Podcast
Questions and Answers
Which of the following is NOT a type of financial market?
Which of the following is NOT a type of financial market?
- Social media market (correct)
- Stock market
- Currency market
- Bond market
The Bretton Woods Conference established the International Monetary Fund (IMF) and the World Bank.
The Bretton Woods Conference established the International Monetary Fund (IMF) and the World Bank.
True (A)
What role do financial intermediaries play in the economy?
What role do financial intermediaries play in the economy?
They are a major source of funds for corporations.
______ companies invest in contributions from policyholders to provide payouts in times of need.
______ companies invest in contributions from policyholders to provide payouts in times of need.
Match the following financial institutions with their primary function:
Match the following financial institutions with their primary function:
What is the primary role of financial intermediaries in the economy?
What is the primary role of financial intermediaries in the economy?
Direct finance involves transferring funds from lenders/savers directly to borrowers/investors.
Direct finance involves transferring funds from lenders/savers directly to borrowers/investors.
Name two types of financial intermediaries.
Name two types of financial intermediaries.
Financial markets negotiate loans, fund projects, and pursue _____ on assets.
Financial markets negotiate loans, fund projects, and pursue _____ on assets.
Match the following financial concepts with their descriptions:
Match the following financial concepts with their descriptions:
What is the primary role of banks regarding financial resources?
What is the primary role of banks regarding financial resources?
Adverse selection occurs when one party has superior information over another party in a transaction.
Adverse selection occurs when one party has superior information over another party in a transaction.
What are M1 components comprised of?
What are M1 components comprised of?
The _______ is the primary mechanism used by the central bank to control the amount of money circulating in the economy.
The _______ is the primary mechanism used by the central bank to control the amount of money circulating in the economy.
Match the following components with their definitions:
Match the following components with their definitions:
What is the correct order of the phases in a market bubble?
What is the correct order of the phases in a market bubble?
Government bonds are considered high-risk investments.
Government bonds are considered high-risk investments.
What term describes the average interest rate global banks charge each other?
What term describes the average interest rate global banks charge each other?
A _______ bond is issued at a discount and does not pay coupon payments.
A _______ bond is issued at a discount and does not pay coupon payments.
Match the following types of bonds with their characteristics:
Match the following types of bonds with their characteristics:
In which market are new issues of stocks and bonds sold for the first time?
In which market are new issues of stocks and bonds sold for the first time?
Convertible bonds allow investors to sell them back to the issuing company before maturity.
Convertible bonds allow investors to sell them back to the issuing company before maturity.
What is the function of a SPAC?
What is the function of a SPAC?
________ refers to the interest rate associated with bonds, which is inversely correlated to interest rates.
________ refers to the interest rate associated with bonds, which is inversely correlated to interest rates.
What does the coupon rate of a bond represent?
What does the coupon rate of a bond represent?
What type of loan is secured by the value of a vehicle?
What type of loan is secured by the value of a vehicle?
Interest rate risk arises from mismatching maturities of assets and liabilities.
Interest rate risk arises from mismatching maturities of assets and liabilities.
What is the primary risk involved when borrowers fail to repay loans?
What is the primary risk involved when borrowers fail to repay loans?
A bank's ability to meet withdrawal demands from depositors is known as _____ risk.
A bank's ability to meet withdrawal demands from depositors is known as _____ risk.
Match the financial instruments with their descriptions:
Match the financial instruments with their descriptions:
What is one method used to measure interest rate risk?
What is one method used to measure interest rate risk?
Credit risk is the chance that the market will lose value due to fluctuations.
Credit risk is the chance that the market will lose value due to fluctuations.
What do banks earn from the difference between deposit and loan rates called?
What do banks earn from the difference between deposit and loan rates called?
Overdraft allows customers to withdraw even with _____ funds.
Overdraft allows customers to withdraw even with _____ funds.
Match the following risks with their descriptions:
Match the following risks with their descriptions:
Which of the following represents a low-risk financial instrument?
Which of the following represents a low-risk financial instrument?
High bank capital ratio leads to lower insolvency risk.
High bank capital ratio leads to lower insolvency risk.
What financial instrument is typically issued by corporations to finance short-term liabilities?
What financial instrument is typically issued by corporations to finance short-term liabilities?
___ risk arises when funds in a foreign country cannot be mobilized to the home country.
___ risk arises when funds in a foreign country cannot be mobilized to the home country.
Which of the following is NOT a function of banks?
