Financial Institutions And Markets
Test 1 Study Set
Financial System
4 - ANSWER 1. Provides for efficient flow of funds from saving to investment
2. Brings savers and borrowers together via financial markets and institutions
3. Allows for financial contracting
4. Permits exchange of financial claims and assets
Financial System is Composed of
3 - ANSWER 1. Markets for financial assets
2. Financial institutions and intermediaries
3. Regulatory bodies
Main Roles
3 - ANSWER 1. Allocation of Scarce Resources
2. Facilitates Risk Sharing
3. Other Important Functions
Allocation of Scarce Resources
2 - ANSWER 1. Some economic units (households, firms) have excess financial
resources
2. Other economic units wish to utilize these resources
Facilities Risk Sharing
3 - ANSWER 1. Uncertainty is a fact of life for households and firms
2. "Risk Aversion" is the desire to share and/or trade risks
3. Example: insurance industry
Other Important Functions
3 - ANSWER 1. Clear and settle payments
,2. Aggregate funds
3. Generate and disseminate info
Financial Claims
3 - ANSWER 1. Financial assets and liabilities, financial contracts
2. Examples: Shares of stock, bonds
3. Also known as financial instruments and or securities
Financial Markets
3 - ANSWER 1. Stock Markets
2. Bond Markets
3. Foreign Exchange Markets
Financial Institutions (Intermediaries)
2 - ANSWER 1. Facilitate flows of funds from savers to borrowers
2. Banks, mutual funds, pension funds, insurers
Major Players in the Economic System
4 - ANSWER 1. Households
2. Businesses
3. Governments
4. Foreign Investors
Households - ANSWER 1. Supply labor, demand products, save for future
Businesses - ANSWER 1. Demand labor, supply products, and invest in productive
assets
Governments - ANSWER 1. Collect taxes and provide "public goods" (education,
defense)
Foreign Investors - ANSWER 1. Non domestic households, businesses, governments
Surplus Spending Units
3 - ANSWER 1. Have income for the period that exceeds spending
2. Results in savings, saver, lender, or investor
3. Many SSUs are households
,Deficit Spending Units
2 - ANSWER 1. Have spending for the period that exceeds income
2. Borrower, usually businesses or governments
A Primary Function of the Financial System - ANSWER 1. Match SSUs and DSUs
Financial Claims with SSUs and DSUs
3 - ANSWER 1. SSU provides cash that is spent by DSU now
2. DSU provides some form of IOU
3. IOU becomes SSUs financial claim
Financial Claim
3 - ANSWER 1. This is an asset to the SSU, liability to the DSU
2. What is payable by one is receivable by other
3. Known as financial assets, total financial assets = total liabilities
Why do we have Financial Markets? - ANSWER 1. Ability to resell financial claims makes
SSUs more willing to provide them in first place
Direct Financing
2 - ANSWER 1. SSU and DSU directly interact
2. SSU transfers funds directly, DSU issues claims (stock, bonds) directly
Examples of Direct Financing - ANSWER 1. Corporate bond issuance
2. IPO
3. Private placement of corporate bonds/equity
Key Characteristics - ANSWER 1. Large, wholesale transactions
2. Minimum transaction size, $1 million
3. Sophisticated parties involved in transactions, commercial banks, governments,
hedge funs
Investment Banking Services - ANSWER 1. Play key role in security issuance
, 2. Origination
3. Underwriting
4. Distribution
Origination - ANSWER 1. Prepare security for sale, determine amount to be raised
Underwriting - ANSWER 1. Line up commitments to buy, often investment bank makes a
"firm commitment", guarantees price
Distribution - ANSWER 1. Marketing and sales of securities to institutions and certain
(wealthy) individuals
Indirect Financing
2 - ANSWER 1. Financial Intermediary brings SSU/DSU together
2. Financial claim from DSU goes to FI first, FI issues separate financial claim to SSU
Glass-Stegall Act
4 - ANSWER 1. Investment banking was separated from commercial banking
2. Starting in 1999, commercial banks could engage in investment banking
3. During financial crisis, remaining investment banks were forced to merge with large
commercial banks
4. Merrill Lynch and Bank of America, Goldman and Morgan Stanley
Facebook IPO
3 - ANSWER 1. IPO was May 18, 2012
