Review

Question 1

What is a financial security

Answer 1

a financial contract that comes about whenever funds are transferred

Question 2

Diagram of the financial system

Answer 2

Question 3

Financial Institutions: Chartered Banks

Answer 3

• take deposits and act as lenders

Question 4

Financial Institutions: Insurance Companies

Answer 4

contractual savers: in most cases the premiums on policies are paid once a month so they have a steady stream of income

• collect premiums from policyholders
• pool the funds
• pay out the funds to those who suffer covered losses

Question 5

Financial Institutions: Pension Funds

Answer 5

The funds in pension plans are held directly for the pensioners

Question 6

Financial Institutions: Mutual Funds

Answer 6

• do not change the nature of the underlying security
• they pool small sums of money together from individuals, so they can make investments that would not usually be possible for smaller investors
• they offer professional expertise in the management of those funds

Question 7

Debt instruments

Answer 7

• represents a legal obligation to repay borrowed funds at a specified maturity date and provide interest payments specified in the agreement

Examples:
- Bank Loans
- Bankers’ Acceptance (BA)
- Treasury Bills (T-Bills)
- Mortgage loans
- Bonds (long-term debt)
- debentures

Question 8

Equity instruments

Answer 8

represent an ownership stake in a company

most common forms
- common shares
- preffered shares