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EC1008 Finance > Financial System Quiz > Flashcards

Financial System Quiz Flashcards

1
Q

How can funds be obtained in the financial market?

A

1) Issuance of debt instruments
2) Issuance of equities

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2
Q

How are secondary markets organized?

A

1) Centralized exchange
2) OTC market

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3
Q

What is the difference between the Money and Capital market?

A

Short-term instruments are exchanged in the money market, and long-term instruments in the capital market.

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4
Q

List the money market instruments

A

1) US Treasury bills
2) Certificates of deposit
3) Commercial paper
4) Repos
5) Federal Funds

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5
Q

US Treasury Bills

A

Issued by the US government to finance government expenditure + sold at discount prices.

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6
Q

Certificates of Deposit

A

Sold by banks and pays annual interest of a given amount and at maturity pays back face value + must remain untouched for whole period.

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7
Q

Commercial Paper

A

Issued by large banks and well known big corporations (e.g. Microsoft) used by firms to repay short-term liabilities.

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8
Q

Repos

A

Short-term loans for which Treasury bills serve as collateral (firm purchases t-bills from bank, and bank repurchases some time later).

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9
Q

Federal Funds

A

Overnight loans between banks at the Federal Reserve.

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10
Q

What is the name of the rate of borrowing costs?

A

Prime rate

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11
Q

List the capital market instruments

A

1) Stocks
2) Mortgages
3) Corporate bonds
4) Government securities
5) State and local government bonds
6) Consumer & bank commercial loans

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12
Q

Stocks

A

Equity claims on the net income and assets of a corporation.

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13
Q

Mortgages

A

Loans used to purchase structure which becomes collateral for loans.

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14
Q

What are mortgage-backed securities?

A

Debt instruments backed by a bundle of individual mortgages whose interest and payments are paid to the holder of the security.

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15
Q

Corporate bonds

A

Long-term bonds that sends the holder an interest payment twice per year and pays off the face value when the bond matures.

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16
Q

What are convertible bonds?

A

Corporate bonds that are allowed to be converted into a specified number of shares of stock at any time up to the maturity date.

17
Q

What is an attractive characteristic of state and local government bonds?

A

Interest payments are exempt from federal income tax and state taxes.

18
Q

Foreign bonds

A

Bonds sold in a foreign country and denominated in that country’s currency.

19
Q

Eurobond

A

A bond denominated in a currency other than that of the country in which it is sold.

20
Q

Eurocurrency

A

Foreign currencies deposited in banks outside the home country (e.g. Eurodollars).

21
Q

What is Financial Intermediation?

A

The process of indirect financing using financial intermediaries.

22
Q

How do Financial Intermediaries reduce transaction costs?

A

Economies of scale (reduced cost as size of transaction increases) and liquidity services

23
Q

What is risk-sharing?

A

Process of creating and selling assets with lower risk and using the funds acquired to purchase other assets that have more risk.

24
Q

What processes involve risk-sharing?

A

Asset transformation + diversification.

25
Q

Moral Hazard

A

Occurs after the transaction when the lenders have no control on the behavior of the borrower after having received the loan.

26
Q

Asymmetric Information

A

The unequal knowledge that each party to a transaction has about the other party.

27
Q

How is asymmetric information reduced in the market?

A

Screening (credit ratings) + monitoring.

28
Q

List the types of depository institutions

A

1) Commercial banks
2) Savings and loans associations
3) Credit unions

29
Q

List the types of contractual savings institutions

A

1) Life insurance companies
2) Fire & casualty insurance companies
3) Pension and retirement funds

30
Q

List the types of investment intermediaries

A

1) Finance companies
2) Mutual funds
3) Hedge funds
4) Investment banks

31
Q

What regulations are used to prevent financial panic?

A
  • Restriction of entry
  • Disclosure of books
  • Restriction on assets + activities
  • Deposit insurance
  • Limits on competition
  • Restriction on interest rates
32
Q

What are the key principles of money and banking?

A

1) Time
2) Risk
3) Information
4) Markets

33
Q

What is the difference between an asset and liability?

A

An asset is something that is owned; a liability is something that is owed.

34
Q

What is the difference between brokers and dealers?

A

Brokers match buyers with sellers; dealers buy/sell from buyers and sellers.

35
Q

What are the advantages of Financial Intermediaries?

A

1) Lower transaction costs
2) Reduce risk
3) Reduce information asymmetry

EC1008 Finance (8 decks)

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