, and foreign exchange (A)</p> Signup and view all the answers

What is the role of depository institutions in relation to the central bank?

<p>They keep a certain fraction of their deposits with the central bank (A)</p> Signup and view all the answers

What is the main characteristic of the Money Market?

<p>It is a market for trading short-term securities with a maturity of less than 1 year (D)</p> Signup and view all the answers

What is the consequence of banks having a significant influence on the economy?

<p>Regulation of banks is crucial for maintaining control over the money supply (C)</p> Signup and view all the answers

What is the term for bonds issued by a foreign company in a domestic country and denominated in that country's currency?

<p>Foreign bonds (A)</p> Signup and view all the answers

What is the term for bonds issued by a U.S. company in the Eurozone and denominated in euros?

<p>Reverse Yankee bonds (B)</p> Signup and view all the answers

What is the primary reason for regulating banks' reserve requirements?

<p>To improve control over the money supply (C)</p> Signup and view all the answers

What are the three elements of international financial markets?

<p>Foreign bonds, domestic bonds, and international bonds (C)</p> Signup and view all the answers

What is the main difference between the domestic market and the international financial market?

<p>The location of the issuer (D)</p> Signup and view all the answers

Flashcards

Over-the-Counter (OTC) Markets

Dealers at different locations with inventory ready to trade.

Money Market

Markets classified by security maturity: short-term (less than 1 year).

Capital Market

Markets classified by security maturity: long-term (more than 1 year) plus equities.

Foreign Bonds

Bonds sold in a foreign country, denominated in that country's currency.

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Yankee Bonds

Bonds issued by a foreign company in the U.S. in USD.

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Reverse Yankee Bonds

Bonds issued by a U.S. company in the Eurozone in EUR.

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Financial Markets

Channel funds from lenders to borrowers.

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Debt Market

Allows governments, corporations, and individuals to borrow funds.

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Stock Market

Allows companies to raise equity capital.

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Regulation of Financial Institutions

Ensuring stability and controlling monetary policy.

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Derivatives

Payoffs depend on an underlying asset's value.

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Forward/Futures Contracts

Contracts to buy or sell assets at a future date.

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Swaps

Agreements to exchange cash flows over time.

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Options

Contracts giving the right, but not the obligation, to buy or sell.

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Exchanges

Trades conducted in central locations, mostly electronic.

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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:
    1. Foreign bonds: bonds sold in a foreign country and denominated in that country’s currency.
    2. Yankee bonds: bonds issued by a foreign company in the U.S. in USD.
    3. 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:
    1. Debt market: allows governments, corporations, and individuals to borrow.
    2. Stock market: allows companies to raise equity capital.

Regulation of Financial Institutions

  • Main reasons for regulating financial institutions:
    1. Ensure the soundness of financial intermediaries.
    2. 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:
    1. (Regular, Regulated) Exchanges: trades conducted in central locations (now mostly electronic).
    • Stocks
    • Futures
    • Options
    • Commodities
    1. Over-the-Counter (OTC) markets

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