Introduction to financial markets part one

The market value size of outstanding instruments of capital markets depends on factors?

• Primary cash flows

• Number of issued securities

• Market prices of securities

• Number of issued securities and market prices of securities

Answer explanation

Market value is also commonly used to refer to the market capitalization of a publicly traded company and is calculated by multiplying the number of its outstanding shares by the current share price.

The money market where securities are issued by governments to obtain funds for the short term is classified as?

• Money market instruments

• Capital market instruments

• Counter instruments

• Counter instruments

Answer explanation

The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers. Money market funds, money market accounts, certificate of deposits (CDs), commercial paper, banker's acceptance, and repurchase agreements (Repos) are money market instruments.

The depository institutions include?

• Mutual funds

• Saving banks

• Commercial banks and thrifts

• Credit unions

Answer explanation

A thrift bank–also just called a thrift–is a type of financial institution that specializes in offering savings accounts and originating home mortgages for consumers. Thrift banks are also sometimes referred to as Savings and Loan Associations (S&Ls). Thrift banks differ from larger commercial banks, like Wells Fargo or Bank of America, because they usually offer higher yields on savings accounts and provide limited lending services to businesses.

The major liabilities of the commercial banks are?

• Junk bonds

• Loans

• Deposits

• Swap bonds

Answer explanation

When bank customers deposit money into a checking account, savings account, or a certificate of deposit, the bank views these deposits as liabilities. After all, the bank owes these deposits to its customers and is obligated to return the funds when the customers wish to withdraw their money.

Loans, treasury securities, and reserves are bank's assets.

Every financial market has the following characteristic

• It determines the level of interest rate

• It allows loans to be made

• It allows common stock to be traded

• It channels funds from lenders to borrowers

Answer explanation

Financial markets create securities products that provide a return for those who have excess funds (Investors/lenders) and make these funds available to those who need additional money (borrowers)

Financial markets have the basic function of

• Bringing together people to lend funds & people who want to borrow funds

• Assuring that the swings in the business cycle are less pronounced

• Assuring that governments need never resort to printing money

• Assuring a stable interest rate

Answer explanation

One of the main functions of financial markets is to allocate capital, matching those who have the capital to those who need it.

Which of the following are securities?

• A certificate of deposit

• A share of Vinatex Danang Joint Stock Company common stock

• A treasury bill

• All three choices provided

Answer explanation

Security is a tradable financial asset that includes debt, equity, hybrids, and derivatives.

Which of the following statements about the characteristics of debt and equity are true?

• They can both be long-term financial instruments

• They both involve a claim on the issuer's income

• They both enable a corporation to raise funds

• All three choices provided

Answer explanation

Companies can raise capital via debt or equity. Equity refers to stocks, or an ownership stake, in a company. Buyers of a company's equity become shareholders in that company. The shareholders recoup their investment when the company's value increases (their shares rise in value), or when the company pays a dividend. Buyers of a company's debt are lenders; they recoup their investment in the form of interest paid by the company on the debt.

It is often easier for companies to raise money through debt, as there are fewer regulations on debt issuance, the risk for an investor (lender) is generally lower, and a company's assets can be used as collateral.

Which of the following can be described as involving direct finance?

• A corporation's stock is traded in an OTC market

• People buy shares in a mutual fund

• A pension fund manager buy commercial paper in the secondary market

• A pension fund manager buy commercial paper from the issuing corporation

Answer explanation

When borrowers borrow funds directly from the financial market without using a third-party service, such as a financial intermediary, it is called direct finance.

Which of the following can be described as involving indirect finance?

• A corporation takes out loans from a bank

• A corporation buys commercial paper in a secondary market

• People buy shares in a mutual fund

• All three choices provided

Answer explanation

Indirect finance is the process of obtaining funds or investing funds through third-party institutions like banks and mutual funds.