AFM 121 MIDTERM QUESTIONS AND ANSWERS

What is the vital function of financial markets? - Answer- Help facilitate transfer of capital What are the three components of the wealth transfer process? - Answer- Financial instruments (what is actually bought / sold) Financial markets (facilitating / buying financial instruments) Financial intermediaries (people / companies involved in financial instruments and markets) What is capital made up of? - Answer- Capital is made up of governments, corporations and individuals How is capital transferred? - Answer- Direct investment (land, real estate) Indirect investment (stocks, bonds, t-bills) When will people transfer capital? - Answer- When it is easy, cheap, and generates a good return What does capital flow depend on? - Answer- Political environment Economic trends Fiscal and Monetary policy Investment opportunities Labour force (highly educated / laws governing rights of labour force) Who provides capital? - Answer- Retail investors (individuals that buy retail) Institutional Investors (pension funds and mutual funds) Foreign investors (can include foreign retail, institutional and government investors) Who uses capital? - Answer- Companies and businesses (earn money through internally through existing operations and reinvest the money) (raise money by issuing stocks/bonds) Government (t bills, longer term debt) (spend on all forms of government spending that aren't covered by tax and other revenues) What are the different kinds of financial instruments? - Answer- Debt Equity Investment Funds Derivatives