Part -1
Finance and Financial Markets
1. Finance and the financial system is about how an economy does what?
a. Prices and manages risk.
b. It creates money for the government.
c. It maintains price stability.
d. It creates jobs and employment.
2. A financial claim is
a. the financial liability of a borrower.
b. the financial asset of a saver.
c. both the financial liability of a borrower and the financial assets of a saver.
d. the wealth created by an economy.
3. A financial system creates liquidity by
a. direct finance.
b. pricing risk.
c. providing an information system.
d. providing a range of financial assets and market in which to trade them.
4. Why are financial intermediaries important to any financial system?
a. They help to overcome the mismatch of wants and needs that can exist between borrower and lender in direct finance and transactions via financial markets.
b. They act as brokers to bring parties together.
c. They provide a clearing and settlement system.
d. They print banknotes.
5. What is a maturity transformation performed by financial intermediaries?
a. A financial intermediary's liabilities have a lower risk of default than its assets.
b. A financial intermediary may use short term financial liabilities to fund their acquisition of longer term assets.
c. Lower transaction costs are achieved for savers and borrowers by economies of scale.
d. A great many individually small amounts are taken from savers, to provide fewer but individually larger amounts to borrowers.
6. What important function does a secondary financial market perform?
a. It is a market that enables new financial claims to be issued.
b. It pays annual dividends from the company's profits.
c. It provides liquidity for the financial claims issued on the primary market by allowing those who bought financial claims on the market to liquidate their holding at some future date; thus it encourages more activity in the primary market.
d. It allows borrowers to arrange funds via a private placement through the use of a group of investment banks acting directly as the underwriters and the sales team.
7. What is the "breadth" of a secondary financial market?
a. The volume of orders at price above and below the current equilibrium price and be responsive to any changes in demand.
b. The consistency of the flow of buy and sell orders in the market and ensures markets do not crash.
c. It is the size of any imbalance between the demand and supply of the orders in the market.
d. It is the number of buyers and sellers in the market: "broad" markets have a considerable numbers of buyers and sellers whereas "thin" markets will have very few; hence breadth is important for the liquidity of a market at any given time.
8. Money market securities will include
a. stocks and shares in a company.
b. commercial paper and bankers acceptances.
c. government bonds.
d. bank loans.
9. Sub-prime mortgages were an example of the failure of:
a. liquidity in the market.
b. pricing of risk within the financial system.
c. financial institutions.
d. allocation of resources efficiently.
10. What does ‘the originate and distribute model' in banking mean?
a. The bank provides loans and holds them on their own books.
b. The bank underwrites share sales and subsequently sells the shares.
c. Loans made by the banks are securitised and the future income streams from the loans are sold to investors.
d. Insurance policies are sold by the banks.
Part -2
1. Do the terms ‘financial claims', ‘financial assets' and ‘financial liabilities' refer to three different things? (Explain your answer)
2. Explain the meaning and significance of ‘breadth', ‘depth' and ‘resilience' as desirable features of a secondary financial market.