Chapter 6: Financial Market

Question 1

Classifications of structure of Financial Markets: ____, ____, ____.

Answer 1

1. Nature of claim
2. Maturity of claim
3. Seasoning of claim

Question 2

• Classification by nature of claim: ____; ____.
• Classification by maturity of claim: ____; ____.
• Classification by seasoning of claim: ____; ____.

Answer 2

• Debt market; Equity market
• Money market; Capital market
• Primary market; Secondary market

Question 3

Debt markets is the market where ___________ are traded.

Answer 3

debt instruments

Question 4

The equity market (often referred to as the stock market) is the market for _______. _____ are securities that are a claim on the earnings and assets of a corporation.

Answer 4

trading equity instruments; Stocks

Question 5

The maturity of debt market is _______ whereas the maturity of equity market is ________.

Answer 5

defined; undefined

Question 6

About the relationship between the buyer and the seller of the debt market, ___________ do not gain ownership in the business or have any claims to the future profits of the __________. _________ only obligation is to repay the loan with interest.

Answer 6

bondholders; borrower; The borrower’s

Question 7

About the relationship between the buyer and the seller of the equity market, those who purchase _______________ gain ownership of the business. _______________ also have claims on the future earnings of the firm

Answer 7

equity instruments; Equity holders

Question 8

Debt market is ______ risky than equity market for 2 reasons:
- Returns are ___________ than equity market returns
- If the company run into trouble, the _____________ are paid first, before other expenses are paid.

Answer 8

less; less volatile; bondholders

Question 9

Equity market is _______ risky:
- Returns are ___________ than debt market returns
- If the company run into trouble, _____________ are less likely to receive any compensation

Answer 9

more; more volatile; shareholders

Question 10

Money market: A financial market in which only _________________ (maturity of less than one year) are traded

Answer 10

shorterm debt instruments

Question 11

4 Money market securities:

Answer 11

Treasury Bills
Commercial paper
Negotiable certificates of deposits
Banker’s acceptances

Question 12

4 Money market securities:

Answer 12

• Treasury Bills
• Commercial paper
• Negotiable certificates of deposits
• Banker’s acceptances

Question 13

3 Money market securities’ characteristics:

Answer 13

• Mature in one year or less from their original issue date
• Highly liquid, minimal default risk
• Usually sold in large denominations
  *

Question 14

Capital market: A financial market in which __________ (maturity of greater than one year) and _______________ are traded

Answer 14

longterm debt; equity instruments

Question 15

3 Capital market securities:

Answer 15

Bond, Stock, Mortgage

Question 16

Money market securities’ characteristics:

Answer 16

• Mature in more than one year
• Low liquidity, high default risk
• High return

Question 17

Primary market: a financial market in which _____________, such as a bond or a stock, are sold to _____________ by the corporation or government agency borrowing the funds.

Answer 17

new issues of a security; initial buyers

Question 18

2 Characteristics of Primary market:

Answer 18

• Not well known to the public
• Where the issuer of the security actually receives the proceeds of the sale

Question 19

Secondary market: is a financial market in which ________ that have been ___________ can be resold

Answer 19

securities; previously issued

Question 20

Characteristics of secondary market: The person who has sold the security ____________ in the exchange for the security, but the corporation that issued the security acquires _________.

Answer 20

receives money; no new funds.

Question 21

2 Financial market instruments:

Answer 21

Money market instruments and Capital market instruments

Question 22

4 Money market securities:
- _________ Bills
- _____________ paper
- ________________ of deposits
- Banker’s acceptances

Answer 22

• Treasury Bills
• Commercial paper
• Negotiable certificates of deposits
• Banker’s acceptances

Question 23

Treasury bills:
- issued to meet the ___________ needs of the U.S. Gov
- attractive to investors

Answer 23

short-term

Question 24

Commercial paper of Money market instruments:
- ___________ to bank loan
- Used only by __________________
- Unsecured
- Not __________________________

Answer 24

• Alternative
• well-known and creditworthy firms
• a large secondary market

Question 25

Negotiable certificates of deposit (NCD) of money market instruments: - Bank term deposit that is ___________. - It can be _______________ in the secondary market before its _____________.

Answer 25

* negotiable * traded any number of times; maturity.

Question 26

Bankers acceptance of money market instruments: - ________ takes responsibility for a future payment of _____________ - Used mostly in _____________. - _________________ send goods to a foreign destination and want __________ before sending - Bank stamps a time draft from the importer ACCEPTED and obligates the bank to make good on the payment at a specific time

Answer 26

* A bank; trade bill of exchange * international transactions * Exporters; want payment assurance

Question 27

3 Major capital market instruments:

Answer 27

Bonds; Mortgages; Shares

Question 28

Bonds of capital market instruments: - _________________ of a borrower to make ______________ to a lender over a given number of years. 1. Government bonds: _______ 2. State Gov. : ___________ 3. Corporate bonds: __________

Answer 28

-Contractual obligations; periodic cash payments 1. long‐term debt obligations of governments. 2. Issue debt to finance their operation, but cannot issue stock. 3. long‐term IOUs that represent a claim against the firm’s assets.

Question 29

Mortgages of capital market instruments: - ______________ secured by real estate. - _____________ in the capital markets in terms of the amount outstanding.

Answer 29

- Long‐term loans - Largest segment

Question 30

Shares of capital market instruments: - Ordinary shares: 1. 2. 3. - Preference shares: 1. 2.

Answer 30

- Ordinary shares: 1. Equity shares that represent the basic ownership claim in a corporation. 2. Holders are entitled only to a residual claim against the firm’s cash flows or assets. 3. Limited liability applies. - Preference shares: 1. Represent an ownership interest in the corporation. 2. Holders receive preferential treatment with respect to: * dividend payments * the claim against the firm’s assets in the event of bankruptcy or liquidation.