Which of the following is NOT a function of banks?
Financial intermediaries aim to increase direct lending costs and transaction costs.
Financial intermediaries aim to increase direct lending costs and transaction costs.
What is the purpose of a bank's liquidity management?
What is the purpose of a bank's liquidity management?
Banks primarily earn profits from the spread between interest paid on deposits and interest received from __________.
Banks primarily earn profits from the spread between interest paid on deposits and interest received from __________.
Match the following banking services with their descriptions:
Match the following banking services with their descriptions:
What is an example of a financial claim?
What is an example of a financial claim?
Deregulation in the banking sector typically reduces competition.
Deregulation in the banking sector typically reduces competition.
What is the role of a central bank in the economy?
What is the role of a central bank in the economy?
A bank's _____ is the difference between its assets and liabilities, representing its net worth.
A bank's _____ is the difference between its assets and liabilities, representing its net worth.
Match each type of card with its characteristics:
Match each type of card with its characteristics:
Which of the following best describes 'asymmetric information'?
Which of the following best describes 'asymmetric information'?
Investment banks primarily deal with consumer lending.
Investment banks primarily deal with consumer lending.
What is the credit multiplier?
What is the credit multiplier?
The process of __________ involves the central bank buying or selling government bonds to control money supply.
The process of __________ involves the central bank buying or selling government bonds to control money supply.
Which of these services is typically offered by commercial banks?
Which of these services is typically offered by commercial banks?
Which of the following best describes Eurocurrency?
Which of the following best describes Eurocurrency?
SWIFT is an organization that facilitates safe and secure international banking transactions.
SWIFT is an organization that facilitates safe and secure international banking transactions.
What is the purpose of Asset Liability Management (ALM)?
What is the purpose of Asset Liability Management (ALM)?
A __________ contract allows the right to buy or sell securities at a set price.
A __________ contract allows the right to buy or sell securities at a set price.
Match the following terms with their correct definitions:
Match the following terms with their correct definitions:
Which type of bond is designed to help organizations raise capital in a currency different from their domestic currency?
Which type of bond is designed to help organizations raise capital in a currency different from their domestic currency?
High liquidity generally corresponds with high risk and high return.
High liquidity generally corresponds with high risk and high return.
What do banks typically hold to manage liquidity risk?
What do banks typically hold to manage liquidity risk?
A bank runs the risk of __________ if it cannot meet its liabilities due to sudden cash withdrawals.
A bank runs the risk of __________ if it cannot meet its liabilities due to sudden cash withdrawals.
Match the banking regulations to their purposes:
Match the banking regulations to their purposes:
Which ratio indicates that a bank needs more liquidity?
Which ratio indicates that a bank needs more liquidity?
Investments and financing decisions are not critical to the banking planning process.
Investments and financing decisions are not critical to the banking planning process.
What does Basel III improve upon in relation to capital requirements?
What does Basel III improve upon in relation to capital requirements?
Credit allocation regulation supports sectors like __________ and __________ by requiring banks to hold minimum assets.
Credit allocation regulation supports sectors like __________ and __________ by requiring banks to hold minimum assets.
Flashcards
Financial Intermediaries
Financial Intermediaries
Institutions that facilitate the transfer of funds between savers and borrowers.
Financial System
Financial System
A network of institutions that enable the exchange of funds, including banks, insurance companies, and stock exchanges.
Financial Sectors
Financial Sectors
Parts of the financial system that help money move from savers to borrowers, enabling things like buying a house or paying for college.
Borrowers (Deficit Units)
Borrowers (Deficit Units)
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Lenders (Surplus Units)
Lenders (Surplus Units)
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Stock Market
Stock Market
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Global Financial Systems
Global Financial Systems
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Depository Institutions
Depository Institutions
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Insurance Companies
Insurance Companies
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Asymmetric Information
Asymmetric Information
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Adverse Selection
Adverse Selection
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Moral Hazard
Moral Hazard
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Credit Multiplier
Credit Multiplier
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What are the main sources of funds for banks?
What are the main sources of funds for banks?
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What are Financial Claims?
What are Financial Claims?
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What are Financial Intermediaries?
What are Financial Intermediaries?
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What are examples of Financial Intermediaries?
What are examples of Financial Intermediaries?
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What are the Roles of Financial Intermediaries?
What are the Roles of Financial Intermediaries?
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What are Bank Assets?
What are Bank Assets?
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What are Bank Liabilities?
