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Money And Banks > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

Lender-Savers are

List different examples of lender-savers

A
  1. Households
  2. Business firms
  3. Government
  4. Foreigners
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2
Q

Borrower-Spenders are

A
  1. Business firms
  2. Government
  3. Households
  4. Foreigners
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3
Q

Lender-Savers ==> financial intermediaries ==> borrower-Spenders is an example of

A

Indirect finance

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4
Q

Define Direct finance

A

Borrowers borrow funds directly from lenders in financial markets by selling them securities.

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5
Q

How direct finance perform the essential function of channelling funds

A

By channelling funds from economic players that have saved surplus funds to those who have shortage of funds

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6
Q

How direct finance promote economic efficiency

A

By producing an efficient allocation of capital which increases production and efficiency for the overall economy

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7
Q

Structure of financial markets

List the type of financial markets

A
  1. Debt and equity market
  2. Primary and secondary market
  3. Exchanges and over-the-counter market
  4. Money and capital market
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8
Q

Firms can obtain funds in a Debit and equity markets in two ways

A
  1. The issuance of a debt instruments such as bond or mortgage
  2. The issuance of equities such as common stock
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9
Q

Define a bond

A

A bond is a debt security that promises to make payments periodically for a specified period of time

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10
Q

Define a mortgage

A

Is a contractual agreement by the borrower to pay the holder of the instrument fixed money amount at regular intervals until a specified date when a final payment is made

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11
Q

Define Maturity

A

Is the number of years until the expiration date of the instrument

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12
Q

If maturity term is less than a year then it is

A

Short-term

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13
Q

If maturity term is 10 years or longer then it is

A

Long-term

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14
Q

If maturity term is between one and 10 years then it is

A

Intermediate term

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15
Q

Define common stock

A

Are claims to share in the net income and assets of the business

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16
Q

Periodic payments of equities are referred as

A

Dividends

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17
Q

___________ are Long term securities that have no maturity date

A

Common stock

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18
Q

For bonds the principal payment is at ____________

A

Maturity date

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19
Q

Equities that give the holder a portion of the firm and the right to vote on important issues of the firm and elect directors is often referred to as

A

Common stock

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20
Q

Define primary market

A

The financial market in which new issues of security are sold to initial buyers by the corporation or government agency borrowing to the funds.

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21
Q

Which bank helps the issuer by underwriting securities

A

The investment bank

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22
Q

Define underwriting

A

To guarantee price and sells them

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23
Q

Define Secondary market

A

The financial market in which securities that have been previously issued can be resold

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24
Q

Who are Brokers

A

Are agents of investors who match buyers and sellers

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25
Q

Who are Dealers

A

Link buyers and sellers by buying and selling securities at stated price

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26
Q

Examples of secondary markets are

A
  1. Foreign exchange markets
  2. Future markets
  3. Options market
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27
Q

Which market makes financial instruments more liquid

A

Secondary market

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28
Q

How secondary market affects the prices of securities in primary market

A

Investors who buy securities in the primary market will pay the issuing corporation no more than the price they think the secondary market will set for that security.

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29
Q

Secondary markets are classified to

A
  1. Exchange market
  2. over-the-counter market
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30
Q

Define an Exchange market

A

Where sellers and buyers of securities meet in the one central location to conduct trades

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31
Q

Example of exchange markets

The 3 main examples of Exchange markets

A
  1. NYSE for stocks
  2. Chicago Board of Trade for commodities
  3. Egyptian Exchange (EGX)
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32
Q

Define Over-the-counter-market (OTC)

A

OTC market dealers are in computer contact and have an inventory of securities stand ready to buy and sell securities to anyone who is willing to accept their prices

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33
Q

Over-the-counter-market (OTC) example

A

US government bond market

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34
Q

Define Money market

A

Is a financial market in which only short term debt instruments are traded

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35
Q

Why do corporations and banks actively use money market

A

To earn interest on surplus funds because money market securities are safer

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36
Q

Why money market securities are safer?

A

They have smaller fluctuations in prices than longer term securities and more liquid.

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37
Q

Define Capital market

A

Is the market in which the longer term debt are traded and equity instruments are traded

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38
Q

Capital market securities are often held by ___________

A

Financial intermediaries

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39
Q

What are the US treasury bills?

