Problem Set Questions

Question 1

The Financial System Allows Us To...
A - Channel funds over time
B - Transfer risk across uncertain states of the world
C - Manage asymmetric information
D - Do all of the above

Answer 1

D - Do all of the above

Question 2

A financial security issued by a firm is defined as a claim…
A - That gives the holder the right to vote during shareholder meetings
B - That promises periodic payments for a specified period of time
C - On the firm’s future cash flow
D - That represents a share of ownership of the firm

Answer 2

C - On the firm’s future cash flow

Question 3

Intermediaries that are willing to buy and sell securities at quoted prices are called...
A - Commercial banks
B - Mutual funds
C - Brokers
D - Dealers

Answer 3

D - Dealers

Question 4

Based on the data shown in class for 2019, the largest financial institutions (in terms of asset value) are...
A - US mutual funds
B - US commercial banks
C - Canadian commercial banks
D - Canadian mutual funds

Answer 4

B - US commercial banks

Question 5

The primary market is where…
A - Corporations acquire new funds
B - Investors obtain they liquidity they need
C - Financial securities are continuously traded
D - The only traded securities are bonds

Answer 5

A - Corporations acquire new funds

Question 6

Explain the main reason why it is so important for the economy to have a well-functioning financial system

Answer 6

Most important function: channelling of funds, smoothing of consumption over time

Question 7

Some of your friends claim that the primary market is more important than the secondary market because this is where corporations raise funds. Do you agree?

Answer 7

False: secondary markets provide liquidity and information

a well-functioning primary market cannot exist without a well-functioning secondary market

Question 8

Explain briefly the difference between an order-driven market and a price-driven market in terms of organization, execution/settlement costs, and liquidity

Answer 8

Order-driven market: a centralized trading platform to which all participants are connected, can see an order book containing bid and ask of participants; execution of trade is less costly because of a centralized, fully integrated system (settlement of transaction is automatic once a trade is done).

Price-driven market: not centralized, network of dealers providing bod and ask prices they are willing to trade at; not order book, participants must contact dealers to make deals; more costly but dealers act as market-makers, providing liquidity.