Financial Markets Quiz

A system that connects savers and borrowers through financial markets and institutions, allowing money to flow smoothly from those with surplus funds to those who need them for investment.

Entities that have more money than they need, looking to invest it for returns.

Entities that need more money than they have, requiring funding to finance their activities.

The flow of funds from surplus spending units to deficit spending units through financial markets and institutions.

Financial institutions like banks, insurance companies, and investment funds that act as intermediaries in the financial system.

Organized marketplaces where financial assets are traded, facilitating the flow of capital from savers to borrowers.

Financial assets are any asset that can be bought or sold, including stocks, bonds, and currencies.

They offer higher potential returns but also carry higher risk, such as stocks and bonds.

A market where newly issued securities are bought and sold for the first time. The issuer directly participates, receiving the proceeds from the sale.

A market where existing securities are bought and sold between investors. The issuer does not participate in these transactions.

Involves buying and selling short-term financial instruments (less than a year) issued by companies and governments. This market focuses on liquidity and short-term funding needs.

Involves buying and selling long-term financial instruments (more than a year) issued by companies and governments. This market focuses on long-term investments and capital formation.

This type of financing involves financial intermediaries like banks, insurance companies, and pension funds, connecting savers and borrowers indirectly.

This type of financing involves direct transactions between borrowers and lenders, bypassing financial institutions.

Financial markets are platforms that facilitate the exchange of financial assets like stocks, bonds, and derivatives. They function as hubs for buyers and sellers to determine pricing and liquidity.

Price discovery is the process of establishing a fair market price for an asset based on the interplay of supply and demand. In financial markets, buyers and sellers express their valuations through bids and offers, leading to a clearing price when these meet.

Liquidity in financial markets refers to the ability of market participants to buy or sell assets quickly and easily without significantly impacting the price. Markets with high liquidity have ample available funds to facilitate transactions and meet immediate demands.

Financial markets reduce transaction cost in two key ways: by lowering search costs and decreasing contracting costs. They provide a central platform for buyers and sellers to find each other, eliminating the need for extensive searches. They also streamline the contracting process, simplifying the exchange of financial assets.

Search costs in financial markets refer to the time and money spent by buyers and sellers seeking out suitable counterparties for their transactions. Financial markets reduce these costs by creating a centralized platform where willing buyers and sellers can meet efficiently, streamlining the search process.

Contracting costs refer to the expenses associated with creating and negotiating legal agreements for financial transactions. Financial markets help lower these costs by providing standardized contracts and procedures, reducing the need for individual negotiation and potentially expensive legal consultations.

A tangible asset is something you can physically touch, like a car or a building.

An intangible asset is something you can't touch, but has value, like a patent or a trademark.

Moneyness refers to the ability of an asset to be used as a medium of exchange. The more easily an asset can be used to buy goods and services, the higher its moneyness.

Liquidity refers to how easily and quickly an asset can be bought or sold in the market without affecting its price. Highly liquid assets can be traded quickly and easily.

Risk is the possibility of losing money when investing in an asset. High-risk assets have the potential for high returns but also a higher chance of losing money.

Return is the profit or gain earned from an investment. High-return assets offer the potential for significant profits.

Financial assets can be traded in financial markets, which are organized exchanges where buyers and sellers meet to trade securities.

The ease with which an asset can be bought or sold in the market without affecting its price significantly.

The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (offer) for an asset.

The risk that the borrower (counterparty) will fail to meet their financial obligations, such as repaying a loan or interest payments.

The risk that the price of an asset will fluctuate, leading to potential losses for the investor.

A common measure of price risk calculated as the variance or standard deviation of the price or returns of an asset. High volatility indicates greater price fluctuations.

The smallest unit into which an asset can be divided for trading.

The ease with which an asset can be converted back into cash or its original form.

The specific time when an asset ceases to exist or matures.

The ease and speed with which an asset can be converted into cash without significant loss of value.

A deposit that earns interest and has a fixed maturity date. It cannot be withdrawn before maturity without penalty.

The price at which a market maker is willing to buy an asset from an investor.

The price at which a market maker is willing to sell an asset to an investor.

The difference between the bid price and the offer price represents the cost of buying and then immediately selling an asset.