Financial Markets Quiz
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Questions and Answers

Which of the following is NOT one of the three main types of financial markets?

  • The bond market
  • The foreign exchange market
  • The real estate market (correct)
  • The stock market

    • Financial market activities do not influence the wealth of individuals.

    False

    What type of mutual fund invests in high-quality, short-term debt instruments?

    money market mutual fund

    In financial markets, sellers or savers have an excess of available funds while buyers or borrowers have a __________ of funds.

    <p>shortage</p> Signup and view all the answers

    Match the following financial market types with their descriptions:

    <p>Bond Market = Marketplace for trading debt securities Stock Market = Marketplace for buying and selling equity shares Foreign Exchange Market = Marketplace for trading currencies Money Market = Marketplace for short-term debt instruments</p> Signup and view all the answers

    What is the main purpose of deposit insurance?

    <p>To prevent financial loss for depositors if a financial intermediary fails</p> Signup and view all the answers

    Wealth and income refer to the same concept.

    <p>False</p> Signup and view all the answers

    What is the most liquid asset?

    <p>Money</p> Signup and view all the answers

    The _____ economy is one in which goods and services are exchanged directly for other goods and services.

    <p>barter</p> Signup and view all the answers

    Which of the following is NOT a characteristic of money?

    <p>It deteriorates quickly</p> Signup and view all the answers

    Match the type of money with its description:

    <p>Commodity Money = Money made up of precious metals or another valuable commodity Fiat Money = Paper currency decreed by a government as legal tender Cheques = Written orders directing a bank to pay a specific amount Hyperinflation = Inflation exceeding 50% per month</p> Signup and view all the answers

    Transaction costs are low in a barter economy.

    <p>False</p> Signup and view all the answers

    What is the role of the Canada Deposit Insurance Corporation (CDIC)?

    <p>To insure people's deposits in the event that financial intermediaries fail.</p> Signup and view all the answers

    The method of conducting transactions in an economy is referred to as the _____ system.

    <p>payments</p> Signup and view all the answers

    Which characteristic lowers transaction costs by reducing the number of prices that need to be considered?

    <p>Unit of Account</p> Signup and view all the answers

    Which of the following statements accurately describes equity holders?

    <p>They benefit from increases in the corporation's profitability.</p> Signup and view all the answers

    In the primary market, securities are sold to initial buyers directly by the corporation.

    <p>True</p> Signup and view all the answers

    What role do investment banks play in the primary market?

    <p>They underwrite securities and guarantee a price for a corporation's securities.</p> Signup and view all the answers

    The __________ market includes securities that have previously been issued and can be resold.

    <p>secondary</p> Signup and view all the answers

    Which of the following is NOT a characteristic of the money market?

    <p>It primarily deals with securities that have a maturity of more than one year.</p> Signup and view all the answers

    Government of Canada Treasury Bills do not pay interest but are sold at a discount instead.

    <p>True</p> Signup and view all the answers

    What type of market is characterized by buyers and sellers meeting at a central location?

    <p>Exchanges</p> Signup and view all the answers

    Match the following money market instruments with their descriptions:

    <p>Treasury Bills = Short-term government debt, no interest payments Certificates of Deposit = Deposits that mature within 90 days to 1 year Commercial Paper = Unsecured short-term debt issued by large corporations Repurchase Agreements = Short-term loans secured by treasury bills</p> Signup and view all the answers

    In an __________ market, dealers operate independently and use their inventory to trade securities.

    <p>over-the-counter</p> Signup and view all the answers

    What does the term 'residual claimant' mean in relation to equity holders?

    <p>Equity holders are last to receive payment after all debts are cleared.</p> Signup and view all the answers

    Which of the following best describes E-money?

    <p>Money that exists only in electronic form</p> Signup and view all the answers

    M1+ includes non-chequable deposits like savings accounts.

    <p>False</p> Signup and view all the answers

    What is the first form of E-money that was introduced?

