Money and Banking Midterm Quiz

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Questions and Answers

What type of leasing allows the lessee to own the asset?

Financial leasing (correct)

Operating leasing

Equity leasing

Project leasing

Which of the following banks is state-owned in the Slovak Republic?

VUB

Eximbanka (correct)

Tatrabanka

365

What is a primary function of factoring in finance?

Long-term investment

Asset leasing

Selling claims to third parties (correct)

Insurance underwriting

Which of the following companies is considered a commercial insurance provider?

Allianz Signup and view all the answers

Which institution focuses on executing orders in the financial market?

Stock brokers Signup and view all the answers

What is the primary difference between money and currency?

Money is a broader concept that includes currency. Signup and view all the answers

Which of the following is NOT one of the five core principles of money and banking?

Inflation Signup and view all the answers

What would likely happen to the growth rates of M1 and M2 aggregates if short interest rates rise significantly, given no interest on current accounts?

M2 would grow faster than M1. Signup and view all the answers

Which of the following statements about futures contracts is accurate?

They involve an agreement to exchange amounts of assets at fixed prices in the future. Signup and view all the answers

In an interest rate swap, what is exchanged?

A variable interest rate for a fixed interest rate. Signup and view all the answers

What role do actuaries play in insurance contracts?

They apply statistical methods for risk assessment. Signup and view all the answers

Which of the following is a characteristic of options in financial instruments?

The seller has a potential obligation, while the buyer has a right. Signup and view all the answers

What is the primary purpose of reinsurance groups?

To achieve wider risk diversification. Signup and view all the answers

What is the primary purpose of using an FX swap?

To manage the risk of currency fluctuation between EUR and USD. Signup and view all the answers

Which market deals with newly issued securities such as stocks and bonds?

Primary market Signup and view all the answers

What is a characteristic of the derivative markets?

They consist of financial instruments linked to underlying assets. Signup and view all the answers

Which of the following is NOT a characteristic of a well-run financial market?

High government intervention Signup and view all the answers

What does the term 'di-worse-fication' refer to?

Indiscriminate diversification that leads to increased risk. Signup and view all the answers

What role do financial institutions primarily play in the financial system?

They act as intermediaries between savers and borrowers. Signup and view all the answers

Which type of market involves trading financial instruments for immediate cash payment?

Cash (spot) market Signup and view all the answers

In the context of financial markets, what is market liquidity?

The degree to which assets can be bought and sold quickly. Signup and view all the answers

Which of the following is NOT one of the six parts of the financial system?

Insurance policies Signup and view all the answers

What differentiates money market instruments from bond market instruments?

Money markets deal with debt instruments shorter than one year. Signup and view all the answers

Study Notes

Money and Banking

The Bank of Canada issued a 1 Canadian dollar bill.
The note is legal tender.

Midterm Test Questions

Explain the difference between money and currency.
What are five core principles of money and banking?
What factors should you consider while using the following assets as stores of value: gold, real estate, stocks, government bonds, cryptocurrencies?
Assuming no interest is paid on current accounts, what would you expect to happen to the relative growth rates of M1 and M2 aggregates if short-term interest rates rose significantly?
What are some advantages and disadvantages of a government continuing to issue paper currency in the face of widespread financial innovation?

Financial Instruments Used to Transfer Risk

Insurance contracts: Edward Lloyd - insurance of ships since 1688, life and non-life products, impact on investments (e.g., Warren Buffett - GEICO), diversification of risk, statistical methods, actuaries, reinsurance groups (Swiss Re, Lloyds) offer wider diversification.
Price of derivative instruments: Time value of money, risk transferred.
Futures contracts: Agreement to exchange a fixed amount of an asset or commodity at a fixed price on a set future date. Derivative exchanges (e.g., CBOE Global Markets) feature counterparty risk, initial and variable margin, standardized contracts.
Options: Asymmetric position - buyer has a right, seller has a potential obligation. Similarities with insurance contracts (variable age and health), value is linked to probability, non-linear profile, complexity, and structured notes.
Swaps: Exchange of two specific cash flows in the future. Interest rate swaps exchange variable interest rates for fixed rates (e.g., ABC Co. variable 6-month EUR loan).
FX swap: European ABC Co. wants to buy components from US (USD), sell final product to US client (USD). FX swap eliminates the risk of FX EUR against USD. Interest rate differential between EUR and USD (time value of money). Cost-effective solution, FX forward (far leg) -- exporters/importers.

Financial Markets

Role of financial markets: Market liquidity ensures owners of financial instruments can buy and sell easily with low transaction costs. Information communicates about the issuer and financial instrument. Risk transfer/risk sharing creates a place for investors to buy/sell risks.
Six parts of the financial system: Money, financial instruments, financial markets, financial institutions, regulatory agencies, central banks.
Primary markets: Market for newly issued securities (stocks, bonds). Arrangers/lead arrangers/co-arrangers, manage debt, liquidity, auctions. IPOs (Initial Public Offerings).
Secondary markets: Market for existing securities.
Cash (spot) markets: Financial instruments sold/bought for immediate cash payment.
Equity markets: Stocks.
Debt markets: Money markets - debt instruments shorter than one year (e.g., T-bills). Bond markets - debt instruments longer than one year.
Derivative markets: Financial instruments linked to underlying assets; traded for payment in the future (futures, options, swaps).

Characteristics of a Well-Run Financial Market

Transaction costs are low.
Information about financial instruments and prices are transparent and widely available.
Solid governance enforced by the government (market rules, legal enforcement).

Financial Institutions

Financial intermediaries: Match interests of savers and borrowers. Diversification of risk.
Depository institutions: Commercial banks, savings banks (universal banks).
Non-depository institutions: Insurance companies, asset managers (funds), private equity, and venture capital firms. Differences between money invested in funds and deposited in banks.
Specialized banks: Construction savings, insurance companies, social/health/commercial/life, non-life insurance.
Leasing: Contract where a lessor rents an asset to a lessee. Financial leasing (asset owned by lessee) and Operational leasing (asset owned by lessor).
Factoring: Financing contract where one party sells accounts receivables to a third party (e.g., bank).
Forfaiting: Form of export financing where exporter sells medium/long-term receivables to a forfaiter.
Pension funds: Second and third pillar of pension scheme, asset management companies-investment funds.
Stock brokers: Execution of orders. Private equity and venture capital firms.

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Description

Test your knowledge on the principles of money and banking with this midterm quiz. Explore topics such as the differences between money and currency, the implications of interest rates on money supply, and the role of financial instruments in risk transfer. Prepare to discuss real-world applications and theoretical concepts.