Financial System Lesson 2

Questions and Answers

Which of the following statements correctly differentiates between financial institutions and financial markets?

Financial markets are only used for securities trading, while financial institutions handle all aspects of fund management.

Financial markets facilitate direct fund exchanges between savers and borrowers, while financial institutions provide loans and investments. (correct)

Financial institutions are limited to governmental functions, whereas financial markets involve private sector transactions.

Financial markets are composed solely of government-related entities, while financial institutions include private and public players.

What role do financial institutions play in the financial system?

They regulate the activities of consumers in the financial market.

They directly manage governmental financial markets.

They serve as intermediaries that channel savings into loans and investments. (correct)

They create financial instruments for governmental use.

Which type of financial institution primarily pools resources to pay out claims to policyholders?

Pension Funds

Insurance Companies (correct)

Investment Banks

Commercial Banks

What is NOT a characteristic of financial instruments?

They are strictly issued by government entities. Signup and view all the answers

Which financial institution is specifically mentioned as utilizing individual deposits to provide loans and purchase securities?

Commercial Banks Signup and view all the answers

What is the primary function of mutual funds?

To enable small investors to invest in a diversified portfolio Signup and view all the answers

Which of the following statements about financial markets is correct?

Capital markets involve securities with longer-term maturities. Signup and view all the answers

In the context of pension funds, what role do they play?

They receive payments from employees and invest the proceeds. Signup and view all the answers

What distinguishes preferred stock from common stock?

Preferred stock has priority over common stock in asset claims. Signup and view all the answers

Which of the following describes a financial instrument?

A document representing a legal agreement involving monetary value. Signup and view all the answers

Study Notes

Financial System Overview

Comprises institutions and practices for global, regional, or firm-specific fund exchange.
Users of funds include individuals, firms, and governments.

Financial Institutions

Act as intermediaries converting savings from individuals, businesses, and governments into loans or investments.

Types of Financial Institutions

Commercial Banks: Accept deposits from individuals, offering loans and purchasing securities from firms and government.
Insurance Companies: Pool funds from policyholders to provide loans and invest in various securities until claims are settled.
Mutual Funds: Allow small investors to access diversified portfolios managed by professionals.
Pension Funds: Collect payments from employees to invest on their behalf for retirement savings.
Other Institutions: Include the Government Service Insurance System (GSIS), Social Security System (SSS), Unit Investment Trust Fund (UITF), investment banks, and credit unions.

Financial Markets

Organized platforms for suppliers and users to transact funds directly.

Types of Financial Markets

Primary Market: New securities are issued to investors via public offerings or private placements.
Secondary Market: Trading of previously owned securities occurs.

Market Segments

Money Markets: Trade short-term securities with maturities of one year or less.
Capital Markets: Focus on instruments with longer maturities.

Financial Instruments

Equity Instruments: Represent ownership in a company, including:
- Preferred Stock: Priority claims over common stock in assets.
- Common Stock: Represents true ownership of the company, with returns varying by company performance.
Debt Instruments: Involve legal agreements for monetary value, typically with fixed returns:
- Treasury Bonds and Bills: Issued by the government, providing fixed interest rates.
- Corporate Bonds: Issued by publicly listed companies, also offering fixed returns.

Group Activities

Encouraged comparative analysis of pairs through Venn diagrams:
- Group 1: Commercial Banks vs. Insurance Companies
- Group 2: Mutual Funds vs. Pension Funds
- Group 3: Primary Market vs. Secondary Market
- Group 4: Capital Market vs. Money Market
- Group 5: Equity Instrument vs. Debt Instrument

Description

This quiz focuses on Lesson 2 of the Financial System, where students learn to distinguish between financial institutions, financial instruments, and financial markets. It also covers the users of funds and helps compare and contrast different financial instruments. Enhance your understanding of the complex world of finance.