TEST BANK For Financial Markets And Institutions 8th Edition
By Anthony Saunders
1. What is the basic function performed by FMs? - ANSWER:Financial markets
transfer funds from those who have excess funds to those who need funds
Surplus Units - ANSWER:Participants who receive more money than they spend ex.
Investors
Deficit Units - ANSWER:Those who spend more money than they receive. Ex. College
Students
Securities - ANSWER:Represent a claim on the issuer. Ex. Stocks
Debt Securities - ANSWER:Represent debt, credit or borrowed funds incurred by the
issuer. Ex. Treasury Bills
Equity Securities - ANSWER:Represent ownership or equity in the firm. Ex. Stocks
How do FMs accommodate a firm's financing needs? - ANSWER:The financial
markets serve as the mechanism whereby corporations (acting as deficit units) can
obtain funds from investors (acting as surplus units).
How do FMs accommodate an individual's investment needs? - ANSWER:The
financial markets offer investors access to a wide variety of investment
opportunities, including securities issued by the U.S. Treasury and government
agencies as well as securities issued by corporations.
What is 'flow of funds' in the context of FMs? - ANSWER:FM's channel funds from
surplus units to deficit units
What is the difference between 'primary' and 'secondary' markets? Illustrate with an
example. - ANSWER:Primary Markets: Facilitate the issuance of new securities. Ex.
IPO's
Secondary Markets: Facilitate the trading of existing securities, which allows
investors to change their ownership of the securities. Ex. NASDAQ
What is 'liquidity' in FMs? - ANSWER:The degree to which securities can be sold
without loss of value.
Why is 'liquidity' a necessary condition of FMs? - ANSWER:Investors prefer liquid
securities so that they can easily sell the securities whenever they want (without a
loss in value)
, Can you think of another feature that is also necessary for FM players? -
ANSWER:How many investors they have depends on how well they can perform.
Who are the FM players? - ANSWER:Issuers and Investors
What is a 'money market'? Provide an example of a MM security. - ANSWER:MM:
Facilitate the sale of short-term debt securities by deficit units to surplus units
Ex. Treasury bills
What are 'capital markets'? Provide examples of TWO securities. - ANSWER:Capital
markets facilitate the sale of long-term securities by deficit units to surplus units
Ex. Buildings and Equipment
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Corporate Bonds - ANSWER:LT (10-20 Years), $1,000 face value,
every 6 month for cash flow
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value:
Government bonds (aka Treasuries) - ANSWER:LT (10-20) Years, 6 month periodic
cash flow, $1,000 face value
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Mortgages (aka Mortgage Bonds) - ANSWER:$10,000 face value,
paid out every 6 months
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Mortgage Backed Securities - ANSWER:Paid until house is paid
off, monthly payments
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Common Stocks - ANSWER:No maturity, Can be sold and
purchased at any time
Residential Mortgages - ANSWER:Residential mortgages are obtained by individuals
and families to purchase homes
Commercial Mortgages - ANSWER:Commercial mortgages are long-term debt
obligations created to finance the purchase of commercial property
Prime Mortgages - ANSWER:They are offered to those who meet the criteria of
paying off their loan in a timely manner based off their income.
By Anthony Saunders
1. What is the basic function performed by FMs? - ANSWER:Financial markets
transfer funds from those who have excess funds to those who need funds
Surplus Units - ANSWER:Participants who receive more money than they spend ex.
Investors
Deficit Units - ANSWER:Those who spend more money than they receive. Ex. College
Students
Securities - ANSWER:Represent a claim on the issuer. Ex. Stocks
Debt Securities - ANSWER:Represent debt, credit or borrowed funds incurred by the
issuer. Ex. Treasury Bills
Equity Securities - ANSWER:Represent ownership or equity in the firm. Ex. Stocks
How do FMs accommodate a firm's financing needs? - ANSWER:The financial
markets serve as the mechanism whereby corporations (acting as deficit units) can
obtain funds from investors (acting as surplus units).
How do FMs accommodate an individual's investment needs? - ANSWER:The
financial markets offer investors access to a wide variety of investment
opportunities, including securities issued by the U.S. Treasury and government
agencies as well as securities issued by corporations.
What is 'flow of funds' in the context of FMs? - ANSWER:FM's channel funds from
surplus units to deficit units
What is the difference between 'primary' and 'secondary' markets? Illustrate with an
example. - ANSWER:Primary Markets: Facilitate the issuance of new securities. Ex.
IPO's
Secondary Markets: Facilitate the trading of existing securities, which allows
investors to change their ownership of the securities. Ex. NASDAQ
What is 'liquidity' in FMs? - ANSWER:The degree to which securities can be sold
without loss of value.
Why is 'liquidity' a necessary condition of FMs? - ANSWER:Investors prefer liquid
securities so that they can easily sell the securities whenever they want (without a
loss in value)
, Can you think of another feature that is also necessary for FM players? -
ANSWER:How many investors they have depends on how well they can perform.
Who are the FM players? - ANSWER:Issuers and Investors
What is a 'money market'? Provide an example of a MM security. - ANSWER:MM:
Facilitate the sale of short-term debt securities by deficit units to surplus units
Ex. Treasury bills
What are 'capital markets'? Provide examples of TWO securities. - ANSWER:Capital
markets facilitate the sale of long-term securities by deficit units to surplus units
Ex. Buildings and Equipment
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Corporate Bonds - ANSWER:LT (10-20 Years), $1,000 face value,
every 6 month for cash flow
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value:
Government bonds (aka Treasuries) - ANSWER:LT (10-20) Years, 6 month periodic
cash flow, $1,000 face value
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Mortgages (aka Mortgage Bonds) - ANSWER:$10,000 face value,
paid out every 6 months
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Mortgage Backed Securities - ANSWER:Paid until house is paid
off, monthly payments
Describe the following CM securities based on Time to Maturity, Periodic Cash Flows,
and Par/Face Value: Common Stocks - ANSWER:No maturity, Can be sold and
purchased at any time
Residential Mortgages - ANSWER:Residential mortgages are obtained by individuals
and families to purchase homes
Commercial Mortgages - ANSWER:Commercial mortgages are long-term debt
obligations created to finance the purchase of commercial property
Prime Mortgages - ANSWER:They are offered to those who meet the criteria of
paying off their loan in a timely manner based off their income.
