Chapter 1 - financial overview - PRACTICE

Question 1

What difficulties would a businessman or a family encounter if financial markets and
institutions would not exist?

Answer 1

limited access to capital
reduced investment opportunities
risk management challenges
lack of payment
reduced economic growth

Question 2

Discuss the differences between the types of the financial assets that may be issued by
companies and Public Administrations
a) by companies

Answer 2

shares,bonds,raise capital,invest,higher risk,lower liquidity

Question 3

Discuss the differences between the types of the financial assets that may be issued by
companies and Public Administrations
b)public administration

Answer 3

Public debt/fixed income securities
low risk
high liquidity

Question 4

Comment the advantages of the existence of broad (breath) financial markets?

Answer 4

broad financial markets provide investors with greater ability to spread risk and diversify their investments,reducing their exposure to any single asset or sector.This diversification can lead to more stable and resilient Portfolios

Question 5

Comment the advantages of the existence of of deep
ones?

Answer 5

deep financial markets offer lower transaction costs and reduced price volatility.Investors can enter and exit positions more easily which enhances market efficiency and allows for more accurate price discovery

teacher version : many purchase and sale orders which will favour the determinaton of the price of the liquidity ofthe securities

Question 6

Comment the advantages of the existence of transparent ones?

Answer 6

transparent financial markets promote trust,comfidence, and fairness among market participants. they reduce the risk of the insider trading and market manipulation.Investors can make more informed decisions based on readily available information.

Question 7

What are the functions carried out by financial intermediaries? Identify operations by which
they perform these functions.

Answer 7

Mediation - between lenders and borrowers of the economy: they facilitate the contact between investors and providers of funds

transformation of financial assets ( intermediation)

1.operations
2.risk management
3.payment
4.information/expertise

Question 8

Classify (in incremental order) the following financial assets accordng to their expected
return:

1 Simple bonds issued by a company of the textile sector (e.g. Inditex)

2 Shares issued by a company of the high-tech or the new communications sectors (not listed
companies)

3 Commercial paper issued by an electrical company (for example, Endesa)

4 Spanish Treasury Bills

5 Shares issueHow do the secondary markets help the primary?
d by a listed bank (for example, Bankinter)

Answer 8

4,3,1,5,2

Question 9

How do the secondary markets help the primary?

Answer 9

by providing liquidity to the asset,option to sell now for people

Question 10

preferred shares

Answer 10

1.debt instrument issued by a company
2.fixed retribution (conditional by optaining profit- similar to stock)
because of 1 and 2 = high risk
in case of bancrupcy = common debt, preferred shares,ordinary shares ( like stocks)

Question 11

Name four financial assets and sort them by order of liquidity

Answer 11

Bank deposit certificate
australian T-bills
uber commercial paper
shares of apple

Question 12

9. Explain the differences between a broker and a dealer

Answer 12

broker - of behalf of others ,no risk, commision,connecting buyers and sellers

dealer - on it own,risk,spread(differences between prices)

Question 13

Explain the differences between a financial mediator and a financial intermediary. Name an
example of each financial agent.

Answer 13

financial mediator - they are only good in contract borrowers to lenders : no transformation of FA

financial intermediaries transformation of FA, investment bank, insurance company,investment fund) - indirect financing

Question 14

buying securities—

Answer 14

— = issuing other FA

Question 15

Identify the functions of financial intermediation in the strict sense, broker or dealer, in the
following actions:
a) A financial institution acquires a bond issue for its own portfolio of securities with the intention
of selling the bonds later in the secondary market and getting a capital gain.
b) A financial institution acquires a bond issue for its own portfolio of securities and issues other
assets at the same time to finance this operation.
c) A financial institution is responsible for the placement of a bond issue to the public without
acquiring them previously.

Answer 15

a) dealer
b) financila intermediary
c)broker

Question 16

Why it is necessary that financial assets are to some extent standardized.

Answer 16

you know the provisions,characteristic - the negociations are faster and more efficient,efffective

Question 17

Why should financial officers (directors, CFO) follow the secondary financial markets?

Answer 17

To understand how th ecompany is valued,positioned. if the stock prices are low and shareholders see more potencial,there could be a takeover

Question 18

When interest rates rise, how can firms and consumers’ economic behavior change?

Answer 18

higher income for savers and decrease of value of stocks and bonds - the interest rate rise the return the issuers of financila asset must offer if they want to obtain resources to make investments.

increases the cost of financing

Question 19

Why is a Microsoft share an asset for its owner and a liability for Microsoft?

Answer 19

for the owner its profitable because he receives dividend and for microsoft its liability because he has to pay the dividentd - so its an obligation :)

Question 20

One of the reasons for the reduced economic growth of some economies in developing
countries is the absence of developed financial markets. Does this sentence make sense? Why?

Answer 20

yes because when markets develop….

Question 20

Why would you be willing to make a deposit in a Bank that grants you a 5% interest if the Bank
lends money to your neighbor at a 10% interest rate, rather than lending your money directly to
your neighbor?

Answer 20

because its just less risky - risk diversification. some insurance and liquidity - u can withdraw your money quicker. less time and effort, risk-reward trade off.

Question 21

1.- Which of the following characteristics define Monetary Markets?
a) Some of their main assets, such as Treasury Bills or Commercial Paper are issued at discount.
b) Monetary Financial assets offer a high return due to the high risk of these assets
c) Monetary Financial assets are highly illiquid, due to the lack of active secondary financial
markets.
d) Equity assets are traded in monetary markets.

Answer 21

a is correct.

WHY ITS WRONG?
b) Monetary Financial assets offer a high return due to the high risk of these assets - THIS IS FOR CAPITAL MARKET
c) Monetary Financial assets are highly illiquid, due to the lack of active secondary financial markets. - LLIQUID NAD EXISTANCE
d) Equity assets are traded in monetary markets. - SORT-TERM ASSETS

Question 22

2. In a financial market:
   a) Depth is linked to the number of buying and selling orders within the market
   b) The higher the transparency of information, the higher the flexibility of the market
   c) The larger the variety of financial assets, the easier to fulfill the preferences of savers and
   investors
   d) Freedom of access increases the depth of the marke

Answer 22

All are correct

Question 23

3 Among the functions of the Securities Exchange Commission (Comisión Nacional del Mercado
de Valores) are:
a) To guarantee the transparency of information in the financial markets.
b) To protect investors.
c) To determine the price of shares listed on the Stock Exchange.
d) To reduce the volatility of the prices of the financial assets traded in organised markets.

Answer 23

a and b is correct

Question 24

4 The following assets have no risk:
a)…fixed-term securities, both public and corporates.
b)…securities issued by the Public Treasury with the highest rating.
c)…a fixed-term security that offers a fixed coupon and is traded in an organised market.
d)…an investment, whether public debt or corporate debt, implies, more or less, a certain exposure
to risk

Answer 24

d is correct -only investment in this case.