Money and Banking Midterm Quiz

A financial market where newly issued securities like stocks and bonds are traded for the first time. These markets connect companies seeking capital with investors looking to invest.

A financial market for trading existing securities, already issued in the primary market. It allows for quick transactions between investors.

A financial market where financial instruments are bought or sold for immediate cash payment. This includes equity (stocks) and debt (money and bond markets).

Financial markets for trading financial instruments linked to an underlying asset, with payment agreed upon in the future. Examples include futures, options, and swaps.

The ability of market participants to easily and quickly buy or sell financial instruments with minimal transaction costs. This ensures smooth and efficient market operations.

The process of financial markets communicating information about the issuer and the financial instrument traded. It facilitates informed decision-making for investors.

The ability of financial markets to create opportunities for investors to transfer or share risks. It allows for diversification and risk management.

Financial institutions that act as intermediaries between savers and borrowers. Their role is to match investment needs and funding sources.

Financial institutions that accept deposits from customers and make loans. They include commercial banks and savings banks.

Financial institutions that provide financial services such as insurance, asset management, and private equity. They do not accept deposits but manage money for clients.

Money refers to anything generally accepted as a means of payment for goods and services, while currency is a specific form of money issued by a government or central bank, like banknotes and coins.

Five core principles of money and banking include scarcity, divisibility, portability, durability, and acceptability. These principles ensure that money functions effectively as a medium of exchange, store of value, and unit of account.

When evaluating assets as stores of value, consider factors like liquidity, volatility, potential for appreciation, inflation hedging capabilities, and risk tolerance. Each asset class has unique characteristics.

If short-term interest rates rise significantly, the M2 aggregate, which includes savings deposits, is expected to grow faster than the M1 aggregate, which primarily includes checking accounts. This is because higher interest rates incentivize people to shift funds from current accounts to higher-yielding savings accounts.

Advantages of government-issued paper currency include familiar and widely accepted, provides a stable medium of exchange, and can be used to manage the economy. Disadvantages include potential for hyperinflation, lack of flexibility in a digital world, and limited ability to adapt to rapid technological advancements.

Insurance contracts transfer risk from an insured party to an insurer, who pools risk from multiple individuals to provide financial protection against specific events. There are various types, such as life and non-life insurance. Insurance plays a vital role in diversifying risk and facilitating investments.

Futures contracts are legally binding agreements to buy or sell a specific asset or commodity at a predetermined price on a future date. They are traded on organized exchanges and used to hedge against price fluctuations in the underlying asset.

Options give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a certain date. They are valuable for risk management, allowing investors to benefit from price movements while limiting potential losses.

A type of financing where one party (the lessor) agrees to rent an asset to another party (the lessee). There are two types:

• Financial leasing: The lessee owns the asset after the lease period.
• Operational leasing: The lessor owns the asset throughout the lease period.

A financial institution or company that provides investment funds for businesses, typically in their early stages or for expansion. They invest in companies with high growth potential.

The process of selling account receivables (money owed to you by customers) to a third party, such as a bank, to improve short-term cash flow and liquidity.

A form of export financing where the exporter sells its claim on medium- or long-term receivables to a bank (the forfaiter). This provides the exporter with immediate cash flow.

A financial institution that manages investments for individuals or institutions. This includes buying and selling stocks, bonds, and other financial assets.