chapter 2 flashcards

Question 1

why is it important of financial markets and intuitions?

Answer 1

• financial markets and institutions are critical to the success of business
• businesses have to go to financial markets and institutions for the financing they need to grow
• when they have surplus cash, they have to invest in bank accounts or in securities
• a modern financial system offers financing in many different forms

Question 2

what is a Financial Market?

Answer 2

a market in which securities are issued and traded

Question 3

whats the difference between a Primary Market and Secondary Market?

Answer 3

• Primary Market: the market for the sale of new securities
• Secondary Market: the purchase and sale of existing securities is known as secondary transaction.

Question 4

what’s another word for stock markets and why?

Answer 4

also called equity markets, since shareholders are said to own common equity of the firm

Question 5

what is the main stock exchange in Canada?

Answer 5

The Toronto Stock Exchange

Question 6

how are the trading in the shares of smaller and emerging Canadian companies done?

Answer 6

through the TSX Venture Exchange and the Canadian National Stock Exchange

Question 7

what are the other financial markets?

Answer 7

• fixed income market
• capital market
• money market
• foreign exchange markets
• commodities markets
• markets for options and other derivatives
• markets for cryptocurrencies

Question 8

what is a Fixed Income Market?

Answer 8

a market where securities promising fixed amount of income, such as bonds, are traded among investors. also known as Debt Market

Question 9

what is Capital Market?

Answer 9

a market for long term (more than one year) debt and equity securities

Question 10

what is a Money Market?

Answer 10

a market where short term (less than one year) securities are traded among investors

Question 11

what is a Foreign Exchange Market ?

Answer 11

any corporation engaged in international trade must be able to transfer money from the dollars to other currencies or vice versa. Foreign exchange is traded over the counter through a network of the largest international banks

Question 12

what are Commodities markets?

Answer 12

markets where commodities such as corn, wheat, oil, and natural gas are traded

Question 13

what are Markets for options and other derivatives?

Answer 13

markets where derivative securities, such as futures and options, are traded among investors

Question 14

what are markets for cryptocurrencies?

Answer 14

a cryptocurrency is an alternative currency, in the form of a digital asset. assets such as this operate outside of central banking systems and use decentralized control to create and secure financial transactions

Question 15

whats a Financial Intermediary ?

Answer 15

an organization that raises money from investors and provides financing for individuals, corporations and other organizations

Question 16

list the different Classes of Intermediaries?

Answer 16

• mutual funds
• exchange-traded funds
• hedge funds
• private equity
• pension funds

Question 17

what are some examples of financial institutions and how are they different?

Answer 17

• Banks and insurance companies are examples of financial intermediaries, they are intermediaries that do more than just pool and invest savings

Question 18

what’s the purpose of Financial Institutions?

Answer 18

they raise financing by accepting deposits or selling insurance policies and provide additional financial services

Question 19

how do Financial Institutions differ from a mutual fund?

Answer 19

unlike a mutual fund, they do not only invest in securities but also loan money directly to individuals and businesses

Question 20

what are some functions of Financial Markets and Intermediaries?

Answer 20

• transporting cash across time
• risk transfer and diversification
• liquidity
• the payment mechanism
• information (commodity prices, interest rates, stock values)

Question 21

what do WELL FUNCTIONING markets allow?

Answer 21

allow individuals and corporations to share risks and transport savings across time

Question 22

what is the Opportunity Cost of Capital?

Answer 22

the minimum acceptable rate of return on capital investments

Question 23

how is the Cost of Capital for corporate investment set?

Answer 23

by the expected rates of return on investment opportunities in financial markets

Question 24

explain the Crisis of 2007-2009?

Answer 24

• illustrates the importance of financial markets and institutions
• had its roots in the easy money policies of the US Federal Reserve and other central banks
• subprime mortgages packed into martgae back securities
• US government had to intervene to rescue institutions
• in Europe the banking crisis became entwined with a sovereign debt crisis
• Greece-largest sovereign default in history (100 billion euros)
• US government, US federal reserve, rating agencies, bankers promoting products all to blame

Question 25

what does Saving Flow through financial markets and intermediaries do?

Answer 25

it provides financing for individuals, corporations or other organizations

Question 26

mutual funds, exchange traded funds and pension funds allows investors to..?

Answer 26

diversify in professionally managed portfolios

Question 27

what do Financial Markets provide for investors?

Answer 27

provide liquidity and diversification opportunities for investors, as well as information regarding prices, interest rates and values

Question 28

what does the existence of financial markets allow?

Answer 28

it allows individuals to maximize value