What are Bank Liabilities?
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What is Bank Capital?
What is Bank Capital?
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What are Credit Transfers?
What are Credit Transfers?
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What are Direct Debits?
What are Direct Debits?
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What are Current Accounts?
What are Current Accounts?
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What are Investment Products?
What are Investment Products?
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What are Pension and Insurance Products?
What are Pension and Insurance Products?
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What is Asymmetric Information?
What is Asymmetric Information?
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What is Adverse Selection?
What is Adverse Selection?
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What is Moral Hazard?
What is Moral Hazard?
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What is a bubble?
What is a bubble?
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What are the stages of a bubble?
What are the stages of a bubble?
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How do governments respond to bubbles?
How do governments respond to bubbles?
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What is a bond?
What is a bond?
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What is a coupon rate?
What is a coupon rate?
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What is a zero-coupon bond?
What is a zero-coupon bond?
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What is the difference between a primary market and a secondary market?
What is the difference between a primary market and a secondary market?
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What is an IPO?
What is an IPO?
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What is a SPAC?
What is a SPAC?
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What is the difference between a mutual fund and a hedge fund?
What is the difference between a mutual fund and a hedge fund?
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Eurocurrency
Eurocurrency
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SWIFT
SWIFT
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Interbank Market
Interbank Market
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Forward Market
Forward Market
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Eurobonds
Eurobonds
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Liquid Asset
Liquid Asset
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Liquidity Tradeoff
Liquidity Tradeoff
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Credit Risk
Credit Risk
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Interest Rate Risk
Interest Rate Risk
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Liquidity Risk
Liquidity Risk
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Market Risk
Market Risk
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Asset-Liability Management (ALM)
Asset-Liability Management (ALM)
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Off-Balance Sheet (OBS) Transactions
Off-Balance Sheet (OBS) Transactions
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Loan
Loan
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Collateral
Collateral
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Mortgage
Mortgage
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Securitization
Securitization
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Business Loan
Business Loan
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Installment Loan
Installment Loan
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Line of Credit
Line of Credit
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Overdraft
Overdraft
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GAP Analysis
GAP Analysis
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Risk-Adjusted Return on Capital (RAROC)
Risk-Adjusted Return on Capital (RAROC)
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Value at Risk (VaR)
Value at Risk (VaR)
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Insolvency
Insolvency
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Study Notes
Financial Intermediaries and Markets
- Financial intermediaries facilitate the flow of funds from savers to borrowers, improving allocation of resources and increasing economic welfare.
- Financial markets provide a platform for negotiating loans, investments, and pursuing returns on assets.
- Borrowers (deficit units) need funds for long-term projects at low costs.
- Lenders (surplus units) are concerned with minimizing costs, prefer high liquidity, and prefer short-term, high-return options.
- Investors participate in financial markets to seek returns on their investments.
Direct vs. Indirect Finance
- Direct finance involves the direct exchange of funds between lenders and borrowers.
- Indirect finance involves the use of financial intermediaries as a conduit to transfer funds.
- Financial intermediaries reduce transaction costs (research, bargaining) for parties and minimizing risk.
- Intermediaries pool small savings to provide larger loans.
Types of Financial Markets
- Stock markets facilitate the trading of company shares.
- Bond markets trade government and other bonds.
- Currency markets deal with currency exchange.
- Commodity markets trade agricultural products, metals, and energy.
- Futures and options markets deal with derivatives based on present or future values.
Global Financial Systems
- Global systems comprise regulated entities (banks, insurance), regulators, supervisors, and institutions.
- Historical development includes the gold standard, WWI & WWII impacts, the Great Depression, the Bretton Woods Conference, and establishment of international institutions like the IMF (international balance of member states, lender of last resort) and World Bank (developing countries, funding, credit risk).
Financial Institutions
- Depository institutions (banks, credit unions) accept deposits (liabilities) and make loans (assets).
- Insurance companies collect premiums (payments) and provide coverage for various risks.
- Pension funds collect contributions from workers and pay benefits to retirees; investment is in securities and real estate.
- Finance companies use savings to provide loans; raise capital by selling bonds.
- Security firms (investment banks) facilitate access to financial markets.
- Government-sponsored enterprises support various sectors (housing mortgages, agriculture).
Financial Institutions- Banks
- Functions: Acceptance of deposits, lending, investment, payment services, administration of pensions or insurance via e-banking.
- Profitability: interest on loans minus interest paid on deposits.