    <p>Debit card</p> Signup and view all the answers

    M2 includes all elements of M1 plus ______ assets that are less liquid.

    <p>near-money</p> Signup and view all the answers

    Match the following monetary aggregates with their definitions:

    <p>M1+ = Includes currency and personal chequable accounts M2 = M1 plus less liquid assets M2+ = M2 plus deposits at near banks M3 = All components of M2++ plus large deposits</p> Signup and view all the answers

    Which of the following is considered a flow variable?

    <p>Monthly income</p> Signup and view all the answers

    E-cash can only be used for physical purchases.

    <p>False</p> Signup and view all the answers

    What is the primary feature of a smart card?

    <p>It contains a computer chip for digital cash.</p> Signup and view all the answers

    M2++ includes M2+ and adds ____________ contracts.

    <p>life insurance</p> Signup and view all the answers

    Which monetary aggregate is the least broad measure?

    <p>M1+</p> Signup and view all the answers

    M3 includes all types of institutional deposits.

    <p>True</p> Signup and view all the answers

    Define the term 'present value' in finance.

    <p>Today's value of a future payment.</p> Signup and view all the answers

    Most liquid assets are represented in ______.

    <p>M1+</p> Signup and view all the answers

    Match the following definitions with the correct monetary aggregates:

    <p>M1 = Currency plus demand deposits M2+ = M2 plus near bank deposits M2 = M1 plus savings accounts M3 = M2++ plus large deposits</p> Signup and view all the answers

    What effect does a strong Canadian dollar have on Canadian goods exported abroad?

    <p>Makes them more expensive for foreign consumers</p> Signup and view all the answers

    Depository institutions include only banks.

    <p>False</p> Signup and view all the answers

    What is the primary function of contractual savings institutions?

    <p>To mobilize accumulated savings and funnel them into productive uses.</p> Signup and view all the answers

    A _________ is a bond-like debt instrument backed by a pool of mortgages.

    <p>mortgage-backed security</p> Signup and view all the answers

    Match the financial terms with their definitions:

    <p>Mortgage = A loan for property Municipal bonds = Bonds issued by local government Eurodollars = U.S. dollars deposited in foreign banks Corporate bonds = Debt securities issued by companies</p> Signup and view all the answers

    What risk does moral hazard typically describe?

    <p>Taking on risk without facing the full consequences</p> Signup and view all the answers

    As interest rates decrease, consumers are less likely to make large purchases.

    <p>False</p> Signup and view all the answers

    What is the role of financial markets in the economy?

    <p>To produce an efficient allocation of capital.</p> Signup and view all the answers

    __________ institutions include life insurance companies and pension funds.

    <p>Contractual savings</p> Signup and view all the answers

    Which term describes the process of borrowers obtaining funds directly from lenders?

    <p>Direct finance</p> Signup and view all the answers

    Corporate bonds typically have lower interest rates compared to government securities.

    <p>False</p> Signup and view all the answers

    Define what a security is.

    <p>An asset for the buyer and a liability for the seller.</p> Signup and view all the answers

    What must be true for both strategies involving bonds to be equal?

    <p>The interest rate on the two-year bond must equal the average of the two one-year interest rates.</p> Signup and view all the answers

    A long-term debt instrument has a maturity term of _______ years or longer.

    <p>10</p> Signup and view all the answers

    Segregated Markets Theory adequately explains all observations about yield curves.

    <p>False</p> Signup and view all the answers

    What theory combines aspects of both Segmented Markets Theory and Liquidity Premium Theory?

    <p>Liquidity Premium Theory</p> Signup and view all the answers

    What typically influences the movement of interest rates?

    <p>Inflation and economic growth</p> Signup and view all the answers

    How does a strong dollar affect the worth of bond holdings to foreign investors?