A

These are short term instruments issued in (1/3/6) month maturities to finance the federal government

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40
Q

Money market instruments are

A
  1. Us treasury bills
  2. Negotiable bank certificates of deposits
  3. Commercial papers
  4. Repurchase agreements
  5. Federal funds
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41
Q

Which money market instrument pay a set amount at maturity and have no interest payments although they effectively pay interest by initially selling at discount

A

US treasury bills

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42
Q

Which money market instrument is the most liquid because it’s actively traded

A

TB

Treasury bond

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43
Q

Which money market instrument is the safest and why?

A

TB, since there is almost no possibility of default, as government can issue currency or raise taxes to meet obligations

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44
Q

Define default

A

When the issuer of the instrument is unable to pay interest payments or pay off the value of the instrument when it matures

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45
Q

Negotiable bank certificates of deposits are

A

Debt instruments sold by a bank to depositors which pay annual interest of a given amount and at maturity pays back the original price.

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46
Q

Which Money market instrument is important source of funds for commercial banks

A

Negotiable bank certificates

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47
Q

Negotiable CD are sold in

Negotiable bank certificates

A

Secondary markets

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48
Q

Define commercial paper

A

Is a short term debt instrument issued by large banks and well know corporations

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49
Q

Define Repurchase Agreements

A

Repurchase agreements (repos) are effectively short term loans (with maturity less than 2 weeks), for which treasury bills serve as collateral

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50
Q

What is a collateral?

A

is an asset that the lender receives if the borrower does not pay back the loan

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51
Q

The following example is an example of :
“A large corporation like Microsoft may have idle funds ($ 1 million), it buys US TB for one week. After a week the bank will repurchase the TB at a price slightly above ($1 million)”

A

Repurchase agreements

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52
Q

Which Money Market insrument is an important source of bank funds?

A

Repurchase agreement

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53
Q

Federal Funds are

A

Overnight loans between banks of their deposits at the Federal Reserve

Fedral reserve refers to (Central Bank)

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54
Q

___________ funds are loans by banks to other banks ( interbank loans)

A

Federal

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55
Q

The Interest on federal funds is called

A

“The federal fund rate”

(interbank rate)

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56
Q

If the interbank rate is high this denotes that __________

A

banks are strapped for funds.

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57
Q

If the interbank rate is low this denotes that __________

A

the credit needs of banks are low

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58
Q

CAPITAL MARKET INSTRUMENTS includes

A
  1. Stocks
  2. mortgages and Mortgages-Backed Securities
  3. Corporate bonds
  4. US government securities
  5. US government agency securities
  6. State and local government bonds
  7. Consumer and bank commercial
    loans
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59
Q

Define a stock

A

Is an equity claim on the net income and assets of a corporation

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60
Q

Which Capital market instrument makes periodic payments (dividends) and the holder owns a portion of the firm and gives him the right to vote on important issues of the firm

A

Stocks

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61
Q

Stocks are long-term securities because

A

they have no maturity date

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62
Q

Mortgages and Mortgages-Backed
Securities are

A

loans to households or firms to purchase land, housing , or other real structures in which the structure or land itself serves as collateral for the loans.

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63
Q

_______________ are long term bonds issued by corporations with very strong credit rating.

A

Corporate bonds

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64
Q

Which type of bond sends the holder an interest payment twice a year and pays off the face value when the bond matures

A

Typical corporate bond

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65
Q

Convertible bond

A

Allows the bondholder to convert bonds into a specified number of shares of stock at anytime up to
the maturity date.

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66
Q

The main holders of corporate bonds are

A
  1. life insurance companies
  2. Pension funds
  3. Households
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67
Q

US government securities are

A

long term instruments are issued by the US treasury to finance the deficits of the federal government

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68
Q

What is the most liquid security traded in the capital market

A

US government securities

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69
Q

US government securities are held by

A

1.Federal Reserve
2.banks
3.households
4.foreigners

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70
Q

US government agency securities are

A

long-term bonds are issued by government agencies to finance mortgages, farm loans, and power generating equipment.