- Assets: Income-earning assets (primarily loans and securities), non-interest earning assets (reserves)
- Liabilities: Deposits, bonds and equity. Net worth = equity = assets-liabilities
- Bank capital: cushions against risk. Funding: deposits and interest rates.
Bank Services
- Deposit Services: checking accounts (transactions), savings accounts (interest), time deposits (interest & locked in timeframe).
- Lending Services: consumer loans, mortgages, business loans, auto loans, overdraft facilities.
- Investment Services: stocks, savings bonds, mutual funds, gold.
- Pension/Insurance Services: protection against adverse events, retirement income, separate from public pensions.
- E-banking: digital transactions.
Economic Imbalances and the Role of Central Banks
- Economic interdependence and imbalances (imports > exports) exist globally.
- Central banks control the money supply by: open market operations (buying/selling securities), reserve requirements, and interest rate adjustments.
- Open market operations: influence money supply
- Reserve requirements: modify the credit multiplier
- Interest rates: impact lending & borrowing
- Deregulation and reregulation influence market competitiveness.
Banking Risks and Management
- Asymmetric information: one party knows more than the other; financial institutions reduce it and mitigate moral hazard by gathering and providing credible information about borrowers.
- Risks: credit risk (defaults), interest rate risk (changes in interest rate), liquidity risk (withdrawal), currency/foreign exchange risk, market risk (price movement), country risk (foreign), management risk.
- Risk Measurement: GAP analysis (sensitive assets/liabilities), duration analysis (cash flows), VAR (loss measurement).
- Capital management: maintaining sufficient equity to absorb losses.
- Liquidity management: balancing asset and liability maturities.
Financial Instruments and Markets
- Financial futures: agreements to deliver an asset at a future date at a predetermined price.
- Forward contracts: similar to futures, but traded over-the-counter; often less liquid.
- Options contracts: the right, but not an obligation to buy or sell an asset at a specified price.
- Swaps: agreements to exchange future cash flows.
- Commercial paper: short-term debt instruments issued by corporations.
- Negotiable Certificates of Deposit (CDs): similar to savings accounts, but can be traded on secondary markets.
- Repos or repurchase agreements: short-term borrowing and lending of securities.
- Eurodollars: US dollars deposited in foreign banks.
Regulations and Financial Crises
- Regulations prevent bank runs, systemic risk, and ensure stability.
- Safety & soundness regulations protect banks, and monetary policy regulations control money supply, credit allocation policies target specific sectors, investor protection regulates financial market participants' behavior.
- Financial crises (e.g., asset bubbles, lack of regulation) result in asset value declines, debt defaults, and systemic failures.
- Government responses to crises usually involve lowering interest rates, buying back debt, and bank bailouts.
Debt Securities
- Bonds: fixed-income securities representing a loan to a borrower (often a corporation or government).
- Types of bonds: corporate bonds, municipal bonds, government bonds (bills, notes, bonds), zero-coupon bonds, convertible bonds, callable bonds.
Equity Markets
- Primary market: issuances of new equity.
- Secondary market: trading of existing equities.
- Initial Public Offerings (IPOs): companies sell stock to the public.
- Special Purpose Acquisition Companies (SPACs): firms raising capital to buy another company.
- Mutual funds: investment vehicles providing portfolio access for individual investors.
- Hedge funds: alternative investment vehicles with higher risks and fees.
- Private equity: investment in non-public companies
International Banking and Markets
- International banking: operating across national borders, involves traditional foreign banking and eurocurrency banking.
- Eurocurrency markets: foreign exchange transactions, deposits, and loans denominated in foreign currency but held at banks outside the domestic country of issuance.
- LIBOR and Euribor: benchmark interest rates for international borrowing and lending.
- Eurobonds: bonds issued in a currency different from the issuing country's currency.
- Foreign bonds: bonds issued in the domestic currency of the country receiving the bond.
Financial Crises
- Financial crises may involve decline in asset values, increased debt, difficulty in meeting obligations. Stages: asset value decline, financial system failure, breakdown.
- Asset Bubbles: asset prices rise dramatically, then crash (e.g., tulip mania, credit crisis). Government responses: interest rate lowering, debt buybacks, bailouts.
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Description
Test your knowledge on financial markets, intermediaries, and institutions with this engaging quiz. Explore concepts from the roles of banks to types of financial markets and the impact of financial intermediaries on the economy. Perfect for students studying finance or anyone interested in the financial world.