Understanding Financial Systems

What are financial markets primarily used for?

• To provide entertainment and leisure activities.

• To regulate government policies and laws.

• To store physical assets like gold and real estate.

• Financial markets are primarily used for trading financial instruments and facilitating capital allocation.

Name two types of financial markets.

• Stock market, Bond market

• Real estate market

• Insurance market

• Commodities market

What is a stock?

• A stock is a government-issued certificate.

• A stock is a type of bond.

• A stock is a share in the ownership of a company.

• A stock is a form of currency.

What is a bond?

• A bond is a type of stock that represents ownership in a company.

• A bond is a contract for purchasing goods and services.

• A bond is a debt security issued by entities to raise capital, promising to pay back the principal with interest.

• A bond is a financial instrument used to buy real estate.

What role do investment funds play in financial markets?

• Investment funds are designed to eliminate all investment risks.

• Investment funds primarily focus on short-term trading profits.

• Investment funds are only for wealthy individuals and not accessible to the general public.

• Investment funds facilitate capital allocation, enhance market liquidity, and provide diversification for investors.

What is the purpose of financial regulation?

• To promote competition among financial institutions.

• To maintain financial system integrity and protect consumers.

• To eliminate all risks in the financial market.

• To increase government control over personal finances.

Name one regulatory body in the financial sector.

• Federal Reserve System

• Financial Industry Regulatory Authority (FINRA)

• International Monetary Fund (IMF)

• Securities and Exchange Commission (SEC)

What is the difference between primary and secondary markets?

• The primary market involves new securities issuance, while the secondary market involves trading existing securities.

• The primary market is for trading commodities, while the secondary market is for stocks.

• The primary market deals with real estate transactions, while the secondary market is focused on mutual funds.

• The primary market is where companies buy back their shares, and the secondary market is for issuing new bonds.

What are derivatives in finance?

• Derivatives are government bonds with fixed interest rates.

• Derivatives are stocks that pay dividends.

• Derivatives are physical assets like real estate or commodities.

• Derivatives are financial contracts whose value is based on the price of an underlying asset.

How do interest rates affect investment decisions?

• Investors only consider interest rates when saving money.

• Higher interest rates always lead to more investments.

• Interest rates affect investment decisions by influencing borrowing costs and the attractiveness of saving versus investing.

• Interest rates have no impact on investment decisions.