Chapter 1: Financial Systems and the Financial Market

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True

Financial market based on country's perspective are: national and external markets.

True

Financial market based on manner of financial intermediaries are: dealer market and broker market.

False

Financial market is not the same with the other economic markets where suppliers and buyers of financial instruments meet.

True

The financial system permits an efficient method to move funds between entities who have funds and entities who need funds.

False

Finance is the application of economic principles to decision-making that involves the allocation of money under conditions of certainty.

True

Finance provides the framework for making decisions as to how those funds should be obtained and then invested.

False

Financial instruments are medium of exchange of contractual obligation of a party, where such contract cannot be traded.

True

Financial instruments can be classified into two types: cash or derivative financial instrument.

False

Financial instruments can only be tangible, and not intangible, to consider as legitimate.

False

Financial instruments represent claims on the future income or assets of the lender.

True

A properly functioning financial system also enhances welfare of individual consumers as they have immediate access to funds allowing them to purchase things as they prefer.

True

All types of financial markets offer different degrees of liquidation.

True

Although original issuers are not involved, they also benefit from the transactions in the secondary market.

False

An underwriter provides an undertaking to purchase the remaining securities if the offer will not be fully subscribed by the public. As consequence, there is no fee paid by the issuing company to the underwriters.

False

Another way to offer securities to a private entity is through an auction process.

False

Auction can be done in three methods: Dutch auction, American auction, and Descending price sealed auction.

True

Auction is usually used for issuance of treasury bills, bonds, and other securities issued by the government and are commonly executed exclusively with market makers.

False

Broker market is where the buyer and seller are not brought directly together by a third party.

False

Capital can only be financial, not physical, of which are used to produce more wealth.

False

Capital generates profit.

False

Capital market instruments are very liquid and easily convertible to cash and has very little default risk because of the associated short maturity term.

True

Capital market is the sector of financial markets where financial instruments issued by governments and corporations that will mature beyond one year from issuance date are traded.

False

Capital market securities are classified into two: equity and stock.

True

Capital markets are expected to be a liquid market where fund demanders can interact with potential investors to acquire external financing resources.

False

Cash financials instruments are exchange in money market as well as in the capital market.

False

Efficient allocation of capital occurs when funds are invested in productive investments that yield return for the fund providers and not to fund demanders.

False

Dealer market is where the buyer and seller of the securities are brought together by a broker and the trade occurs at that point.

False

Dealer markets have centralized trading floors like the exchange markets.

True

Derivative financial instruments are exchange in capital market.

True

Descending price sealed auction is also known as first-price sealed auction.

False

Descending price sealed auction is where the prospective buyers commence the auction by submitting an initial bid price. Other buyers interested to purchase the securities submit a new bid to top the previous one.

False

Direct financing is where the borrowing activity between both parties still happens though indirectly through the intervention of a financial intermediary.

True

Domestic market refers to the market where issuers who are considered residents in a country issue the securities and where these securities are traded afterwards.

True

Dutch auction is where seller begins the sale at a high price From that point, the price of the securities is continuously lowered down at specific intervals until the potential buyer agrees to purchase at that price.

True

Easy access to a venue where investors can sell financial instruments for cash is an appealing feature when circumstances may occur that push investors to sell a financial instrument.

True

Efficient financial markets enhance the economic well-being of all members of the society.

False

English auction is where bidders submit sealed bids to the sellers. The sealed bids are ranked from highest to lowest price. The number of securities is allocated first to the highest priced bid, in full amount, and the remaining amount of securities is allocated pro rata to the lowest priced bids.

True

Entrepreneurial skills generate profit.

True

Examples of secondary market include foreign exchange market, futures market, and option market.

False

Exchange (or formalized) is the place where unlisted financial instruments are allowed to be traded, in addition to listed financial instruments.

True

Exchanging of financial instruments is also more commonly known as trading.

False

Explicit search cost include value of time consumed to look for a counter-party for the transaction.

False

External market has two characteristics: -upon issuance, these securities are offered simultaneously to investors in different countries -securities are issued in accordance to the regulatory jurisdiction of the country where it is issued

False

Money markets are exclusive for short-term investors.

False

Finance came from the Greek word "finer" which means "to end and settle a debt"

True

Financial market refers to channels or places where funds and financial instruments such as stocks, bonds, and other securities are exchanged between willing individuals and/or entities.

False

Financial markets are special type of financial entity that acts as a third party to facilitate the borrowing activity between lenders and borrowers.

False

Financial markets based on instruments traded: Primary market and Secondary market.

False

Financial markets based on market type: Money market and Capital market.

False

Financial markets do not provide additional options to lender and borrowers on which form they want their transaction to be in.

True

Financial markets help in creating more efficient allocation of capital which results in higher production and efficient that ultimately leads to economic growth.

True

Financial system is composed of network of inter-related systems of financial market, intermediaries, and services.

False

Financial system serves as an irregular, time-efficient and cost-effective link between fund providers and fund demanders.

True

Financial systems allows households, companies, and the governments who have available funds to invest these funds in more potentially productive vehicles that can result in faster growth in the economy.

True

Foreign market refers to the market where issuers who are not residents of a country can sell or issue securities and subsequently traded.

False

Implicit search cost are expenses needed to advertise intent to purchase or sell a financial instrument.

True

In an efficient market, the price of securities, which is a product of interaction between buyers and sellers in the market, is believed to be a fair estimate of its real value.

True

In the world of commerce, finance is a key player in ensuring continuity of operations.

