Questions and Answers
Which of the following statements correctly differentiates between financial institutions and financial markets?
What role do financial institutions play in the financial system?
Which type of financial institution primarily pools resources to pay out claims to policyholders?
What is NOT a characteristic of financial instruments?
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Which financial institution is specifically mentioned as utilizing individual deposits to provide loans and purchase securities?
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What is the primary function of mutual funds?
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Which of the following statements about financial markets is correct?
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In the context of pension funds, what role do they play?
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What distinguishes preferred stock from common stock?
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Which of the following describes a financial instrument?
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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
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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.
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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
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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.