Topic 1: Introduction of Financial System(100% Guaranteed)

financial system correct answers a financial system comprises THREE principal elements which facilitate the flow of funds: Financial Institutions, Financial markets, Financial Instruments financial assets correct answers Currency or a financial instrument which represents a claim to future cash flows. Ex: shares issued by a company government treasury bonds, bank term deposits financial instrument correct answers a contract that gives rise to a financial asset of one entity and a financial liability or equity investment of another entity Equity correct answers shares issued by a company which represent an ownership position for the shareholder Debt correct answers contractual claims to periodic cash flows in the form of interest payments and principal repayments hybrids correct answers combine the elements or characteristics of both debt and equity. Ex: - an instrument issued which makes periodic interest payments, but offers a future ownership entitlement (example: convertible notes) derivatives correct answers a product whose pricing is derived from an existing product (e.g. gold). Not instruments issued for raising funds. A tool for managing risk (e.g. the risk that the price of gold may change in the future). Types: futures, options, swaps, forwards primary markets correct answers involve the issue of new financial instruments. Newly formed (issued) securities are bought or sold in primary markets, such as during Initial Public Offerings (IPO) secondary markets correct answers trade existing instruments (securities). No new funds are raised by the original issuer. Secondary markets allow investors to buy and sell existing securities direct markets correct answers Supplier of funds contracts directly with the user of funds Direct finance issues include shares, discount securities, bonds and government securities intermediated markets correct answers supplier of funds (investor) contracts with a financial intermediary such as a bank (e.g. term deposit);and user of funds (borrower) also contracts with the intermediary (e.g. housing loan)