Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What are financial markets? - ansMarkets where funds are transferred from those with excess
funds to those in need of funds.
What are the three major components of the financial system? - ansFinancial assets, financial
institutions, and financial regulators.
What is a financial asset? - ansAn asset that represents a claim on someone else for a
payment.
Define a security. - ansA financial asset that can be bought and sold in a financial market.
What is a bond? - ansA debt security that promises to make payments periodically for a
specified period.
What does 'maturity' refer to in the context of bonds? - ansThe life of a bond, or the time
between the original sale and payment of the face value.
What is a coupon payment? - ansInterest paid at specified intervals for the use of borrowed
funds.
What is the face value of a bond? - ansThe principal paid when a bond matures.
What is commercial paper? - ansA type of bond with maturities less than one year, issued by
corporations.
What are Treasury bills? - ansShort-term debt securities issued by the U.S. government.
What is a zero-coupon bond? - ansA bond sold at a discount from face value with no
specified coupon or interest payment.
Define money. - ansAnything that is generally accepted in payment for goods and services or
to pay off debts.
What is the money supply? - ansThe total quantity of money in the economy.
What are stocks? - ansFinancial securities that represent partial ownership of a firm.
What are dividends? - ansPayments made by a corporation to its shareholders after keeping
some of its profits.
What does foreign exchange refer to? - ansUnits of foreign currency and the market where
they are traded.
What is securitization? - ansThe process of converting loans and other financial assets into
tradable securities.
What is a financial liability? - ansA financial claim owed by a person or a firm.
What are financial intermediaries? - ansFinancial firms that borrow funds from savers and
lend them to borrowers.
What is indirect finance? - ansFunds flow from lenders to borrowers indirectly through
financial intermediaries.
What is direct finance? - ansFunds flow directly from savers to borrowers.
What is the role of commercial banks? - ansTo take in deposits and use them to make loans.
What are nonbank financial intermediaries? - ansEntities like savings and loans, credit
unions, and investment banks that also take deposits and make loans.
,Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What do insurance companies do? - ansCollect premiums from customers and invest them to
pay claims and other costs.
What is the function of pension funds? - ansTo collect contributions and make benefit
payments during workers' retirements.
What are mutual funds? - ansFunds that obtain money by selling shares to investors and
invest in a portfolio of financial assets.
What is the purpose of hedge funds? - ansTo make riskier investments with funds from a
small number of wealthy investors.
What are the functions of financial intermediaries? - ansLower transaction costs, provide
liquidity services, reduce risk exposure, and deal with asymmetric information problems.
What is the primary function of financial intermediaries? - ansTo connect savers and
borrowers, allowing small savers and borrowers to benefit from financial markets.
What do economies of scope in financial intermediaries refer to? - ansThe ability to lower the
cost of information production for multiple services by using one information resource.
What are debt instruments? - ansFinancial instruments that represent a loan made by an
investor to a borrower, with a specified maturity date.
What distinguishes primary markets from secondary markets? - ansPrimary markets involve
the issuance of new securities, while secondary markets involve the trading of existing
securities.
What is the role of investment banks in primary markets? - ansInvestment banks underwrite
securities, facilitating the issuance of new stocks and bonds.
What are money markets? - ansMarkets that deal in short-term debt instruments, typically
with maturities of one year or less.
What are capital markets? - ansMarkets that deal in longer-term debt and equity instruments.
What is a Eurobond? - ansA bond denominated in a currency other than that of the country in
which it is sold.
What are Eurocurrencies? - ansForeign currencies deposited in banks outside their home
country.
What is the Federal Reserve? - ansThe central bank of the United States, established to
manage banking problems and monetary policy.
What is the primary responsibility of the Federal Reserve? - ansTo manage the money supply
and interest rates to achieve macroeconomic policy objectives.
What is the Federal Open Market Committee (FOMC)? - ansThe main policymaking body of
the Federal Reserve, which meets eight times a year to set the federal funds rate.
What was a major cause of the financial crisis of 2007-2009? - ansThe housing bubble of
2000-2005, characterized by unsustainable increases in housing prices.
What role did Fannie Mae and Freddie Mac play in the financial crisis? - ansThey facilitated
borrowing for homeowners by selling bonds to investors and purchasing mortgages from
banks.
,Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What happened to mortgage standards leading up to the financial crisis? - ansStandards were
greatly loosened, allowing many subprime borrowers with flawed credit histories to obtain
loans.
What was the Troubled Asset Relief Program (TARP)? - ansA program enacted by Congress
in 2008 to provide funds to commercial banks in exchange for stock.
What was a significant consequence of the financial crisis on the economy? - ansA severe
recession, with unemployment rising from under 5% to over 10%.
What is the purpose of regulating the financial system? - ansTo increase information
available to investors and ensure the soundness of financial intermediaries.
What is one way to reduce adverse selection in financial markets? - ansBy increasing the
information available to investors.
What is deposit insurance? - ansA measure to avoid bank runs by protecting depositors' funds
in case of bank failure.
What does the term 'moral hazard' refer to in finance? - ansThe risk that a party engages in
risky behavior knowing that it is protected against the consequences.
What is the significance of insider trading regulations? - ansTo prevent unfair advantages in
trading based on non-public information.
How did the Federal Reserve respond to the financial crisis? - ansBy implementing
unprecedented interventions in financial markets and providing implicit guarantees to large
financial firms.
What is the impact of international financial markets on domestic economies? - ansThey
affect exchange rate policies, capital controls, and the performance of domestic financial
systems.
What is the role of international financial institutions like the IMF? - ansTo provide financial
stability and support to countries facing economic challenges.
What is money? - ansAnything that is generally accepted as payment for goods and services
or in the settlement of debts.
How does money differ from wealth? - ansWealth is the total collection of pieces of property
that serve to store value, while money is a stock concept used for transactions.
What is barter? - ansA system of exchange in which individuals trade goods and services
directly for other goods and services.
What is commodity money? - ansMoney that has intrinsic value, such as gold, silver, or
shells.
What is fiat money? - ansMoney that has no intrinsic value and is used as currency, such as
paper money and coins.
What was the Continental dollar? - ansA fiat currency that became almost worthless due to
excessive printing during the war.
What was reestablished in 1879 regarding the U.S. dollar? - ansThe gold standard, with an
ounce of gold worth $20.67.
, Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What happened in 1933 regarding the gold standard? - ansPresident Roosevelt suspended the
gold standard.
What are the four key functions of money? - ansMedium of exchange, unit of account, store
of value, and standard of deferred payment.
What is the role of money as a medium of exchange? - ansIt eliminates the trouble of finding
a double coincidence of needs and promotes specialization.
What does money serve as a unit of account? - ansIt measures value in the economy and
reduces transaction costs.
How does money function as a store of value? - ansIt saves purchasing power over time,
though it can lose value during inflation.
What is the payments system? - ansA mechanism for conducting transactions in the economy.
What is the transition from commodity money to fiat money? - ansEarly banks stored gold
coins and issued paper certificates, leading to the use of paper currency not backed by
physical commodities.
What are checks? - ansPromises to pay on demand money deposited with a bank or financial
institution.
What are electronic funds transfer systems? - ansComputerized payment-clearing devices that
facilitate transactions.
What is e-money? - ansDigital cash used to buy goods and services, including debit cards and
stored-value cards.
What is Bitcoin? - ansA decentralized form of e-money created by a system of linked
computers, known for its privacy in transactions.
What are some advantages of e-money over traditional cash? - ansE-money can be more
convenient and efficient for transactions.
What are some challenges to a cashless society? - ansSeveral factors work against the
complete disappearance of the paper system despite the rise of e-money.
What was the gold reserve requirement reduced to in 1945? - ans25%.
What significant action did President Nixon take in 1971? - ansHe broke all ties to gold,
making the dollar a fiat currency once again.
What is the significance of the term 'standard of deferred payment'? - ansIt allows money to
facilitate exchanges over time, not just at a single point in time.
What is a unilateral transfer in the context of money? - ansMoney used to pay off public
debts.
What technology underlies Bitcoin? - ansBlockchain, which is a distributed ledger allowing
secure transactions.
How is Bitcoin created? - ansBy 'mining', where decentralized users verify and process
transactions using computing power.
Why is Bitcoin unlikely to become the money of the future? - ansIt performs less well as a
unit of account and a store of value.
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What are financial markets? - ansMarkets where funds are transferred from those with excess
funds to those in need of funds.