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71
Q

US government agency securities are guaranteed by

A

The federal government

72
Q

US government agency securities are held by

A

the same parities who held the government bonds

73
Q

State and local government
bonds are called

A

municipal bonds

74
Q

Define the following:
Long term debt instruments issued by state and local government to finance expenditure on schools, roads, and other large programs.

A

State and local government
bonds

75
Q

What is the most important feature of State and local government
bonds

A

Their interest payments are exempt from income tax and generally from state taxes in the issuing state.

76
Q

The biggest buyers of State and local government bonds

A

Commercial banks

77
Q

Consumer and bank commercial
loans are

A

Loans to consumers and businesses are made principally by bank.

78
Q

Apart from the bank, consumer loans can be financed by

A

Finance companies

79
Q

The extraordinary growth of foreign financial markets has been the result of :

A

1.Large increases in the pool of savings in foreign countries.
2.The deregulation of foreign financial markets which has enabled foreign markets to expand their activities.

80
Q

Foreign bonds are

A

Sold in a foreign country and denominated in that country’s currency

81
Q

Eurobond

A

bond denominated in a currency other than that of the country in which it is sold

82
Q

Eurocurrencies

A

foreign currencies deposited in banks outside the home country

83
Q

Eurodollars

A

U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks

84
Q

What are the advantages of channeling funds through financial intermediaries

A

1.Lower transaction costs
2.Reduce the exposure of investor to risk
3.Deal with asymmetric information problems
4.Economies of scope

85
Q

Transaction cost is

A

The time and money spent in carrying out financial transactions

86
Q

Financial intermediaries reduce transaction costs because

A

They developed expertise in lowering them and because their large size allows them to take advantage of economies of scale

87
Q

Banks provide the customers with___________ , that make it easier for customers to conduct transactions

A

Liquidity services

88
Q

Example of liquidity services

A

Banks provide depositors with checking accounts that enables them to pay their bills easily

89
Q

Risk is defined as

A

The uncertainty about the returns investors will earn on assets

90
Q

Financial intermediaries reduce the exposure of investors to risk by

A

1.Risk sharing through diversification
2.Asset transformation

91
Q

Risk sharing through diversification is done by

A

investing in a collection assets whose returns do not always move together, then the overall risk is lower than for individual assets

92
Q

Asset transformation is

A

Where risky assets are transferred into safer assets for investors

93
Q

How can financial intermediaries earn profit

A

By the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

94
Q

Asymmetric information involves

A

One party does not know enough about the other party to make accurate decisions

95
Q

Examples of asymmetric information problems are

A

1.Adverse selection
2.Moral hazard

96
Q

Adverse selection is the problem created by asymmetric information _______ the transactions occurs.

97
Q

Adverse selection in financial markets occurs because

A

Lenders usually do not know all information about borrowers

98
Q

Adverse selection occurs when

A

The potential borrowers who are the most likely to produce an adverse outcome are the ones who most actively seek out loan and are the most likely to be selected

99
Q

How intermediaries deal with Asymmetric information

A

They try to avoid selecting the risky borrower by gathering information about them

100
Q

Moral hazard is the problem created by asymmetric information ___________ the transaction occurs

101
Q

Moral hazard in financial markets occurs after the debt contract starts because

A

Because the lender such as a bank may not have the same information that is available for the other part (borrower)

102
Q

Moral hazard is

A

The risk that the borrower might engage in activities that are immoral from the point of view of the lender. It lowers the probability that the loan will be repaid

103
Q

How intermediaries deal with Moral hazard

A

1.Intermediaries ensure borrower will not engage in activities that will prevent him to repay the loan
2. Sign a contract with restrictive covenants

104
Q

Economies of scope is

A

The ability to use one resource to provide many products and services

105
Q

Economies of scope involves

A

Reduction in the cost of information production for each service by applying one information resource to many different services

106
Q

How banks achieve economies of scope

A

Through offering multiple financial services to their customers

107
Q

How economies of scope can cause potential costs for financial intermediaries

A

Conflict of interests

108
Q

What is conflict of interests

A

It is a type of moral hazard problem arising when a person or institution has a multiple objectives some of which conflict with each other.