    <p>It yields more home currency to foreigners, increasing asset value.</p> Signup and view all the answers

    The interest rate on an n-period bond is determined by the average of the _____ interest rates on shorter-term bonds.

    <p>one-year</p> Signup and view all the answers

    Match the following theories with their primary characteristics:

    <p>Segmented Markets Theory = Accounts for differences in rates based on separate markets for various maturities Liquidity Premium Theory = Explains all key observations about yield curves Expectations Theory = Suggests that long-term interest rates reflect expected future short-term rates</p> Signup and view all the answers

    What primarily characterizes the capital market?

    <p>Long-term debt and equity instruments are traded.</p> Signup and view all the answers

    Mortgage-backed securities serve as collateral for loans that are explicitly tied to real estate.

    <p>True</p> Signup and view all the answers

    Define the term 'adverse selection' in financial transactions.

    <p>The problem created by asymmetric information prior to a transaction, where one party takes advantage of hidden characteristics.</p> Signup and view all the answers

    The ________ provides mortgage-loan insurance to facilitate housing loans.

    <p>Canada Mortgage and Housing Corporation (CMHC)</p> Signup and view all the answers

    What is a bond?

    <p>A debt security promising periodic payments</p> Signup and view all the answers

    Match the following financial instruments with their characteristics:

    <p>Corporate bonds = Issued by corporations and typically make interest payments twice a year. Government Agency Securities = Bonds issued by various government agencies. Consumer loans = Loans made by banks to individuals or businesses. Eurobonds = Bonds denominated in a currency other than that of the country of sale.</p> Signup and view all the answers

    Common stock represents a claim to partial ownership in a corporation.

    <p>True</p> Signup and view all the answers

    Which of the following is a characteristic of corporate bonds?

    <p>They can be convertible to stock.</p> Signup and view all the answers

    What is the main difference between stock dividends and bond interest payments?

    <p>Stock dividends are shares of profits, while bond interest is a fixed payment.</p> Signup and view all the answers

    Which type of financial institutions primarily raise funds through the issuance of chequable deposits?

    <p>Chartered Banks</p> Signup and view all the answers

    Eurocurrencies refer specifically to U.S. dollars deposited in U.S. banks.

    <p>False</p> Signup and view all the answers

    What is the primary function of financial intermediation?

    <p>To stand between lenders and borrowers, facilitating the transfer of funds.</p> Signup and view all the answers

    Credit unions can be considered large financial institutions compared to banks.

    <p>False</p> Signup and view all the answers

    The ______ is responsible for managing the money supply and interest rates in Canada.

    <p>Bank of Canada</p> Signup and view all the answers

    Match the financial instruments with their characteristics:

    <p>Bonds = Promises periodic payments and has a maturity date Stocks = Represents ownership in a corporation Foreign Exchange = Currency exchange rates between different countries Financial Intermediaries = Institutions that facilitate borrowing and lending</p> Signup and view all the answers

    What are the primary investment strategies of life insurance companies?

    <p>They primarily invest in corporate bonds and mortgages.</p> Signup and view all the answers

    The ________ market involves bonds sold in a foreign country, denominated in that country's currency.

    <p>foreign bond</p> Signup and view all the answers

    Match the following types of bonds with their issuers:

    <p>Provincial bonds = Issued by provinces Municipal bonds = Issued by municipalities Canadian government bonds = Issued by the federal government Corporate bonds = Issued by corporations</p> Signup and view all the answers

    Which phase of the business cycle indicates a low turning point?

    <p>Trough</p> Signup and view all the answers

    Pension funds acquire funds primarily from employers and __________.

    <p>employees</p> Signup and view all the answers

    What is the main function of investment banks?

    <p>To help corporations issue securities</p> Signup and view all the answers

    Which of the following is NOT a reason why capital markets are considered riskier?

    <p>Higher levels of liquidity.</p> Signup and view all the answers

    Economic expansion is characterized by at least two quarters of negative output growth.

