Financial Markets & Institutions - Exam 1 Questions With Complete Solu-
tions
1. What is a finan- If a market is a venue of exchange, then a financial market is a market in which
cial market? financial assets (securities) are exchanged (usually for cash).
Funds transferred when a party purchases a financial asset previously held by
another party
2. Financial institu- constitute all of the ditterent organizations that facilitate the transfer or flow of
tions funds between surplus units and deficit units.
3. Surplus units allows those who have more money than they currently need to earn a return on
their savings (through investing in financial securities) or obtaining other financial
services.
4. Deficit Units allow those who need more money than they have to obtain that money in
exchange for some form of IOU (financial securities).
5. Primary markets new securities issued, new money raised
6. Secondary mar- trading of existing securities among investors
kets
While the primary market seems most important, the secondary market is vitally
important in providing liquidity to investors.
7. Money markets short-term debt market used to finance short-term needs
Maturity of one year or less
Highly liquid
Low expected return but low risk
Common types: treasury bills, commercial paper (corporations issue), and nego-
tiable certificates of deposit (depository institutions issue)
8. Capital markets
, Financial Markets & Institutions - Exam 1 Questions With Complete Solu-
tions
long-term debt and equity market used to finance long-term needs
Includes bond, mortgage, and stock markets
9. Direct security claims against the issuer of the securities ... stock is an ownership claim on the
markets issuing corporation, bonds are claims on the cash flows of the issuing corporation
or government, etc.
10. Derivative securi- have their value tied to changes in the value of some other asset or security, and
ties is often a "side bet," not directly related to the underlying asset.
Listed stock option values depend on the value of the underlying stock, but have
nothing to do with the company whose stock the options are derived from.
Futures provide a means to hedge risk related to the changing price of financial
instruments or commodities along with the ability to speculate on price changes
of those instruments.
11. Direct transfers DUs and SUs find each other, and craft tailored financial deals ... e.g. Shark Tank
Often diflcult to find appropriate matches
12. Indirect trans- IBF help issuers of securities through some combination of advising, underwriting,
fers through in- and distribution to raise money
vestment bank- New securities are issued by DUs and the same securities are purchased by SUs
ing firms
13. Indirect transfers DUs obtain funding from financial intermediaries, using the funds that the inter-
through financial mediaries raise from the SUs
intermediaries Financial intermediaries invest in DU securities, SUs obtain the securities/services
of financial intermediaries
14. Depository Insti- Commercial banks
tutions Savings associations
Credit unions
tions
1. What is a finan- If a market is a venue of exchange, then a financial market is a market in which
cial market? financial assets (securities) are exchanged (usually for cash).
Funds transferred when a party purchases a financial asset previously held by
another party
2. Financial institu- constitute all of the ditterent organizations that facilitate the transfer or flow of
tions funds between surplus units and deficit units.
3. Surplus units allows those who have more money than they currently need to earn a return on
their savings (through investing in financial securities) or obtaining other financial
services.
4. Deficit Units allow those who need more money than they have to obtain that money in
exchange for some form of IOU (financial securities).
5. Primary markets new securities issued, new money raised
6. Secondary mar- trading of existing securities among investors
kets
While the primary market seems most important, the secondary market is vitally
important in providing liquidity to investors.
7. Money markets short-term debt market used to finance short-term needs
Maturity of one year or less
Highly liquid
Low expected return but low risk
Common types: treasury bills, commercial paper (corporations issue), and nego-
tiable certificates of deposit (depository institutions issue)
8. Capital markets
, Financial Markets & Institutions - Exam 1 Questions With Complete Solu-
tions
long-term debt and equity market used to finance long-term needs
Includes bond, mortgage, and stock markets
9. Direct security claims against the issuer of the securities ... stock is an ownership claim on the
markets issuing corporation, bonds are claims on the cash flows of the issuing corporation
or government, etc.
10. Derivative securi- have their value tied to changes in the value of some other asset or security, and
ties is often a "side bet," not directly related to the underlying asset.
Listed stock option values depend on the value of the underlying stock, but have
nothing to do with the company whose stock the options are derived from.
Futures provide a means to hedge risk related to the changing price of financial
instruments or commodities along with the ability to speculate on price changes
of those instruments.
11. Direct transfers DUs and SUs find each other, and craft tailored financial deals ... e.g. Shark Tank
Often diflcult to find appropriate matches
12. Indirect trans- IBF help issuers of securities through some combination of advising, underwriting,
fers through in- and distribution to raise money
vestment bank- New securities are issued by DUs and the same securities are purchased by SUs
ing firms
13. Indirect transfers DUs obtain funding from financial intermediaries, using the funds that the inter-
through financial mediaries raise from the SUs
intermediaries Financial intermediaries invest in DU securities, SUs obtain the securities/services
of financial intermediaries
14. Depository Insti- Commercial banks
tutions Savings associations
Credit unions
