Chapter 3

Question 0

• • Financial Markets

* * Financial Intermediaries

Answer 0

• Markets in which financial assets can be traded.
• Institutions with financial claims on both sides of the balance sheet that act as go-betweens in funneling funds from saver-lenders to borrower-spenders.

Question 1

** Financial System and its function

Answer 1

Where funds are channeled from those who have money (savers-lenders), to those who want money (borrower-spenders), using

• Direct finance – via financial markets
• Indirect finance – using financial intermediaries

Question 2

** Capital Markets

Answer 2

The segment of the marketplace where financial instruments have original maturities of more than a year (including equities, that have no maturity at all).
Instruments:
Corporate Stocks (stock market)
Residential mortgages
Corporate bonds
U.S. government agency securities
U.S. government securities (marketable, long-term)
Commercial, farm, and multifamily mortgages
State and local government bonds

Question 3

** Money Market

Answer 3

Where financial instruments have original maturities of less than one year.
Instruments:
Commercial Paper
Negotiable bank CDs (large-denomination)
U.S. Treasury bills

Question 4

** Financial Institution Overview

Answer 4

Institutions which engage in activities associated with either the financial markets or the intermediated markets.

• Commercial Banks
• Mutual funds (stock and bond)
• Private pension funds
• Life insurance companies
• State and local government retirement funds
• Money market mutual funds
• Commercial and consumer finance companies
• Savings and loan associations and mutual savings banks
• Property and casualty insurance companies
• Credit unions

Question 5

** Mutual Fund

Answer 5

A fund that pools the investments of a large number of shareholders and purchases securities such as stocks or, in a money market mutual fund, money market instruments.

Question 6

** Money Market Mutual Fund

Answer 6

Mutual funds that invest in money market instruments.

Question 7

** Financial Intermediaries (teachers definition)

Answer 7

Financial intermediaries are institutions that purchase claims with one set of characteristics (loans, etc.) and “transform” them into indirect claims with difference characteristics (DDs, CDs, etc.)

Question 8

3 reasons why Financial Intermediaries exist

Answer 8

1. Lower transaction costs
2. Provide diversification
3. Production of information

Question 9

** FI - commercial banks

Answer 9

a financial institution that offers a wide variety of services, including checking accounts and business loans.

Question 10

** FI - finance companies

Answer 10

Non-deposit financial intermediaries that specialize in making consumer and business loans.

Question 11

** FI - private pension funds

Answer 11

funds that invest and manage the contributions of individuals saving for retirement.

Question 12

** FI - life insurance company

Answer 12

companies that sell life insurance, annuities and other savings-orientated products.

Question 13

** FI - state and local government retirement funds

Answer 13

funds that invest and manage the contributions of state and local government employees saving for retirement.

Question 14

** FI - commercial and consumer finance companies

Answer 14

Non-deposit financial intermediaries that specialize in making business/consumer loans.

Question 15

** FI - credit unions

Answer 15

Depository institutions specializing in consumer loans that are organized around a common link among depositors - such as a common employer.

Question 16

** FI - savings and loan association (S&L)

Answer 16

depository institutions that are substantially restricted to investing in home-related assets such as mortgages.

Question 17

** FI - property and casualty insurance companies

Answer 17

financial intermediaries that offer insurance against casualties such as automobile accidents, fire, theft, negligence, and malpractice.