    <p>False</p> Signup and view all the answers

    Property and Casualty (P&C) insurance companies generally hold more liquid assets than life insurance companies.

    <p>True</p> Signup and view all the answers

    Moral hazard arises when both parties to a transaction have equal access to information.

    <p>False</p> Signup and view all the answers

    What is the main function of financial intermediaries?

    <p>To borrow funds from savers and lend to borrowers.</p> Signup and view all the answers

    A budget surplus occurs when ______ is greater than government spending.

    <p>tax revenue</p> Signup and view all the answers

    Explain what 'risk sharing' means in financial terms.

    <p>The process of creating and selling assets that have acceptable risk characteristics to investors.</p> Signup and view all the answers

    Name one characteristic that distinguishes hedge funds from mutual funds.

    <p>Hedge funds have minimum investment requirements and are subject to weaker regulation.</p> Signup and view all the answers

    What occurs when one party has more information than another in a transaction?

    <p>Adverse selection</p> Signup and view all the answers

    The __________ of financial intermediation refers to the reduction of transaction costs per dollar as transaction size increases.

    <p>economies of scale</p> Signup and view all the answers

    The failure of financial intermediaries due to asymmetric information is referred to as a __________.

    <p>financial panic</p> Signup and view all the answers

    Inflation is the average price level of goods and services in an economy.

    <p>False</p> Signup and view all the answers

    Which type of financial institution primarily invests in long-term securities?

    <p>Contractual Savings Institutions</p> Signup and view all the answers

    Match the following institutions to their primary focus or service:

    <p>Depository Institutions = Accept deposits and make loans Mutual Funds = Diversified portfolios of stocks and bonds Hedge Funds = Limited partnerships with high minimum investments Pension Funds = Long-term retirement savings</p> Signup and view all the answers

    What does the Foreign Exchange Market enable?

    <p>It enables the exchange of one country's currency for another.</p> Signup and view all the answers

    The largest revenue source for the federal government is ______.

    <p>income tax</p> Signup and view all the answers

    Asymmetric information is beneficial for financial markets as it fosters transaction efficiency.

    <p>False</p> Signup and view all the answers

    Match the following monetary concepts with their definitions:

    <p>Inflation Rate = Percentage change in price level Monetary Policy = Management of money supply and interest rates Fiscal Policy = Government spending and taxation decisions Aggregate Output = Total production of final goods and services</p> Signup and view all the answers

    What are the largest asset holdings of pension funds?

    <p>Corporate bonds and stocks.</p> Signup and view all the answers

    Investment companies that raise money by selling shares to purchase safe and liquid assets are called __________.

    <p>Money Market Mutual Funds</p> Signup and view all the answers

    What type of deposits do Trust and Loan Companies primarily use to obtain funds?

    <p>All of the above</p> Signup and view all the answers

    Why do governments regulate financial markets?

    <p>To increase information available to investors</p> Signup and view all the answers

    What does YTM stand for in financial terms?

    <p>Yield To Maturity</p> Signup and view all the answers

    An increase in an asset's risk relative to alternatives will increase the quantity demanded of that asset.

    <p>False</p> Signup and view all the answers

    What is the definition of liquidity?

    <p>The ease and speed with which an asset can be turned into cash.</p> Signup and view all the answers

    The total resources owned by the individual, including all assets, is known as __________.

    <p>Wealth</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Wealth = Total resources owned by an individual, including all assets Liquidity = Ease and speed with which an asset can be turned into cash Risk = Degree of uncertainty associated with the return on an asset Expected Return = Return on one asset relative to alternative assets</p> Signup and view all the answers

    When is the quantity demanded of an asset likely to rise?

    <p>When its liquidity increases</p> Signup and view all the answers

    A change in quantity supplied refers to a shift of the entire supply curve.

    <p>False</p> Signup and view all the answers

    What does the demand curve illustrate?

