4.2.4.1 Financial markets NOTES

What is the primary function of money as a medium of exchange?

• To provide a standard measurement of value

• To be universally accepted in exchange for goods and services

• To be used for settling debts

• To maintain its value over time

What does 'Narrow Money' include?

• Long-term debt securities

• Currency in circulation and other highly liquid assets

• Foreign currencies

• Savings accounts and time deposits

Which market deals with short-term borrowing and lending?

• Capital Market

• Foreign Exchange Market

• Money Market

• Commodities Market

What is a key role of financial markets in the economy?

• To channel funds from savers to borrowers

• To manage private property

• To provide public goods

• To ensure government stability

What is the difference between debt and equity?

• Debt must be repaid with interest, while equity represents ownership and potential dividends

• Equity must be repaid at maturity, while debt does not mature

• Debt holders have voting rights in the business, while equity holders do not

• Debt involves ownership in a company, while equity involves borrowing money

What happens to bond prices when market interest rates rise?

• Bond prices decrease

• Bond prices fluctuate unpredictably

• Bond prices increase

• Bond prices do not change

What is the effect of a market interest rate decrease on the price of existing bonds?

• Makes them more attractive, increasing their price

• Makes them less attractive, reducing their price

• Has no effect on their price

• Decreases their nominal value

What does the term 'coupon' refer to in the context of bonds?

• The total value of the bond at maturity

• The initial price of the bond when issued

• A discount offered on new bonds

• The periodic interest payment to the bondholder

How is the yield on a bond calculated if the market price of the bond falls?

• Market price divided by the annual coupon

• Annual coupon divided by the market price

• Nominal value divided by the annual coupon

• Annual coupon divided by the nominal value

What is the relationship between bond prices and market interest rates?

• Direct relationship

• Inverse relationship

• No relationship

• Proportional relationship