109
Q

Potentially competing interests may lead the firm to

A

Conceal information or disseminate misleading information leading to less efficient financial markets

110
Q

Types of financial intermediaries

List the 3 types of financial intermediaries

A
  1. Depository institutions
  2. Contractual savings institutions
  3. Investment intermediaries
111
Q

Types of Depository institutions

List the 2 most known depository institutions

A
  1. Commercial banks
  2. Credit unions
112
Q

Types of Contractual Saving institutions

List the 3 most known contractual saving institutions

A
  1. Life insurance companies
  2. Life and causality insurance companies
  3. Pension funds and government retirement funds
113
Q

Types of Investment
intermediaries

The 4 types of financial intermediaries

A
  1. Finance companies
  2. Mutual Funds
  3. Money market Mutual funds
  4. Hedge funds
114
Q

Depository institutions are

A

are financial intermediaries that accept deposits from
individuals and institutions and make loans

115
Q

The study of money and banking focuses on depository institutions because

An important component of money supply

A

They are involved in the creation of deposits

116
Q

Commercial banks raise funds by

A

issuing three types of deposits

1.Checkable deposits
2.Savings deposits
3.Time deposits

117
Q

Checkable deposits are

issued by commercial banks

A

deposits on which checks can be written

118
Q

Savings deposits

issued by commercial banks

A

deposits that are payable on demand but do not allow their owner to write checks

119
Q

Time deposits are

issued by commercial banks

A

deposits with fixed terms to maturity

120
Q

Commercial banks use funds to

Funds raised from deposits e.g Saving deposits

A

make commercial, consumer, and mortgage loans and to buy government securities and municipal bonds.

121
Q

Which is the largest financial intermediary that have the most diversified portfolios of assets.

A

Commercial Banks

122
Q

Savings and loan associations and mutual banks are financial intermediaries that

A

raise funds by issuing checkable deposits, savings deposits, and time deposits.

123
Q

Which institutions were constrained
in making mortgages loans for housing in the past

A

savings and loan associations and mutual savings banks

124
Q

Credit Unions are

A

very small cooperative lending institutions organized around a particular group.

Such as union members and employees of a particular firm

125
Q

Credit unions acquire funds from deposits called

A

shares and make consumer loans

126
Q

Contractual Savings
Institutions are

A

Financial intermediaries that acquire funds at periodic intervals on a contractual basis

127
Q

Why contractual saving institutions do not worry about losing funds quickly as much as depository institutions

A

As they can predict how much they will have to pay out in benefits in the coming years

128
Q

Contactual saving institutions can predict how much they will have to pay out in benefits in the coming years accordingly they tend to invest in

A

Long term securities such as corporate bonds, stocks and mortgage

129
Q

Types of Contractual Savings
Institutions

A
  1. Life insurance companies
  2. Fire and casulty insurance companies
  3. Pension funds and government retirement funds
130
Q

Life insurance companies insure people against

A

Financial hazards following a death

131
Q

Life insurance companies acquire funds from

A

Premiums

Payments to keep their polices in force

132
Q

Life insurance companies use funds to

A

Buy corporate bonds, mortgages and stocks

133
Q

Fire and Casuality Insurance Companies insure people against

A

Loss from theft, fire, and accidents

134
Q

Fire and Causality Insurance Companies aquire funds from

135
Q

Fire and casuality Insurance companies use funds to

A

Buy municipal bonds and corporate bonds

136
Q

Why Fire and casuality Insurance companies use their funds to buy more liquid assets than life insurance companies do

A

They have greater possibility of loss of funds if major disasters occur

137
Q

Pension Funds and Government Retirement Funds provide

A

Retirement income in the form of annuities to employees who are covered by a pension plan

138
Q

How pension and government retirement funds aquire funds

A

By contributions from employers and from employees, who either have a contribution automatically deducted from their paychecks or contribute voluntarily

139
Q

Pension Funds and Government Retirement Funds use funds to purchase

A

Purchase corporate bonds and stocks

140
Q

Types of Investment intermediaries

A
  1. Finance companies
  2. Mutual Funds
  3. Money market Mutual Funds
  4. Hedge Funds
  5. Investment bank
141
Q

Finance Companies raise funds by

A

Selling commercial papers and by issuing stocks and bonds

142
Q

Finance Companies lend funds to

A

consumers, who use them to purchase furniture , automobiles, home improvements and small businesses