    <p>The relationship between quantity demanded and price when all other economic variables are held constant.</p> Signup and view all the answers

    The concept that explains how much of an asset people will want to hold in their portfolios is called __________.

    <p>Theory of Portfolio Choice</p> Signup and view all the answers

    What happens to the quantity demanded if the price of a good increases?

    <p>It decreases</p> Signup and view all the answers

    Higher expected returns lead to a reduction in the quantity demanded for an asset.

    <p>False</p> Signup and view all the answers

    Explain the relationship between the price of bonds and the quantity of bonds demanded.

    <p>There is a negative relationship; as the price of bonds increases, the quantity of bonds demanded decreases.</p> Signup and view all the answers

    When all other economic variables are held constant, quantity demanded changes due to a change in the __________ of the good.

    <p>price</p> Signup and view all the answers

    Match the following terms with their corresponding effects on quantity demanded:

    <p>Increase in risk = Decreases quantity demanded Increase in expected return = Increases quantity demanded Increase in price = Decreases quantity demanded Increase in liquidity = Increases quantity demanded</p> Signup and view all the answers

    What happens to the demand curve when expected inflation rises?

    <p>It shifts left.</p> Signup and view all the answers

    An increase in supply of bonds causes the supply curve to shift left.

    <p>False</p> Signup and view all the answers

    What is the effect of a decrease in demand on the demand curve for bonds?

    <p>It shifts left.</p> Signup and view all the answers

    In Keynes’s view, a higher level of ______ causes the demand for money to increase.

    <p>income</p> Signup and view all the answers

    Match the factors with their impact on the demand curve for bonds:

    <p>Increased wealth = Shifts right Higher expected interest rates = Shifts left Increased risk = Shifts left Increased liquidity = Shifts right</p> Signup and view all the answers

    What effect does higher default risk have on interest rates?

    <p>It increases interest rates.</p> Signup and view all the answers

    What does a rightward shift in the supply curve indicate?

    <p>An increase in supply</p> Signup and view all the answers

    Less liquidity in corporate bonds leads to lower interest rates compared to more liquid bonds.

    <p>False</p> Signup and view all the answers

    Movements along the demand curve occur due to changes in the price of bonds.

    <p>True</p> Signup and view all the answers

    What is the term for the graphical representation showing the relationship between interest rates and different maturities of bonds?

    <p>Yield Curve</p> Signup and view all the answers

    A bond with ________ risk will always have a positive risk premium.

    <p>default</p> Signup and view all the answers

    What is the relationship between the quantity of money demanded and interest rates, according to Keynes?

    <p>Negatively related.</p> Signup and view all the answers

    When expected inflation decreases, the supply of bonds shifts to the ______.

    <p>left</p> Signup and view all the answers

    Match the following yield curve types with their descriptions:

    <p>Upward-Sloping = Long-term rates are higher than short-term rates Flat = Short- and long-term rates are approximately equal Inverted = Short-term rates are higher than long-term rates</p> Signup and view all the answers

    Which factor does NOT cause the demand curve for bonds to shift?

    <p>Changes in bond prices</p> Signup and view all the answers

    What is the effect of favorable tax treatment on certain bonds, such as municipal bonds?

    <p>It lowers their interest rates.</p> Signup and view all the answers

    According to the Expectations Theory, long-term bond rates are influenced by current short-term rates.

    <p>True</p> Signup and view all the answers

    An increase in the equilibrium interest rate signifies a rightward shift of the demand curve for bonds.

    <p>False</p> Signup and view all the answers

    What is the term that describes a premium required for holding less liquid long-term bonds?

    <p>Liquidity Premium</p> Signup and view all the answers

    What two effects cause the demand curve for money to shift in Keynes's liquidity preference analysis?

    <p>Income effect and price level effect.</p> Signup and view all the answers

    Higher government budget deficits lead to an increase in the ______ of bonds.

    <p>supply</p> Signup and view all the answers

    When short-term rates are high, yield curves are more likely to slope ________.

