Question 1

The financial asset is referred to as a ________ if the claim is a fixed dollar.

Accepted Answer

A fixed dollar claim is typically associated with a debt instrument, such as a bond, where the issuer is obligated to pay a fixed amount of interest and principal to the investor. Common equity instruments represent ownership in the company, while preferred equity instruments have characteristics of both debt and equity. Derivative instruments derive their value from an underlying asset, but do not represent a fixed dollar claim on that asset.

Question 2

Which of the below is NOT a factor that has led to the integration of financial markets?

Accepted Answer

Increased institutionalization, such as the growth of pension funds and mutual funds, is actually a factor that has contributed to the integration of financial markets. Therefore, D is the option that is NOT a factor that has led to the integration of financial markets.

Question 3

Which of the below statements is TRUE?

Accepted Answer

Different countries have different regulatory frameworks for financial markets and institutions based on their culture and history. Some regulations may be emphasized more than others.

Answer: B 
 The standard explanation for government regulation in a market is to ensure efficiency and low cost in production of goods and services.

Answer: None for C and D 
 Option C is incorrect because governments in most developed economies have established complex regulatory systems for financial markets. Option D is incorrect because financial activity regulation includes rules for traders of securities and trading on financial markets.

Question 4

Business entities include nonfinancial and financial enterprises. ________ manufacture products such as cars and computers and/or provide nonfinancial services such as transportation and utilities.

Accepted Answer

The passage clearly states that nonfinancial enterprises can manufacture products and provide nonfinancial services. Financial enterprises, on the other hand, deal primarily with money and finances, such as banks and investment firms. Therefore, the correct answer is B.

Question 5

Derivative instruments derive their value from ________.

Accepted Answer

Derivative instruments derive their value from the underlying instruments to which they relate, such as stocks, bonds, commodities, or currencies. The value of the derivative is based upon the price movements of these underlying assets.

Question 6

A factor leading to the integration of financial markets is ________.

Accepted Answer

The answer of A factor leading to the integration of...

Question 7

An asset is a possession that has value in an exchange and can be classified as ________.

Accepted Answer

An asset can be classified as either tangible (such as property, equipment, or inventory) or intangible (such as patents, trademarks, or goodwill). Financial and variable are not appropriate classifications for assets, and fixed refers specifically to fixed assets such as buildings or machinery.

Question 8

Derivative markets may have at least three advantages over the corresponding cash (spot) market for the same financial asset. Which of the below is ONE of these advantages?

Accepted Answer

Transactions in the derivatives market are typically faster due to standardized contracts and centralized exchanges, which facilitate quicker execution compared to the cash market.

Question 9

From the perspective of a given country, financial markets can be classified as either internal or external. The internal market is composed of two parts: the domestic market and the foreign market. The domestic market is ________.

Accepted Answer

The domestic market refers to the market within a country where issuers domiciled in that country issue securities and where those securities are subsequently traded.

Question 10

A(n) ________ such as plant or equipment purchased by a business entity shares at least one characteristic with a financial asset: Both are expected to generate future cash flow for their owner.

Accepted Answer

Tangible assets such as plants or equipment are physical assets that can be seen and touched. They are expected to generate future cash flow for their owners through their productive use. This is similar to financial assets, which are also expected to generate future cash flows for their owners, but are not physical in nature.

Question 11

Financial assets have two principal economic functions. Which of the below is ONE of these?

Accepted Answer

The answer of Financial assets have two principal economic functions....

Question 12

Financial markets can be categorized as those dealing with newly issued financial claims that are called the ________, and those for exchanging financial claims previously issued that are called the ________.

Accepted Answer

The primary market deals with newly issued financial claims, such as IPOs, while the secondary market deals with the trading of previously issued financial claims, such as stocks and bonds. Therefore, choice D is the correct answer. Choice A and B are incorrect because they are essentially rewording the same concept. Choice C is incorrect because it refers to two different types of markets, rather than distinguishing between newly issued and previously issued financial claims.

Question 13

Derivative contracts provide ________.

Accepted Answer

Derivative contracts provide issuers and investors with an inexpensive way of controlling some major risks by allowing them to transfer the risk to a third party through a contract. While the contracts themselves may have costs associated with them, they are generally less expensive than other methods of controlling risk such as buying physical assets or insurance. Therefore, option B is the best choice as it accurately describes the benefits of derivative contracts.

Question 14

The two basic types of derivative instruments are ________ and ________.

Accepted Answer

The two basic types of derivative instruments are futures/forward contracts and options contracts.

Question 15

A reason for a corporation using ________ is a desire by issuers to diversify their source of funding so as to reduce reliance on domestic investors.

Accepted Answer

Euromarkets offer a way for corporations to raise funds from a broader pool of international investors, reducing their reliance on solely domestic investors.

Question 16

A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.

Accepted Answer

The statement suggests that the function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets, which is represented by option D.

Question 17

Financial markets provide three economic functions. Which of the below is NOT one of these?

Accepted Answer

Financial markets actually reduce the cost of transacting by facilitating efficient and easy trading of financial assets. Therefore, option C is not one of the economic functions provided by financial markets.

Question 18

The shifting of the financial markets from dominance by retail investors to institutional investors is referred to as the ________ of financial markets.

Accepted Answer

Institutionalization refers to the shift in financial markets from being dominated by individual or retail investors to being primarily controlled by large institutional investors such as pension funds, insurance companies, and hedge funds. This shift can have a significant impact on market dynamics and can influence investment strategies and decision-making processes. Globalization refers to the integration of markets across international borders, securitization refers to the process of bundling financial assets such as mortgages into securities, and diversification refers to the process of spreading investments across multiple assets or instruments.

Question 19

A basic economic principle is that the price of any financial asset ________ the present value of its expected cash flow, even if the cash flow is not known with certainty.

Accepted Answer

According to the basic economic principle, the price of any financial asset should be equal to the present value of its expected cash flow, even if the cash flow is not known with certainty. This means that the market price of a financial asset reflects the market's expectation of the future cash flow.

Question 20

Which of the following statements is FALSE?

Accepted Answer

This statement is false because governments have had a significant influence on the development and evolution of financial markets and institutions through their regulatory capacities.

Quiz 1: Introduction