False

Indirect financing is where the borrower-spenders borrow and deal directly with lenders through selling financial instruments or securities. Buying stocks directly from the company is considered as indirect financing.

False

Information cost are costs incurred to look for financial instruments that can be purchased or sold by a party.

False

Information symmetry causes inefficient allocation of financial resources as one party may be in a better negotiating position because of the lacking information of the other party.

False

Information symmetry occurs when one stake holder to a transaction holds superior information than the other party.

True

Initial Public Offering are usually done with investment banks.

True

Labor generates salary or wages.

True

Land generates rent.

False

Lender and borrowers are also known as fund demanders and fund providers, respectively.

False

Lenders recognize financial instruments as liabilities while borrowers recognize it as assets.

False

Long term financial instruments encompasses financial instruments that have maturity dates longer than one year, excluding those that have no maturity at all.

True

Market makers are dealers who create market by offering to sell/buy securities at stated ask/bid price, respectively.

True

Market structure refers to the mechanisms how buyers and sellers interact to arrive at the price and quantity of the securities to be traded.

True

Matching the difference in spending (excess funds from one party to the fund gap of another party) is the main reason for the existence of a financial system.

True

Money market is the sector of financial market where financial instruments that will mature or be redeemed in one year or less from issuance date are traded.

True

Money markets serve as the conduit to efficiently transfer large amounts of money from fund providers to fund demanders for short maturity term quickly and at a cheap cost for the parties involved

False

Most of the time, an undertaker is appointed for public offerings.

False

Non-negotiable instruments like mortgage loans, savings deposits and life policies are issued only in secondary markets and are not traded in primary markets.

True

Offering to the general public is done through issuing a prospectus or placing document which contains an offer to the general public to subscribe or purchase securities at a stated price.

True

Order-driven structure is where the buyers and sellers propose their price through their brokers who conveys the bid in a centralized location.

False

Order-driven structure is where the market makers establish a price quote at which the market participants should trade with.

False

Over-the counter (or informal) are centralized trading locations where financial instruments are purchased or sold between market participants.

True

Participants in financial markets include ultimate lenders and borrowers such as households, government, and businesses, financial intermediaries, broker and dealers, regulators, fund managers and fund exchanges.

False

People who save frequently are the same people who have access to profitable investment opportunities.

True

Price is normally driven by the level of risk on how the issuer of the financial instruments.

False

Price valuation is the process of determining or valuing the financial instrument in the market.

False

Price valuation refers to the interaction between buyers and sellers in the financial market in order to come up with price of the traded financial instruments.

True

Primary market is a type of financial market wherein fund demanders such as corporation or a government agency raise funds through new issuances of financial instruments.

False

Primary market securities do not include issuance of additional debt or equity securities of an already publicly traded company.

False

Private companies who will sell shares to the general public for the very first time is said to undergo an initial private offering.

False

Private placement is also called as limited private offer.

True

Private placement occurs when the issuer looks for a single investor, an institutional buyer or a group of buyers to purchase the whole securities issuance instead of offering it to the general public.

False

Subsequent transactions in secondary markets affect the original issuer of financial instrument.

False

Public offering can only be an offer for subscription and not an offer for sale.

True

Public offering occurs when securities are offered for sale to the general public.

True

Quote-driven structure is also called as primary dealer market, professional market or market-made market.

True

Regulatory environment is the governance body to ensure that the transaction that occur within the financial systems complies with the laws and regulations imposed to the actors as well as the elements that plays within the system.

False

Salaries are earned on a daily or weekly basis, more than that is called Wages

False

Search cost are costs related in evaluating investment characteristics of a financial instrument.

True

Secondary market allows the buyers and seller to save on search and information cost as they do not need look for transactions on their own.

False

Secondary market based on market structure: number-driven and quote-driven.

True

Secondary market refers to the market wherein the securities issued in primary market are subsequently traded.

True

Tap issue occurs when issuers are open to receive bids for their securities at all times. Issuers maintain the right to accept or reject the bid prices based on their how much fund they need, when they need the fund and what is their outlook of the market.

False

The four economic functions of secondary market are: price discovery, liquidity and reduction in borrowing cost, support to the primary market, and implementation of fiscal policy.

False

The main economic function of financial intermediaries is to serve as channel to transfer excess funds from fund providers to fund demanders.

False

The price discovery function of financial market determines how the available funds from the fund demanders are allocated towards the fund providers based on the fund providers' willingness to accept the return required by the fund demanders.

False

The sources of wealth are: -Labor -Land -Interest -Entrepreneurship

False

The theoretical foundations for finance draw from the field of commerce and, for this reason, finance is often referred to as financial commerce.

False

The three main economic functions of the financial market are: price valuation, liquidity, reduction in transaction cost.

False

There are four type of isuue methods that can be done in a secondary market: public offering, private placement, auction, and tap issue.

False

Trading of bonds and currency are usually done in an order-driven structure.

True

Transaction cost can be classified into two types: search cost and information cost.

True

Types of orders that go into an oder-driven structure: market orders (or at-best orders), limit orders, day orders, and good-until-cancelled orders.

False

Underwriting means that investment banks do not guarantee the price for the securities of the issuing company and then sells these to the general public.

True

Usually, primary markets transactions are coursed through investment banks which are financial institutions that act as intermediaries between issuing companies and potential investors.

False

Usually, the demanders of fund in the financial market determine the required return for a financial instrument.

False

With the flow of financial instruments, price is created. Money is used to either be reinvested or earned out from the system flows.


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