    <p>downward</p> Signup and view all the answers

    What is one of the main assumptions of the Segmented Markets Theory?

    <p>Investor preferences vary across market segments.</p> Signup and view all the answers

    Match the following terms with their correct definitions:

    <p>Liquidity = Ease of converting assets to cash Risk = Uncertainty of bond returns Expected returns = Anticipated returns on investment Equilibrium = Point where supply meets demand</p> Signup and view all the answers

    What is the defining characteristic of a perpetuity?

    <p>It pays fixed periodic payments indefinitely.</p> Signup and view all the answers

    The return on a bond will always equal the yield to maturity on that bond.

    <p>False</p> Signup and view all the answers

    What is the formula to calculate the current yield of a bond?

    <p>Current Yield = Yearly Coupon Payment / Price of the Bond</p> Signup and view all the answers

    When interest rates rise, the price of a bond typically __________.

    <p>falls</p> Signup and view all the answers

    Match the types of risks with their descriptions:

    <p>Interest Rate Risk = Potential decrease in returns due to rising interest rates Reinvestment Risk = Uncertainty in reinvesting proceeds from bonds Nominal Interest Rate = Interest rate not adjusted for inflation Real Interest Rate = Interest rate adjusted for expected inflation</p> Signup and view all the answers

    What does the term 'rate of capital gain' refer to?

    <p>The change in a security's price relative to its initial purchase price.</p> Signup and view all the answers

    Long-term bonds are generally less volatile than short-term bonds.

    <p>False</p> Signup and view all the answers

    What is the Fisher equation used for?

    <p>To determine the real interest rate.</p> Signup and view all the answers

    Which of the following statements about a simple loan is true?

    <p>It must be repaid at maturity date along with interest.</p> Signup and view all the answers

    The true cost of borrowing is measured by the __________ interest rate.

    <p>real</p> Signup and view all the answers

    Match the terms related to bonds with their definitions:

    <p>Consol = A perpetual bond with fixed payments Current Yield = Yearly coupon payment divided by bond price Capital Gains = Increases in market value over time Interest Rate Risk = Risk of loss due to interest rate changes</p> Signup and view all the answers

    The yield to maturity on a discount bond is less than its coupon rate.

    <p>False</p> Signup and view all the answers

    Which of the following statements about bond returns is correct?

    <p>Returns may be negative if interest rates increase.</p> Signup and view all the answers

    What is the term for the interest rate that equates the present value of payments from a credit market instrument with its value today?

    <p>yield to maturity</p> Signup and view all the answers

    A bond's price and interest rates have a directly proportional relationship.

    <p>False</p> Signup and view all the answers

    In a coupon bond, the _____ is the fixed interest payment made to the bondholder annually.

    <p>coupon payment</p> Signup and view all the answers

    What is the impact of a lower real interest rate on borrowing and lending incentives?

    <p>It increases borrowing incentives and decreases lending incentives.</p> Signup and view all the answers

    Match the following credit market instruments with their definitions:

    <p>Simple Loan = Repayment required at maturity with interest Coupon Bond = Fixed payments until maturity date Fixed Payment Loan = Amortized payments over a set time frame Discount Bond = Bought below face value, repaid at face value</p> Signup and view all the answers

    What is the main characteristic of a coupon rate?

    <p>The percentage of the face value paid as a yearly coupon</p> Signup and view all the answers

    The __________ rate is the interest rate adjusted for expected changes in the price level.

    <p>real</p> Signup and view all the answers

    What is the effect of a rise in interest rates on long-term bonds?

    <p>The price decreases.</p> Signup and view all the answers

    All bonds pay interest through regular payments to the bondholders.

    <p>False</p> Signup and view all the answers

    What type of loan requires fixed periodic payments and fully amortizes over time?

