Podcast
Questions and Answers
What is a financial system?
What is a financial system?
- A system that includes only financial intermediaries
- A system that includes only financial markets
- A system for tracking personal finances
- A system that consists of financial markets and intermediaries (correct)
Name the two ways of financing.
Name the two ways of financing.
Direct finance and indirect finance
What is direct finance?
What is direct finance?
Funds are transferred directly from lenders to borrowers by sale of securities.
What is indirect finance?
What is indirect finance?
What is a financial market?
What is a financial market?
In a financial market, who is a saver?
In a financial market, who is a saver?
In a financial market, who is a borrower?
In a financial market, who is a borrower?
What is a security or financial instrument?
What is a security or financial instrument?
What are the two types of securities?
What are the two types of securities?
What is a debt security?
What is a debt security?
What is equity?
What is equity?
What do stocks represent?
What do stocks represent?
What are bonds?
What are bonds?
Why are financial markets important?
Why are financial markets important?
How do financial markets promote economic activity?
How do financial markets promote economic activity?
How do financial markets promote economic efficiency?
How do financial markets promote economic efficiency?
How do financial markets increase the well-being of consumers?
How do financial markets increase the well-being of consumers?
Firms can raise funds by issuing what?
Firms can raise funds by issuing what?
Debt instruments can be divided based on what?
Debt instruments can be divided based on what?
What is a maturity date?
What is a maturity date?
What is classified as short-term in maturity?
What is classified as short-term in maturity?
What is classified as intermediate-term in maturity?
What is classified as intermediate-term in maturity?
What is classified as long-term in maturity?
What is classified as long-term in maturity?
What is a money market?
What is a money market?
What is a capital market?
What is a capital market?
What is the most common method of raising funds for firms?
What is the most common method of raising funds for firms?
The debt or bond market is much larger than the?
The debt or bond market is much larger than the?
What does it mean that equity holders have a residual claim?
What does it mean that equity holders have a residual claim?
What is the primary market?
What is the primary market?
What do investment banks do in primary markets?
What do investment banks do in primary markets?
What is a secondary market?
What is a secondary market?
Where do brokers and dealers work?
Where do brokers and dealers work?
What do brokers do?
What do brokers do?
What do dealers do?
What do dealers do?
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Study Notes
Overview of the Financial System
- A financial system connects lenders who have surplus funds with borrowers who need financing.
- Financial markets and intermediaries facilitate this interaction.
Types of Financing
- Direct finance involves direct transfer of funds through the sale of securities.
- Indirect finance channels funds through intermediaries like banks and credit unions.
Financial Markets
- A venue for borrowing and lending where those with a fund shortage can obtain funds from savers.
Role of Savers and Borrowers
- Savers are lenders in the financial market.
- Borrowers, also known as spenders, utilize funds for various expenditures.
Securities
- Securities are tradable assets that grant the buyer future claims on the issuer’s income or assets.
- Two main types of securities are debt securities and equity.
Debt Securities
- Require the issuer to repay borrowed funds, detailing the interest rate and maturity dates.
Equity
- Represents ownership in a firm, with stocks serving as a common form of equity.
Importance of Financial Markets
- Encourage economic activity and efficiency, enhancing consumer well-being.
Promotion of Economic Activity
- Financial markets create investment opportunities for savers and provide financing for business ideas.
Promotion of Economic Efficiency
- Efficient capital allocation leads to increased production levels.
Enhancement of Consumer Well-Being
- Financial markets allow consumers to purchase goods like cars and homes through installment payments.
Fundraising Methods for Firms
- Companies can raise funds by issuing debt instruments or equities, predominantly favoring debt instruments.
Debt Market Structure
- The debt (bond) market far exceeds the equity (stock) market in size.
- Equity holders possess a residual claim, meaning they receive payments only after debt holders are paid.
Market Types
- Primary Market: where new securities are issued; often not publicized.
- Secondary Market: where previously issued securities are bought and sold, ensuring liquidity.
Role of Investment Banks
- Underwrite securities in primary markets by guaranteeing a price for securities before public sales.
Brokers and Dealers in the Secondary Market
- Brokers connect buyers with sellers of securities.
- Dealers facilitate transactions by buying securities to resell them at set prices.
Significance of Secondary Markets
- Provide liquidity, making it easier for investors to buy and sell assets, thus aiding in price discovery.
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