Intro

Question 1

What does the financial system do

Answer 1

It enables investors to buy and to sell financial securities

Question 2

Why is there a need for a financial system

Answer 2

Because some have a cash surplus and others have opportunities so both win on transferring the liquidity where it is needed the most

Question 3

What are tue firms role in the financial system

Answer 3

They issue securities to gain liquidity for acquiring capital

Question 4

What are the individuals role in the financial system

Answer 4

They supply capital through investment in securities

Question 5

What position has the government in the financial system

Answer 5

They to can act as a firm and issue treasury bills to finance their activities

Question 6

What are se securities

Answer 6

Claims on the borrowers future earnings or assets

Question 7

What are direct finance

Answer 7

When borrowers aka firms borrow direct from lenders aka bond buyers on the financial markets

Question 8

Why are financial markets important

Answer 8

They allow capital to be allocated where most productive and so making the economy as a whole better off

Question 9

What are debt markets

Answer 9

A place where people can obtain funds by issuing a debt instrument like a bond or a mortgage

Question 10

What are debt instruments

Answer 10

A contract to pay a fixed amount until the maturity date where the final payment is made

Question 11

When is a debt instrument short intermediate or long term

Answer 11

Short if maturity is less than one. Long if maturity is more than ten. Intermediate in between

Question 12

What is a stock

Answer 12

A claim to a share in a firms assets and net income

Question 13

How does one earn money on stocks

Answer 13

Through capital gains and dividends

Question 14

What are dividends

Answer 14

Periodic payments of equities

Question 15

Why is the status of residual claimant negative for equity holders

Answer 15

Because they are payed last and may get the scraps

Question 16

What does it mean that debt is senior to equity

Answer 16

That lenders raid first in the case of a bancrupcy

Question 17

Is the stock market a primary or secondary security market

Answer 17

Secondary as you never buy directly from the issuer

Question 18

What do investment banks do

Answer 18

They assist in a companies initial public offering the IPO

Question 19

What does it mean that investment banks underwrite equity issues

Answer 19

They buy issued securities at a guaranteed price and sell them to the public

Question 20

What does it mean that an IB forms a syndicate

Answer 20

That it asks other banks to share the risk of the IPO by assisting in underwriting

Question 21

Why does secondary markets excist

Answer 21

Because they provide liquidity’s to the buyers in the primary market which makes the stocks easier to sell even there

Question 22

What are stock exchanges

Answer 22

A centralized market where a clearing house makes sure that the buyers have cash and the sellers get their money. It validates the transaction and makes sure that people follow their contractual obligations

Question 23

What are OTC markets

Answer 23

Over the counter markets have no central authority in contrast to exchanges and thus contain risk

Question 24

Who are financial intermediaries

Answer 24

Banks, brokers, hedge funds and market makers

Question 25

How can financial intermediaries reduce transaction costs

Answer 25

By leveraging economics of scale
“at least in the past”

Question 26

Explain asset transformation conducted by financial intermediaries

Answer 26

They issue an asset with a fixed low risk and use the proceeds from the issue to buy a riskier asset in bulk. Thus providing risk sharing

Question 27

Can financial intermediaries reduce information costs

Answer 27

Yes they are usually more in the know when it comes to information asymmetry

Question 28

What is adverse selection

Answer 28

When an inability to discriminate when it comes to price forces prices to rise.

Question 29

What comes first adverse selection or moral hazzard

Answer 29

Adverse selection takes place before a transaction while moral hazard takes place after

Question 30

What is moral hazard in financial markets

Answer 30

The borrowers who incentive to engage in other uncondoned activities once they have the money

Question 31

Bow do FIs reduce information asymmetry problems

Answer 31

By screening borrowers to prevent adverse selection and monitoring their activities against moral hazard

Question 32

What are depository institutions

Answer 32

Commercial banks, savings and loan associations as well as mutual savings banks that specialize in mortgages plus credit unions that specialize in consumer loans

Question 33

What are contractual savings institutions

Answer 33

Life insurance companies, fire and casualty insurance companies and pension/ government retiremental funds where people are bound to save by contract and that hold assets in stocks and bonds

Question 34

What are some financial intermediaries

Answer 34

Finance companies, mutual funds and money market mutual funds.

Question 35

What is the purpose of financial regulation

Answer 35

To prevent panic and crashes by regulating reports and propping up those at the risk of a bank run or something similar as well as limiting certain assets and forcing some to buy ensurance