    <p>fixed payment loan</p> Signup and view all the answers

    The present value of a bond consists of the present value of both the _____ payments and the final payment of the face value.

    <p>coupon</p> Signup and view all the answers

    What happens to the price of a bond when the yield to maturity increases?

    <p>The bond price falls.</p> Signup and view all the answers

    The face value of a coupon bond is paid back in full at maturity, regardless of interest payments.

    <p>True</p> Signup and view all the answers

    What is the formula for calculating the simple interest rate?

    <p>interest payment / amount of the loan</p> Signup and view all the answers

    Match the following types of loans with their definitions:

    <p>Simple Loan = One-time payment at maturity Fixed Payment Loan = Amortized over set period Coupon Bond = Regular coupon payments until maturity Discount Bond = Sold below value and no interest payments</p> Signup and view all the answers

    The _____ of a bond indicates how much interest is paid relative to its face value.

    <p>coupon rate</p> Signup and view all the answers

    What is a unique feature of a discount bond?

    <p>It does not pay interest until maturity.</p> Signup and view all the answers

    What is the Fisher effect primarily associated with?

    <p>Interest rate changes due to inflation expectations</p> Signup and view all the answers

    An increase in the money supply will shift the supply curve for money to the left.

    <p>False</p> Signup and view all the answers

    What happens to the demand for money when the price level rises?

    <p>People want to hold a greater nominal quantity of money.</p> Signup and view all the answers

    The amount of interest sacrificed by not holding an alternative asset is known as the _____ cost.

    <p>opportunity</p> Signup and view all the answers

    Match each type of bond to its corresponding risk category:

    <p>Corporate Bonds = Default Risk Municipal Bonds = Tax-exempt Government Bonds = Default-free Junk Bonds = High Default Risk</p> Signup and view all the answers

    What effect does an increase in default risk have on corporate bonds?

    <p>Shifts demand curve for corporate bonds left</p> Signup and view all the answers

    Default-free bonds have no associated default risk.

    <p>True</p> Signup and view all the answers

    What is the risk premium in bond markets?

    <p>The spread between interest rates on bonds with default risk and default-free bonds.</p> Signup and view all the answers

    During recessions, the risk of _____ increases, leading to higher risk premiums for corporate bonds.

    <p>business defaults</p> Signup and view all the answers

    What is a characteristic of investment-grade securities?

    <p>Lower yields due to lower perceived risk</p> Signup and view all the answers

    Liquidity refers to how easily a bond can be converted into cash.

    <p>True</p> Signup and view all the answers

    What happens to U.S. Treasury bonds when municipal bonds gain tax-free status?

    <p>Demand for municipal bonds shifts rightward and demand for U.S. Treasury bonds shifts leftward.</p> Signup and view all the answers

    As income rises and the economy expands, people tend to hold _____ money.

    <p>more</p> Signup and view all the answers

    Match the following credit ratings with their risk levels:

    <p>Baa/BBB = Investment-grade Below BBB = Speculative-grade AAA = Low default risk D = In default</p> Signup and view all the answers

    Which factor can shift the demand for bonds to the right?

    <p>Increase in income</p> Signup and view all the answers

    Tax-exempt municipal bonds typically have higher interest rates than taxable bonds.

    <p>False</p> Signup and view all the answers

    Study Notes

    Market Overview

    • Markets facilitate the exchange of goods and services between buyers and sellers.
    • Financial markets transfer funds from surplus to deficit units.
    • Sellers/savers have excess funds; buyers/borrowers have a shortage.
    • Financial market activity impacts individual wealth (net worth), business behaviour, and economic performance.
    • Key financial markets: bond market, stock market, and foreign exchange market.

    Financial Instruments

    • Securities represent claims on future income or assets.
    • Bonds are debt securities; they promise periodic payments for a fixed time.
    • The bond market facilitates borrowing for corporations and governments.
    • Stocks represent ownership shares in corporations.
    • Equity finance transactions on stock markets entail ownership claims in companies.
    • Initial Public Offerings (IPOs) are the first sale of a company's stock.

