Introduction to Finance - Chapter 9: Basics of Securities

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Questions and Answers

What defines real assets?

Assets that do not physically exist

Assets that represent claims for income

Assets that can only be traded on public markets

Assets that create new value with human labor (correct)

Which of the following describes financial assets accurately?

They must be traded publicly

They are claims for cash flows or rights to assets (correct)

They create new value independently

They only include physical securities

What is a significant characteristic of dematerialized securities?

They are represented by electronic signs (correct)

They represent ownership through documentation

They have fixed maturity periods

They exist in a physical form

Which type of security has a maturity period longer than 5 years?

Debenture bonds Signup and view all the answers

What does fixed yield in securities refer to?

Cash flows are determined at issuance Signup and view all the answers

What distinguishes public trade from private trade of securities?

Public trade is accessible to all possible investors Signup and view all the answers

Which of the following does not represent a type of securities maturity?

Variable-term Signup and view all the answers

Which of these is NOT typically a characteristic of marketable financial assets?

They have constant value over time Signup and view all the answers

What is the primary role of the monetary system within the financial system?

To secure the money supply and liquidity of the economy Signup and view all the answers

Who are defined as savers in the financial markets?

Economic actors who have a surplus of capital Signup and view all the answers

Which of the following is NOT a function of the financial system?

Conducting primary market transactions Signup and view all the answers

Financial markets primarily facilitate the exchange between which two economic actors?

Savers and borrowers Signup and view all the answers

What do borrowers typically seek from financial markets?

To obtain money for short-term liquidity or long-term investments Signup and view all the answers

What characterizes financial assets compared to real assets?

Financial assets represent claims or rights to cash flows Signup and view all the answers

The function of reallocation of incomes within the financial system is handled by which subsystem?

Fiscal system Signup and view all the answers

Which of the following best describes financial markets?

Platforms for the exchange of financial instruments and money between savers and borrowers Signup and view all the answers

Study Notes

Introduction to Finance - Chapter 9: Basics of Securities

The financial system is a crucial part of the overall economic system.
Its role is to ensure a reliable money supply, liquidity, and operational payment systems.
It also facilitates the allocation of funds from savers to borrowers and income redistribution among economic actors.
The financial system functions through different subsystems: Monetary, Supervising, Financial markets (including intermediaries), and Fiscal.

Topics Covered

Real and financial assets
Basics of securities
Bonds
Shares

Financial System Functions

Securing the money supply and liquidity of the economy: Monetary system
Maintaining, regulating, and operating the payment system: Supervising system
Allocating the savers' money to borrowers: Financial markets and intermediaries
Reallocating incomes of different economic actors in time and space: Fiscal system

Financial Markets

Definition: A platform for the exchange of financial instruments and money, denominated in various currencies.
In simpler terms: Markets where borrowers seeking funds meet with savers with surplus capital.
Key function: Connects savers and investors to borrowers.

Primary Function of Financial Markets

Supply Side: Savers/investors provide capital to borrowers in exchange for financial instruments.
Demand Side: Borrowers seek capital for activities and investments, utilizing financial instruments.

Financial Markets - Primary Function

Connect savers and borrowers.
Demand side: Individuals who need money due to short-term liquidity problems or long-term capital needs for activities or investments; they obtain funds through financial instruments.
Supply side: Investors/savers with excess funds that aren't immediately required, who offer their funds to borrowers in anticipation of future profits.

Real and Financial Assets

Real assets: Tangible items (land, property, machinery) which create value through their use in production or economic activity. They generate income.
Financial Assets: Represent claims on real assets or other financial assets; they represent claims on income but have no inherent value creation capacity in themselves. Trading is a zero-sum game because income/value creation is in the real asset.
Real assets generate income via their use/operation.
Financial assets claim income from real assets from dispersing risk.

Financial Assets and Securities

Financial assets: A broader category, encompassing any contractual agreement where one party holds a financial claim (including cash flow, assets, or rights); the other party incurs a liability to fulfill those claims.
Securities: A subset of financial assets. They are marketable (easily bought/sold financial instruments, like shares/bonds/investment funds).

Types of Securities

Form: Paper or dematerialized.
Maturity: Short-term (under a year), medium-term (1-5 years), or long-term (over 5 years).
Yield: Fixed (e.g., bonds with fixed interest payments) or changing/variable (e.g., stocks, with dividends depending on market conditions).
Trade: Public (exchanges, OTC) or private.
Representations: Ownership (stocks), debt securities (bonds), and derived securities (interest rate derivatives).

Securities - Form

Paper: Physical certificates representing ownership.
Dematerialized: Electronic records/accounts reflect ownership of the security.

Securities - Maturity

Short-term: Less than a year (e.g., treasury bonds.)
Medium-term: 1 - 5 years (most bonds).
Long-term: Over 5 years (bonds).
No maturity: Securities with continuous ownership (e.g., shares).

Securities - Yield

Fixed yield: Fixed income generated when issued (e.g., bonds with fixed interest rates.)
Changing yield: Varying income based on market conditions or underlying asset performance (e.g., stocks, with dividends based on company performance). These income types are not fixed as the market conditions or assets can lead to changes in income.

Securities - Trade

Public: Traded on public exchanges (stock exchanges, OTC) involving a large number of investors.
Private: Traded among a limited circle of investors, often with a lesser cost (often less liquidity).

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Description

Explore the fundamentals of the financial system with a focus on securities in Chapter 9. This quiz covers real and financial assets, including bonds and shares, and delves into the roles and functions of various financial subsystems. Test your knowledge on how the financial system supports economic stability and liquidity.