The Financial System

Question 1

Benefits of having a Financial System

Answer 1

It allows resources to be allocated efficiently

Question 2

What are lenders and borrowers and what do they require

Answer 2

Lenders (in surplus) generally require high return, liquidity, certainty and minimal risk. Examples include mortgage providers and credit card companies

Borrowers (in deficit/demand) generally require low costs and cash for a preferred time. Examples include people, businesses and the government.

Question 3

What is the Financial Market

Answer 3

A place, physical or virtual where financial claims are issued or traded

Question 4

What is a Financial Institution

Answer 4

General term for a business that deals with those who wish to borrow or save and offer financial advice

Question 5

What is the Money Market

Answer 5

A place where short term (less than a year) financial claims are issued or traded

Question 6

What is the Capital Market

Answer 6

A place where long term (greater than a year) financial claims are issued or traded.

Question 7

What is Financial Liability

Answer 7

A financial obligation to someone else (debt).

Question 8

What is a financial asset

Answer 8

A financial obligation that someone owes you or a product you hold

Question 9

What is Risk, Maturity and Liquidity

Answer 9

Risk- the probability of financial gain
Maturity- the time it takes for a financial product to pay back in full or a product end date
Liquidity- how easy it is to transform an asset into cash

Question 10

What are the primary and secondary markets

Answer 10

Primary- Where new issues of debt or equity are put up for sale

Secondary- Where debt or equity are traded

Question 11

What is Equity

Answer 11

Issuer Welles certain rights, may pay dividends (ownership)