What are the three major components of the financial system? - ansFinancial assets, financial
institutions, and financial regulators.
What is a financial asset? - ansAn asset that represents a claim on someone else for a
payment.
Define a security. - ansA financial asset that can be bought and sold in a financial market.
What is a bond? - ansA debt security that promises to make payments periodically for a
specified period.
What does 'maturity' refer to in the context of bonds? - ansThe life of a bond, or the time
between the original sale and payment of the face value.
What is a coupon payment? - ansInterest paid at specified intervals for the use of borrowed
funds.
What is the face value of a bond? - ansThe principal paid when a bond matures.
What is commercial paper? - ansA type of bond with maturities less than one year, issued by
corporations.
What are Treasury bills? - ansShort-term debt securities issued by the U.S. government.
What is a zero-coupon bond? - ansA bond sold at a discount from face value with no
specified coupon or interest payment.
Define money. - ansAnything that is generally accepted in payment for goods and services or
to pay off debts.
What is the money supply? - ansThe total quantity of money in the economy.
What are stocks? - ansFinancial securities that represent partial ownership of a firm.
What are dividends? - ansPayments made by a corporation to its shareholders after keeping
some of its profits.
What does foreign exchange refer to? - ansUnits of foreign currency and the market where
they are traded.
What is securitization? - ansThe process of converting loans and other financial assets into
tradable securities.
What is a financial liability? - ansA financial claim owed by a person or a firm.
What are financial intermediaries? - ansFinancial firms that borrow funds from savers and
lend them to borrowers.
What is indirect finance? - ansFunds flow from lenders to borrowers indirectly through
financial intermediaries.
What is direct finance? - ansFunds flow directly from savers to borrowers.
What is the role of commercial banks? - ansTo take in deposits and use them to make loans.
What are nonbank financial intermediaries? - ansEntities like savings and loans, credit
unions, and investment banks that also take deposits and make loans.
,Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What do insurance companies do? - ansCollect premiums from customers and invest them to
pay claims and other costs.
What is the function of pension funds? - ansTo collect contributions and make benefit
payments during workers' retirements.
What are mutual funds? - ansFunds that obtain money by selling shares to investors and
invest in a portfolio of financial assets.
What is the purpose of hedge funds? - ansTo make riskier investments with funds from a
small number of wealthy investors.
What are the functions of financial intermediaries? - ansLower transaction costs, provide
liquidity services, reduce risk exposure, and deal with asymmetric information problems.
What is the primary function of financial intermediaries? - ansTo connect savers and
borrowers, allowing small savers and borrowers to benefit from financial markets.
What do economies of scope in financial intermediaries refer to? - ansThe ability to lower the
cost of information production for multiple services by using one information resource.
What are debt instruments? - ansFinancial instruments that represent a loan made by an
investor to a borrower, with a specified maturity date.
What distinguishes primary markets from secondary markets? - ansPrimary markets involve
the issuance of new securities, while secondary markets involve the trading of existing
securities.
What is the role of investment banks in primary markets? - ansInvestment banks underwrite
securities, facilitating the issuance of new stocks and bonds.
What are money markets? - ansMarkets that deal in short-term debt instruments, typically
with maturities of one year or less.
What are capital markets? - ansMarkets that deal in longer-term debt and equity instruments.
What is a Eurobond? - ansA bond denominated in a currency other than that of the country in
which it is sold.
What are Eurocurrencies? - ansForeign currencies deposited in banks outside their home
country.
What is the Federal Reserve? - ansThe central bank of the United States, established to
manage banking problems and monetary policy.
What is the primary responsibility of the Federal Reserve? - ansTo manage the money supply
and interest rates to achieve macroeconomic policy objectives.
What is the Federal Open Market Committee (FOMC)? - ansThe main policymaking body of
the Federal Reserve, which meets eight times a year to set the federal funds rate.
What was a major cause of the financial crisis of 2007-2009? - ansThe housing bubble of
2000-2005, characterized by unsustainable increases in housing prices.
What role did Fannie Mae and Freddie Mac play in the financial crisis? - ansThey facilitated
borrowing for homeowners by selling bonds to investors and purchasing mortgages from
banks.
,Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What happened to mortgage standards leading up to the financial crisis? - ansStandards were
greatly loosened, allowing many subprime borrowers with flawed credit histories to obtain
loans.
