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Overview of the Financial System > II. Structure of Financial Markets > Flashcards

II. Structure of Financial Markets Flashcards

1
Q

T or F. A firm or an individual can obtain funds in a financial market through 2 ways.

A

True.

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2
Q

What are the ways in which a firm or an individual can raise funds?

A

Debt instrument and issuance of equities

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3
Q

T or F. Issuing equities is the most common method to obtain funds.

A

False. Should be debt instrument

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4
Q

______ is a contractual agreement by the borrower to pay the holder fixed dollar amounts at regular intervals until it reaches maturity. Examples of this are bonds or mortgages.

A

Debt instrument

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5
Q

What is the term called for the expiration date of the debt instrument?

A

Maturity

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6
Q

What are the terms under a debt installment?

A

short-term, long-term, and intermediate-term

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7
Q

Less than a year of a debt installment’s maturity.

A

Short-term

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8
Q

Equal or more than 10 years of a debt installment’s maturity.

A

Long-term

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9
Q

Debt instruments with a maturity between 1 and 10 years are said to be what term?

A

Intermediate-term

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10
Q

T or F. Common stock is a common example of equities.

A

True

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11
Q

____ are claims to share in the net income and the assets of a business.

A

Equities

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12
Q

Equities usually make periodic payments to their holders, what is this called?

A

Dividends

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13
Q

T or F. Dividends are considered short-term securities because they have no maturity date.

A

False. It is considered long-term securities

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14
Q

Owning stock means that you own a portion of the firm and thus have the right to ______ and to ____.

A

to vote on issues important to the firm and to elect its directors.

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15
Q

What is the main disadvantage of owning a corporation’s equities?

A

An equity holder is a residual claimant - the corporation must pay its debt holders before its equity holders.

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16
Q

What is the advantage of holding equities which is not possible for debt holders?

A

Equity holders benefit directly from any increases in the corporation’s profitability or asset value because it confers ownership rights which is not present in debt holders because their dollar payments are fixed.

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17
Q

T or F. The total value of equities in the US has typically fluctuated between $1 and $10 trillion since the late 1970s, depending on the prices of shares.

A

False. It fluctuated between $1 and $10 trillion since the early 1970s.

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18
Q

T or F. The size of the debt market is on par with that of the equities market: having a value of $19 trillion worth of debt instruments and $20 trillion worth of equities at the end of 1999.

A

True.

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19
Q

_______ is a financial market where new issues of a security, such as a bond or a stock are sold to initial buyers by the corporation or government agency borrowing the funds.

A

Primary Market

20
Q

_______ is a financial market where securities that have been previously issued (secondhand) can be resold.

A

Secondary market

21
Q

T or F. Selling securities to initial buyers in the primary market are held privately behind closed doors.

A

True

22
Q

What financial institution is important in assisting in the initial sale of securities in the primary market?

A

Investment bank

23
Q

How does an investment bank perform the initial sale of securities where it guarantees a price for a corporation’s securities and then sells them to the public?

A

by underwriting securities

24
Q

What is the best-known example of a secondary market?

A

stock exchange

25
Q

T or F. Stock exchange actually has a larger trading volume than bond markets

A

False. bond markets have a larger trading volume.

26
Q

Other examples of secondary market

A

foreign exchange market, futures markets, and options markets

27
Q

T or F. The Secondary market would be able to function well even without its securities brokers and dealers.

A

False. brokers and dealers are crucial

28
Q

_______ are agents of investors who match buyers with sellers of securities, while _______ link buyers and sellers by buying and selling securities at stated prices.

A

Brokers; dealers

29
Q

Will the corporation that issued the security acquire funds after an individual buys a security in the secondary market?

A

No. Only the person who sold the security will receive money in exchange for the security from the individual.

The corporation will only acquire new funds when its securities are first sold in the primary market.

30
Q

What are the two important functions of the secondary market?

A
  • they make it easier to sell these financial instruments to raise cash; hence, making it more liquid.
  • they determine the price of the security that the issuing firm sells in the primary market.
31
Q

How does the liquidity from the secondary market affect the selling of securities in the primary market?

A

The increased liquidity from the financial instruments (secondary market) makes them more desirable and thus easier for the issuing firm to sell in the primary market.

32
Q

The higher the security’s price in the secondary market, the higher will be the ___________ and hence the greater the ____________.

A

the price that the issuing firm will receive for a new security in the primary market; the amount of financial capital it can raise.

33
Q

T or F. Conditions in the Primary market are therefore the most relevant to corporations issuing securities.

A

False. It should be conditions in the secondary market.

34
Q

In what ways can a secondary market be organized?

A

Organize exchanges or have an over-the-counter market.

35
Q

Buyers and sellers of securities meet in one central location to conduct trades

A

Exchanges

36
Q

Examples of organized exchanges

A
  • New York and American stock exchanges (stocks)
  • Chicago board of trade (commodities)
37
Q

Method of organizing a secondary market wherein dealers at different locations have an inventory of securities and stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices.

A

Over-the-counter (OTC) market

38
Q

Why is the OTC market very competitive and not very different from an organized exchange market?

A

because OTC dealers are in computer contact and they know the prices set by each one.

39
Q

T or F. Many stocks are traded over the counter, although the largest corporations usually have their shares traded at organized stock exchanges.

A

True

40
Q

Other over-the-counter markets include those that trade other types of financial instruments such as?

A

negotiable certificates of deposits, federal funds, banker’s acceptances, and foreign exchange.

41
Q

What are other ways of distinguishing markets that are based on the tenor of the securities traded in each market?

A

money market and capital market

42
Q

A financial market where only short-term debt instruments are traded

A

Money market

43
Q

A financial market where longer-term debt and equity instruments are traded

A

Capital Market

44
Q

T or F. Money markets are usually more widely traded than shorter-term securities and tend to be more liquid.

A

False. longer-term securities.

45
Q

What makes short-term securities a safer investment than long-term securities?

A

It has smaller fluctuations in prices

46
Q

Capital market securities such as stocks and long-term bonds are often held by what financial intermediaries?

A

insurance companies and pension funds.

47
Q

Why do corporations and banks use the money market more?

A

to earn interest on surplus funds that they expect to have only temporarily.

Overview of the Financial System (7 decks)

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