Financial Markets, Money Markets, and Institutions

FINANCIAL MARKETS, MONEY MARKETS, AND INSTITUTIONS Q1. A Financial intermediary is an institution that bridges between user & provider of finance. Which of the following is/are a financial intermediary? (MRQ) Venture CapitalistInsurance institutionsCredit unionsCommercial Banks(2 marks) Q2. Which of the following is a money market instrument? (MCQ)Corporate BondTreasury BillsDebenturesStocks(2 marks) Q3. Faust Co trades agricultural products & oils in its markets. Which type of market is Faust Co most likely in? (MCQ)Money marketsDerivatives marketCommodity marketsInsurance markets(2 marks) Q4. Which of the following is a difference in primary & secondary markets? (MCQ)Secondary markets relate to the trading of securities at the initial offeringPrimary & Secondary markets deals in the sale of securitiesThe primary market is used by newly public limited entitiesPrimary markets deal initial offerings & Secondary markets deals in existing investments (2 marks) Q5. The conversion of illiquid assets into marketable securities is known as? (MCQ)FuturesSecuritizationEuro currencyRepos(2 marks) Q6. Which of the following correctly describes Arbitrage? (MCQ)Opportunity for investors to widen their investmentThe use of different types of securities in the financial market for investors to assess their riskThe process of buying a security from one market and selling off to another market to obtain profitAn investment to reduce the risk of unfavorable price movements (2 marks) Q7. The following statements relate to key roles of a financial intermediary. Match the appropriate options with their definitions. (P&D)The pooling of many small deposits to make the larger advancement of finance Reduction in default risk by lending finance to multiple businesses FINANCIAL INTERMEDIATION AGGREGATION MATURITY TRANSFORMATION RISK REDUCTION(2 marks) Q8. Which of the following investment is most risky? (MCQ)Ordinary sharesPreference sharesMarket risk bondsCompany issue bonds(2 marks) Q9. Select the appropriate option in relation to money markets. (HA)It is a market for short-term funds TRUE FALSEThis market is operated by financial institutions TRUE FALSEThe interest-bearing instrument is an example of money market instrument TRUE FALSEMoney market deposits is an example of money market derivatives TRUE FALSE(2 marks) FINANCIAL MARKETS, MONEY MARKETS, AND INSTITUTIONS (ANSWERS) Q1. All options are examples of financial intermediaryVenture Capitalist (An investing company in small companies)Insurance institutions (Charging premiums which are invested to provide returns) Credit unions (A member of the union may borrow from a pool of deposits at low interest) Commercial Banks Q2. BAll others are capital market instruments. Capital markets are long-term financial instruments in form of debt or equity which are traded. Q3. CMoney markets (A market that supports short-term debt financing & investment)Derivatives market (A market that provides instruments for managing financial risk) Commodity markets (A market that supports trading of raw or natural materials)Insurance markets (A market that facilitates buying & selling of insurance) Q4. DSecondary markets relate to the trading of securities at initial offering (Incorrect, trading of old securities)Primary & Secondary markets deals in the sale of securities (Correct, but a similarity between both markets) The primary market is used by newly public limited entities (Correct, for primary market only)Primary markets deal initial offerings & Secondary markets deals in existing investments (Correct, difference between both markets) Q5. BFutures (A buying & selling of a specified asset at a fixed rate in future) Euro currency (A currency which is held by people outside the country of issue of that currency)Repos (An agreement between two parties to buy or sell a financial instrument on an agreed date & price) Q6. COpportunity for investors to widen their investment (Diversification)The use of different types of securities in the financial market for investors to assess their risk (Risk-shifting)The process of buying a security from one market and selling off to another market to obtain profit (Arbitrage)An investment to reduce the risk of unfavorable price movements (Hedging) Q7.The pooling of many small deposits to make the larger advancement of finance AGGREGATIONReduction in default risk by lending finance to multiple businesses RISK REDUCTIONFinancial Intermediation: The process of bringing together of borrower & lender is financial intermediationMaturity Transformation: Borrowers wish to obtain long-term finance & Lender is unwilling to lock its finances. This technique develops a floating pool of deposits which satisfies both needs. Q8. AOrdinary shares, most risky as paid at last after all liabilities are cleared offPreference shares, riskier than bonds as paid after debts are clearedMarket risk bonds, also known as government bond as these provide returns on the current market basis Company issue bonds, risky due to the chance of company defaults but are usually backed up by company assets Q9. It is a market for short-term funds TRUE This market is operated by financial institutions TRUE The interest-bearing instrument is an example of money market instrument TRUE Money market deposits is an example of money market derivatives FALSEMoney market deposit is an example of the interest-bearing instrument rather than money market derivatives. Money market deposit provides high interest on deposited savings.