Investment in Companies: Direct vs Indirect Financing

What is the primary reason for the existence of primary and secondary markets in financial systems?

To provide a way for deficit units to pay returns to surplus units.
To ensure that fund managers can charge fees for their services.
To allow direct matching of surplus and deficit units' preferences.
To resolve the mismatch in preferences between surplus and deficit units. (correct)

In direct financing, what are the main costs involved for deficit units?

Supplying funds through managers who charge fees.
Paying fund manager fees and commissions on IPOs.
Taking a commission for brokering IPOs.
Paying returns to surplus units and fees to investment banks. (correct)

Why do financial markets play a role in resolving mismatches between surplus and deficit units?

To ensure that surplus units pay interest to deficit units.
To encourage direct financing over indirect financing.
To align the preferences of surplus and deficit units. (correct)
To eliminate the need for fund managers.

What is one of the primary functions of banks in the context of direct financing?

To help deficit units with issuing securities and paying returns. (D) Signup and view all the answers

How do surplus units typically provide funds in direct financing?

By supplying funds through managers who charge fees. (A) Signup and view all the answers

What is the main reason for fund managers charging fees in direct financing?

To compensate them for their investment management services. (B) Signup and view all the answers

According to the passage, which of the following is a key contribution of behavioural finance to understanding market prices?

It recognizes that investors do not always act rationally. (B) Signup and view all the answers

What is the relationship between volatility and market risk according to the passage?

Volatility is a measure of the degree of movement in a variable, which indicates the level of market risk. (D) Signup and view all the answers

Which of the following behavioural biases is NOT mentioned in the passage?

Hindsight bias (A) Signup and view all the answers

Which of the following is a characteristic of low volatility according to the passage?

A relatively smooth line (B) Signup and view all the answers

According to the passage, what is the key purpose of behavioural finance?

To understand and explain how reasoning errors influence investor decisions and market prices. (C) Signup and view all the answers

Which of the following is NOT mentioned as a key behavioural bias in the passage?

Herd mentality (D) Signup and view all the answers

What type of financial institutions mainly serve households?

Credit unions (B) Signup and view all the answers

Which type of financial institutions are authorised by ARPA to undertake banking businesses?

Banks (A) Signup and view all the answers

Which financial institutions provide financing services to wholesale customers and have largely been taken over by banks?

Shadow Banks (C) Signup and view all the answers

What type of investment vehicles sell 'units' in their trust and then invest their funds?

Public unit trusts (C) Signup and view all the answers

Which type of financial institutions provide lease financing for motor vehicles and business equipment?

Finance Companies (B) Signup and view all the answers

What do fund managers provide in return for fees?

'Investment management services' (D) Signup and view all the answers

What is the primary role of fund managers in the context of direct financing?

They take a commission on the investments made by surplus units. (C) Signup and view all the answers

What is the main advantage of crowdfunding as a form of direct financing?

All of the above. (D) Signup and view all the answers

What is the primary market in the context of financial markets?

It is where shares are issued for the first time. (A) Signup and view all the answers

What is the role of investment banks in direct financing?

They broker initial public offerings (IPOs) for deficit units. (B) Signup and view all the answers

What is the primary difference between direct financing and traditional financing methods?

Direct financing involves raising funds directly from investors, eliminating intermediaries like banks and fund managers. (A) Signup and view all the answers

What is the primary cost associated with direct financing for deficit units?

The spread or difference between the returns earned by surplus units and the returns paid to deficit units. (B) Signup and view all the answers

What is the primary reason banks borrow from financial markets?

To diversify their funding sources beyond deposits (B) Signup and view all the answers

How did attitudes towards bank deposits change after the Global Financial Crisis (GFC)?

Deposits were seen as safer due to new government guarantees (D) Signup and view all the answers

Why do major banks tend not to borrow a lot of equity?

To achieve economies of scale in their issuing costs (C) Signup and view all the answers

What is typically the main short-term security issued by banks domestically?

Negotiable certificates of deposits (NCDs) (D) Signup and view all the answers

Why do major banks have a funding advantage over smaller competitors?

Due to the ability to borrow offshore and their perceived 'too big to fail' status (C) Signup and view all the answers

What is the main feature of short-term debt securities?

They lack interest payments as interest is embedded into face value (D) Signup and view all the answers