CH. 2 - An Overview of the Financial System(complete solutions)

Financial System correct answers A financial system consists of financial markets and financial intermediaries which connects people with excess money (lenders) with people who needs money for spending (borrowers). Two Ways of Financing correct answers Direct finance and indirect finance Direct Finance correct answers The funds are transferred from lenders to borrowers directly by sale of securities in the financial market Indirect Finance correct answers The funds are channeled from lenders to borrowers through financial intermediaries such as banks, and credit unions What is a financial Market? correct answers A market for funds where people with shortage of funds can borrow from people who have surplus of funds In a financial market, who is a saver correct answers a lender is a saver In a financial market who is a borrower correct answers borrower is a spender Security or financial instrument correct answers A security or a financial instrument is a tradable asset which gives the owner (buyer) a claim on the issuer's (borrower) future income or assets Two types of securities correct answers Debt security and Equity Debt security correct answers A type of security requires the issuer to repay the borrowed money, with the terms that specifies the interest rate and maturity dat Equity correct answers Is a kind of security that provides ownership claim (of the firm) to the holder. An example of equity is stock Stocks correct answers Is a security that represents a claim on the earnings and assets of the issuing corporation Bonds correct answers A debt security that promises the buyer a stream of payments (or a single payment) periodically for a specified period of time Why are financial markets important? correct answers Promotes economic activity, promotes economic efficiency, and increases the well-being of consumers How do financial markets promote economic activity correct answers Provides investment opportunity to the savers, and with funds to the people with business ideas How do financial markets promote economic efficiency correct answers By efficiently allocating the capital, which in turn leads to an increase in production