1. FINANCIAL MARKETS AND SYSTEMS

Question 1

financial markets

Answer 1

markets in which funds are transferred from people who have an excess available funds to people who have a shortage

Question 2

how are funds transferred?

Answer 2

with help of securities

Question 3

security (financial instrument)

Answer 3

claim on the issuer’s future income or assets (any financial claim or piece of property subject to ownership)

all securities have a price that investors must pay to own the security

Question 4

who gains from financial markets?

Answer 4

they are key factors in producing high economic growth
useful for people with different needs to meet

Question 5

funds transferees

Answer 5

1. lender-savers
2. borrower-spenders

Question 6

lender savers

Answer 6

people with no investment opportunities but funds

Question 7

borrower spenders

Answer 7

people with investment opportunities but no funds

Question 8

net lender savers

Answer 8

1. households
2. business firms
3. government
4. foreigners

Question 9

net borrower spenders

Answer 9

1. business firms
2. government
3. household
4. foreigners

Question 10

direct finance vs indirect finance

Answer 10

direct:
lenders lend funds directly to borrowers, by selling financial instruments (claims on borrower’s future income/assets)

indirect: borrowers borrow indirectly from lenders via financial intermediaries (banks) by issuing financial instruments/claims

Question 11

role of financial markets in efficient allocation of capital

Answer 11

allows funds to move from people without productive investment opportunities to those who have them

Question 12

is the allocation of resources always the most efficient?

Answer 12

no, because of:
-over/undervaluation of individual assets
-general undervaluation (financial bubble)

Question 13

how do financial markets improve the well-being of consumers?

Answer 13

allows consumers to time their purchases better (can use financial assets to store wealth in high earning periods of life for low earning periods of life like retirement)

Question 14

how to obtain funds in financial markets

Answer 14

2 ways:
1. issue debt
2. issue equity

Question 15

issue debt (a bond)

Answer 15

contractual agreement by the borrower to pay the bond investor a fixed amount at regular intervals (interest and principal payments) until a specified date (maturity date), when a final payment is made

Question 16

issue equity (common stock)

Answer 16

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

stock= share of ownership in a corporation, voting right

equities make periodic payments (dividends) and are long term

Question 17

primary market vs secondary market

Answer 17

primary = a firm (issuer) raises money from/ sells newly issued shares/ securities to initial buyers/ investors

secondary = securities previously issued are bought and sold among investors

Question 18

how do investors in secondary market sell previously issued shares?

Answer 18

1. exchanges = trades conducted in central locations (nyse, borsa italiana) through auctions
2. dealer markets = dealers at ≠ locations buy and sell by posting the prices they would be willing to buy and sell specific securities
3. over the counter markets = other name for dealer markets

Question 19

broker

Answer 19

executes trades on behalf of the client

Question 20

dealer

Answer 20

or salesperson
buys from or sell to a client

Question 21

trader

Answer 21

someone who attempts to profit from the purchase/sale of securities