Lecture 1 Continued

Question 1

what are the recent financial & economic developments?

Answer 1

• price bubble for tech stocks burst in 2000
• 2001 recession exacerbated by terrorist attack
• housing price bubble burst resulting in housing price declines
• 2007-08 financial crisis followed by the 2008-09 great recession
• economic recovery from the 2007-09 disaster has been slow and economic growth remains low

Question 2

what are the 4 major components of the US Financial system?

Answer 2

policy makers
monetary system
financial institutions
financial markets

Question 3

who are policy makers?

Answer 3

they pass laws and set fiscal/monetary policies

president, congress, US Treasury, federal reserve board

Question 4

what is the monetary system?

Answer 4

they create & transfer money

federal reserve, central bank, commercial banking system

Question 5

what are financial institutions

Answer 5

they accumulate and lend/invest savings

they are depository institutions, contractual savings organisations, securities firms, finance firms

Question 6

what are financial markets?

Answer 6

they market & facilitate the transfer of financial assets

they are debt securities markets, equity securities markets, derivative securities markets and foreign exchange markets

Question 7

what are the 3 components of financial system & the financial functions?

Answer 7

monetary system (creating & transferring money)

financial institutions (accumulating and lending/investing savings)

financial markets (marketing & transferring financial assets)

Question 8

what are debt securities

Answer 8

a negotiable/tradable liability or loan

involves debt rather than ownership

e.g., bonds, mortgage-backed securities

Question 9

what are the types of financial markets?

Answer 9

money markets
capital markets
primary & secondary markets

debt securities markets
derivative securities markets
equity securities markets
foreign exchange markets

Question 10

what are money markets?

Answer 10

where debt securities with maturities of one year or less are issued/traded

Question 11

what are capital markets?

Answer 11

where debt securities with maturities longer than one year and corporate stocks are issued/traded

Question 12

what is maturity?

Answer 12

the date on which the validity of a financial instrument ends

Question 13

what are primary/secondary markets?

Answer 13

primary - where the initial offering or origination of debt securities take place

secondary - physical/electronic platforms where debt and equity securities are traded

Question 14

what is the debt securities markets?

Answer 14

where money market securities, bonds and mortgages are traded

Question 15

what is the equity securities markets?

Answer 15

where corporate ownership shares are sold/traded

Question 16

what are derivative securities markets?

Answer 16

where financial contracts which derive their value from debt/equity securities are originated & traded

Question 17

what are foreign exchange markets?

Answer 17

electronic markets in which banks & institutional traders buy/sell various currencies on behalf of businesses/clients