    Stock vs. Bond

    • Stocks represent partial ownership; bonds represent debt.
    • Stocks pay dividends; bonds pay interest.
    • Stocks have no maturity; bonds have a fixed maturity date.
    • Bondholders get paid before stockholders in the event of default.

    Financial Intermediaries

    • Financial intermediaries (banks, insurance companies) borrow from savers and lend to borrowers.
    • Financial innovation introduces new financial products.
    • Economies of scope arise from offering multiple financial services.

    Aggregate Economic Measures

    • Aggregate output represents total final goods and services production.
    • Aggregate price level is the average price of goods and services.
    • Inflation rate measures price level changes.
    • Unemployment rate reflects the proportion of the labor force without jobs.
    • Monetary theory connects money supply, monetary policy, inflation, and economic activity.

    Business Cycle

    • The business cycle involves recurrent expansion and contraction in economic activity.
    • Phases: peak, recession, trough, expansion.

    Adverse Selection and Moral Hazard

    • Adverse selection occurs when one party has more information than another.
    • Moral hazard is when a party takes extra risk with less consequence.

    Barter System

    • A barter system directly exchanges goods and services.

    Monetary Policy

    • Monetary policy manages money supply and interest rates.
    • The Bank of Canada manages Canada’s monetary policy.

    Fiscal Policy

    • Fiscal policy involves government spending and taxation.
    • A budget surplus occurs when tax revenue exceeds government spending.
    • A budget deficit occurs when government spending exceeds tax revenue.

    Gross Domestic Product (GDP)

    • GDP measures the value of final goods and services produced within an economy in a year.

    Foreign Exchange Market

    • Foreign exchange rates represent the value of one currency relative to another.
    • A strong Canadian dollar means Canadian exports are more expensive abroad.

    Financial Intermediaries (Continued)

    • Depository institutions accept deposits and make loans (e.g., banks, credit unions).
    • Contractual savings institutions (insurance companies, pension funds) pool savings for long-term investments.
    • Investment intermediaries (mutual funds, investment banks) manage investment portfolios and facilitate security issuances

    Regulation of Financial System

    • Government regulates financial markets to improve information and ensure soundness.
    • Regulation often includes restrictions on entry, disclosure requirements, asset restrictions, and deposit insurance.
    • Asymmetric information leads to adverse selection and moral hazard.

    Money

    • Money functions as a medium of exchange, unit of account, and store of value.
    • Barter systems have high transaction costs compared to monetary systems.
    • Money evolves from commodity money to fiat money to electronic forms.

    Monetary Aggregates

    • Monetary aggregates (M1+, M2, M3) measure different components of the money supply.
    • Each aggregate includes increasingly less liquid assets.

    Interest Rates

    • Interest rates represent the cost of borrowing money.
    • Present value calculates today's worth of future cash flows.
    • Different types of loans (simple, fully amortized, discount) have distinct interest rate structures.
    • Yield to maturity equates the present value of payments with the bond's price.
    • Current yield is an approximation of the yield to maturity.

    Portfolio Choice

    • Factors influencing asset demand: wealth, expected return, risk, liquidity.
    • Equilibrium interest rates result from shifts in demand and supply.

    Term Structure of Interest Rates

    • The term structure of interest rates examines the relationship across various bond maturities.
    • Default risk, liquidity, and tax considerations affect bond interest rates (risk-free bonds, default-risk bonds).

    Yield Curves

    • Yield curves display the relationship between interest rates and maturity lengths.
    • Theories explaining yield curves: expectations, segmented markets, liquidity premium.

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    Description

    Test your knowledge on the fundamentals of financial markets, including types of markets, mutual funds, and the roles of institutions like the Canada Deposit Insurance Corporation. This quiz covers essential concepts related to financial activities and their impact on individual wealth.

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