What was the Troubled Asset Relief Program (TARP)? - ansA program enacted by Congress
in 2008 to provide funds to commercial banks in exchange for stock.
What was a significant consequence of the financial crisis on the economy? - ansA severe
recession, with unemployment rising from under 5% to over 10%.
What is the purpose of regulating the financial system? - ansTo increase information
available to investors and ensure the soundness of financial intermediaries.
What is one way to reduce adverse selection in financial markets? - ansBy increasing the
information available to investors.
What is deposit insurance? - ansA measure to avoid bank runs by protecting depositors' funds
in case of bank failure.
What does the term 'moral hazard' refer to in finance? - ansThe risk that a party engages in
risky behavior knowing that it is protected against the consequences.
What is the significance of insider trading regulations? - ansTo prevent unfair advantages in
trading based on non-public information.
How did the Federal Reserve respond to the financial crisis? - ansBy implementing
unprecedented interventions in financial markets and providing implicit guarantees to large
financial firms.
What is the impact of international financial markets on domestic economies? - ansThey
affect exchange rate policies, capital controls, and the performance of domestic financial
systems.
What is the role of international financial institutions like the IMF? - ansTo provide financial
stability and support to countries facing economic challenges.
What is money? - ansAnything that is generally accepted as payment for goods and services
or in the settlement of debts.
How does money differ from wealth? - ansWealth is the total collection of pieces of property
that serve to store value, while money is a stock concept used for transactions.
What is barter? - ansA system of exchange in which individuals trade goods and services
directly for other goods and services.
What is commodity money? - ansMoney that has intrinsic value, such as gold, silver, or
shells.
What is fiat money? - ansMoney that has no intrinsic value and is used as currency, such as
paper money and coins.
What was the Continental dollar? - ansA fiat currency that became almost worthless due to
excessive printing during the war.
What was reestablished in 1879 regarding the U.S. dollar? - ansThe gold standard, with an
ounce of gold worth $20.67.
, Financial Markets and Institutions: Key
Concepts and Roles.
A Comprehensive Exam Study Guide with
100% Verified Answers.
Latest Updated 2025/2026
What happened in 1933 regarding the gold standard? - ansPresident Roosevelt suspended the
gold standard.
What are the four key functions of money? - ansMedium of exchange, unit of account, store
of value, and standard of deferred payment.
What is the role of money as a medium of exchange? - ansIt eliminates the trouble of finding
a double coincidence of needs and promotes specialization.
What does money serve as a unit of account? - ansIt measures value in the economy and
reduces transaction costs.
How does money function as a store of value? - ansIt saves purchasing power over time,
though it can lose value during inflation.
What is the payments system? - ansA mechanism for conducting transactions in the economy.
What is the transition from commodity money to fiat money? - ansEarly banks stored gold
coins and issued paper certificates, leading to the use of paper currency not backed by
physical commodities.
What are checks? - ansPromises to pay on demand money deposited with a bank or financial
institution.
What are electronic funds transfer systems? - ansComputerized payment-clearing devices that
facilitate transactions.
What is e-money? - ansDigital cash used to buy goods and services, including debit cards and
stored-value cards.
What is Bitcoin? - ansA decentralized form of e-money created by a system of linked
computers, known for its privacy in transactions.
What are some advantages of e-money over traditional cash? - ansE-money can be more
convenient and efficient for transactions.
What are some challenges to a cashless society? - ansSeveral factors work against the
complete disappearance of the paper system despite the rise of e-money.
What was the gold reserve requirement reduced to in 1945? - ans25%.
What significant action did President Nixon take in 1971? - ansHe broke all ties to gold,
making the dollar a fiat currency once again.
What is the significance of the term 'standard of deferred payment'? - ansIt allows money to
facilitate exchanges over time, not just at a single point in time.
What is a unilateral transfer in the context of money? - ansMoney used to pay off public
debts.
What technology underlies Bitcoin? - ansBlockchain, which is a distributed ledger allowing
secure transactions.
How is Bitcoin created? - ansBy 'mining', where decentralized users verify and process
transactions using computing power.
Why is Bitcoin unlikely to become the money of the future? - ansIt performs less well as a
unit of account and a store of value.