143
Q

Some finance companies are organised by a parent company to

A

Help sell its products

144
Q

Mutual funds aquire funds by

A

Selling shares to many individuals

145
Q

Mutual funds use the proceeds to

A

purchase diversified portfolio of stocks and bonds

146
Q

Why Mutual funds allow shareholders to pool their resources

A

so that they can take advantages of lower transaction costs

147
Q

Shareholders can sell their shares at any
time, but the value of these shares are determined by

A

demand and supply in the market

148
Q

Mutual funds can be risky because

A

shares are determined by
demand and supply in the market

149
Q

Money market Mutual funds are

A

financial institutions that have the same characteristics of mutual funds but also function to some extent as depository institutions

150
Q

Why it is said that Money Market Mutual Funds function to some extent as depository
institutions

A

because they offer deposit- type accounts

151
Q

Like most mutual funds, Money Market Mutual Funds aquire funds by

A

Selling shares

152
Q

Money Market Mutual Funds use funds aquired to

A

buy money market instruments that are both safe and liquid

153
Q

shareholders in money market mutual funds can

A
  1. Get the interest on their shares
  2. Write checks against the value of their shareholdings
154
Q

Shares in Money market mutual funds function like

A

checking account deposits that pay
interest of commercial banks

155
Q

Hedge funds are

A

a type of mutual funds with special
characteristics

156
Q

Which type of funds are organized as limited partnerships

A

Hedge funds

157
Q

Which type of funds are subject to much weaker regulations

A

Hedge Funds

158
Q

Hedge funds invest in many types of assets, these may include:

A
  • Stocks
  • Bonds
  • Foreign Currencies
159
Q

Investment banks is not a bank because

A

It does not accept
deposits and make loans

160
Q

Which type of investment intermediary help a corporation issue securities?

A

Investment bank

161
Q

How does the investment bank helps a corporation issue securities

A
  1. It first advises the corporation on which type of
    securities to issue (stocks or bonds)
  2. It helps sell (underwrite) the securities by
    purchasing them from the corporation at a predetermined price and reselling them
162
Q

Which Financial intermediary acts as deal maker and earns enormous fees by helping corporations acquire other companies through mergers or acquisitions

A

Investment banks

163
Q

The government regulates financial markets and financial intermediaries for two main reasons:

A
  1. Increase the information available to investors
  2. To ensure the soundness of financial intermediaries
164
Q

Increasing the information available to investors will

Regulation of the Financial System

A
  • Reduce adverse selection and moral hazard problems and enhance the efficiency of the markets
  • Reduce insider trading (trading by largest stockholders in corporations)
165
Q

Why it is important to ensure the soundness of financial intermediaries

A

To avoid financial panic

The collapse of financial intermediaries

166
Q

Governments implement several types of regulations in the financial systems

List the regualtions implemented to avoid financial panic

A
  • Restrictions on entry
  • Disclosure of information
  • Restrictions on Assets and Activities
  • Deposit Insurance
  • Limits on Competition
167
Q

Restrictions on entry are

A

Tight regulations governing who is allowed to set up a financial intermediary

168
Q

Disclosure of information is

A

Reporting requirements for financial intermediaries are stringent. The bookkeeping must follow strict principles, the books are subject to periodic inspection and they must make certain information available to the public

169
Q

Which type of regulation control holding of risky assets and restricting financial intermediaries from engaging in certain risky activities

A

Restrictions on Assets and Activities

170
Q

Deposit Insurance

A

avoid bank runs

171
Q

Limits on Competition

A
  • Branching
  • Restrictions on Interest rates
172
Q

In Egypt, banks are under the supervision of the

173
Q

Which institution supervises and regulates all non-banking financial markets and instruments, including capital markets, insurance activities, mortgage finance & financial leasing in Egypt

A

EFSA

Egyptian Financial Supervisory Authority

174
Q

Which type of institutions usually invest in CDs

A

Corporations, charitable institutions, mutual funds and government agencies.

175
Q

The sources of funds for commercial banks comes from

A

Corporations, charitable institutions, mutual funds and government agencies.

176
Q

Lender-Savers ==> financial markets ==> Borrower-Spenders is an example of

A

Direct finance

Money And Banks (6 decks)

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