Financial Markets Quiz

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Questions and Answers

What is an example of indirect financing?

Capital markets

Money markets

Insurance underwriting

Pension funds (correct)

Which of the following is NOT a role of financial markets?

Issuing securities directly (correct)

Price discovery

Provision of liquidity

Reduction of transaction costs

How do financial markets reduce transaction costs?

By eliminating securities issuance

By limiting access to specific asset classes

By providing a venue for buyers and sellers (correct)

By decreasing the need for regulation

Which of the following aspects does NOT relate to liquidity in financial markets?

High trading fees Signup and view all the answers

What primarily characterizes direct financing?

Participants raise funds through market mechanisms Signup and view all the answers

Which of the following is a feature of price discovery in financial markets?

Expressions of buyer and seller values Signup and view all the answers

Which institution is primarily associated with indirect financing?

Commercial banks Signup and view all the answers

What type of market facilitates the trading of financial assets directly among participants?

Capital market Signup and view all the answers

What indicates that an asset is liquid?

A high number of buyers and sellers Signup and view all the answers

Which statement best describes the relationship between spread and liquidity?

Smaller spreads indicate higher liquidity. Signup and view all the answers

Which risk involves the potential default of a counterparty?

Credit risk Signup and view all the answers

What does price risk primarily refer to?

The fluctuation in the price of an asset Signup and view all the answers

Which of the following currencies is NOT mentioned as an example of asset denomination?

Euro (EUR) Signup and view all the answers

What is the primary function of a financial system?

To facilitate the flow of funds from savers to borrowers. Signup and view all the answers

Which term describes entities that have surplus funds available for investment?

Surplus spending units Signup and view all the answers

What role do financial markets play in the economy?

They enable the transfer of capital between demanders and suppliers. Signup and view all the answers

What is NOT a characteristic of deficit spending units?

They have surplus funds available for investment. Signup and view all the answers

Financial assets can be best described as:

Instruments traded in financial markets. Signup and view all the answers

Which of the following is a key component of the flow of funds mechanism?

Surplus and deficit business units. Signup and view all the answers

Which type of financial markets is most focused on the long-term capital raising?

Bond markets Signup and view all the answers

Which feature of financial assets is essential for making informed investment decisions?

Their properties and performance characteristics. Signup and view all the answers

Which of the following describes low-risk financial assets?

They usually have high liquidity. Signup and view all the answers

What is a defining characteristic of tangible assets?

Their value depends on physical properties. Signup and view all the answers

Which of the following is an example of a low-risk financial asset?

Long-term debt securities Signup and view all the answers

Which of the following best describes financial assets?

They represent legal claims to future benefits. Signup and view all the answers

How does liquidity vary between high-risk and low-risk financial assets?

Low-risk assets typically have high liquidity. Signup and view all the answers

Which statement about bonds is accurate?

They offer legal claims to coupon payments. Signup and view all the answers

What role does 'moneyness' play in understanding financial assets?

It describes the usability of an asset as a means of exchange. Signup and view all the answers

Which of the following statements regarding financial assets is false?

All financial assets are considered high-risk. Signup and view all the answers

What is a characteristic of the primary market?

The issuer receives proceeds from the sale. Signup and view all the answers

Which of the following is an example of a primary market activity?

Public offerings of new securities. Signup and view all the answers

What distinguishes the secondary market from the primary market?

Existing securities are sold between investors. Signup and view all the answers

What type of market is primarily used for trading short-term instruments?

Money market Signup and view all the answers

Which statement accurately describes the capital market?

It deals with long-term financial instruments. Signup and view all the answers

What does the term 'contracting costs' refer to in financial markets?

The costs incurred during asset transactions. Signup and view all the answers

In the context of financial markets, what happens in a private placement?

Securities are sold to a select group of investors. Signup and view all the answers

What is a common feature of transparency in financial markets?

Contracts are implicit in every asset transaction. Signup and view all the answers

What is the primary characteristic of saving deposits that qualifies them as nearly money?

They can be quickly and easily converted into cash. Signup and view all the answers

Which of the following best describes divisibility in relation to bank deposits?

They can be divided into very small amounts, even up to the nearest cent. Signup and view all the answers

What does reversibility refer to in financial terms?

The ease of undoing a financial transaction. Signup and view all the answers

Which of the following would impact the round-trip cost associated with a trade?

The commission fees and bid-offer spread. Signup and view all the answers

What is typically measured by the concept of liquidity?

The loss incurred from immediate liquidation of an asset. Signup and view all the answers

Which asset type commonly has specific maturity dates?

Time deposits. Signup and view all the answers

What is a characteristic of treasury bills in terms of maturity?

They usually have shorter time to maturity compared to corporate bonds. Signup and view all the answers

What is the function of the offer price in the context of reversibility?

It indicates how much one will receive when selling an asset. Signup and view all the answers

Study Notes

Introduction to Financial Markets

Financial markets facilitate the flow of funds from savers to borrowers.
They provide avenues for external capital needs for governmental bodies, businesses, and NGOs.
Commercial banks and financial markets are two ways to access external capital.

Financial Systems

Financial systems efficiently move funds from saving to investment.
They connect borrowers and lenders through markets and institutions.
A flow of funds mechanism facilitates capital allocation between surplus and deficit spending units.

Basic Components of Financial Systems

Financial institutions act as intermediaries channeling funds.
Financial markets provide platforms for transactions between investors, firms, and government, thus facilitating the flow of funds.
Institutions include commercial banks, savings institutions, insurance companies, pension funds, finance companies, and mutual funds.

Role of Financial Markets

Markets facilitate the discovery of prices for assets.
Provision of liquidity ensures sufficient funds for timely transactions.
Reduction of transaction costs improves efficiency through convenient venues for buyers/sellers & standardized contracts.

Types of Financial Markets

Primary Market

New securities are issued and traded for the first time.
The issuer directly receives the proceeds.
Activities include public offerings and private placements. (e.g., TNB issuing shares)

Secondary Market

Existing securities are traded among investors.
The issuer is not involved in transactions.
The market facilitates ownership transfer. (e.g., investor selling shares)

Money Market vs. Capital Market

Money Market

Short-term instruments (less than a year) Low risk, low return, high liquidity
Trading of short-term instruments by Firms & Governments. (Examples include Commercial Paper & Government Paper)

Capital Market

Long-term instruments (more than a year)
High risk, high return, low liquidity
Trading of long-term instruments by Firms & Governments. (Examples include Equity Securities and Long-term Debt Securities)

Financial Assets

Assets have value in exchange, categorized as tangible and intangible.
Intangible assets represent legal claims to future benefits e.g. Shares and Bonds.
Tangible assets have physical properties such as land, buildings or vehicles.

Properties of Financial Assets

Moneyness: Cash, cheques, and savings deposits can be readily converted to cash.
Divisibility : minimum size of the asset in the exchange. e.g., stock shares.
Reversibility: ease of reversing a transaction and bid-offer spread influences this.
Maturity: time when an asset will cease to exist or time deposits period.
Liquidity: a measure of how quickly an asset can be converted to cash. A higher liquidity means a smaller bid-offer spread (the difference between buying and selling price)

Risk

Credit risk: possibility of default by a borrower/issuer
Price risk: potential for fluctuating asset prices due to market forces.

Currency

Assets are denominated in specific currencies (e.g., USD, MYR, SGD).

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Description

Test your knowledge of financial markets with this quiz. It covers key concepts such as indirect financing, liquidity, and the roles of financial institutions. Enhance your understanding of how financial systems operate and distinguish between direct and indirect financing.