2. Morgan Stanley was lead investment bank, $38 was ultimate underwritten value, after
one week $41, in August, worth $20
3. People accused MS of setting IPO price too high
Test 1 Study Set
Financial System
4 - ANSWER 1. Provides for efficient flow of funds from saving to investment
2. Brings savers and borrowers together via financial markets and institutions
3. Allows for financial contracting
4. Permits exchange of financial claims and assets
Financial System is Composed of
3 - ANSWER 1. Markets for financial assets
2. Financial institutions and intermediaries
3. Regulatory bodies
Main Roles
3 - ANSWER 1. Allocation of Scarce Resources
2. Facilitates Risk Sharing
3. Other Important Functions
Allocation of Scarce Resources
2 - ANSWER 1. Some economic units (households, firms) have excess financial
resources
2. Other economic units wish to utilize these resources
Facilities Risk Sharing
3 - ANSWER 1. Uncertainty is a fact of life for households and firms
2. "Risk Aversion" is the desire to share and/or trade risks
3. Example: insurance industry
Other Important Functions
3 - ANSWER 1. Clear and settle payments
,2. Aggregate funds
3. Generate and disseminate info
Financial Claims
3 - ANSWER 1. Financial assets and liabilities, financial contracts
2. Examples: Shares of stock, bonds
3. Also known as financial instruments and or securities
Financial Markets
3 - ANSWER 1. Stock Markets
2. Bond Markets
3. Foreign Exchange Markets
Financial Institutions (Intermediaries)
2 - ANSWER 1. Facilitate flows of funds from savers to borrowers
2. Banks, mutual funds, pension funds, insurers
Major Players in the Economic System
4 - ANSWER 1. Households
2. Businesses
3. Governments
4. Foreign Investors
Households - ANSWER 1. Supply labor, demand products, save for future
Businesses - ANSWER 1. Demand labor, supply products, and invest in productive
assets
Governments - ANSWER 1. Collect taxes and provide "public goods" (education,
defense)
Foreign Investors - ANSWER 1. Non domestic households, businesses, governments
Surplus Spending Units
3 - ANSWER 1. Have income for the period that exceeds spending
2. Results in savings, saver, lender, or investor
3. Many SSUs are households
,Deficit Spending Units
2 - ANSWER 1. Have spending for the period that exceeds income
2. Borrower, usually businesses or governments
A Primary Function of the Financial System - ANSWER 1. Match SSUs and DSUs
Financial Claims with SSUs and DSUs
3 - ANSWER 1. SSU provides cash that is spent by DSU now
2. DSU provides some form of IOU
3. IOU becomes SSUs financial claim
Financial Claim
3 - ANSWER 1. This is an asset to the SSU, liability to the DSU
2. What is payable by one is receivable by other
3. Known as financial assets, total financial assets = total liabilities
Why do we have Financial Markets? - ANSWER 1. Ability to resell financial claims makes
SSUs more willing to provide them in first place
Direct Financing
2 - ANSWER 1. SSU and DSU directly interact
2. SSU transfers funds directly, DSU issues claims (stock, bonds) directly
Examples of Direct Financing - ANSWER 1. Corporate bond issuance
2. IPO
3. Private placement of corporate bonds/equity
Key Characteristics - ANSWER 1. Large, wholesale transactions
2. Minimum transaction size, $1 million
3. Sophisticated parties involved in transactions, commercial banks, governments,
hedge funs
Investment Banking Services - ANSWER 1. Play key role in security issuance
, 2. Origination
3. Underwriting
4. Distribution
Origination - ANSWER 1. Prepare security for sale, determine amount to be raised
Underwriting - ANSWER 1. Line up commitments to buy, often investment bank makes a
"firm commitment", guarantees price
Distribution - ANSWER 1. Marketing and sales of securities to institutions and certain
(wealthy) individuals
Indirect Financing
2 - ANSWER 1. Financial Intermediary brings SSU/DSU together
2. Financial claim from DSU goes to FI first, FI issues separate financial claim to SSU
Glass-Stegall Act
4 - ANSWER 1. Investment banking was separated from commercial banking
2. Starting in 1999, commercial banks could engage in investment banking
3. During financial crisis, remaining investment banks were forced to merge with large
commercial banks
4. Merrill Lynch and Bank of America, Goldman and Morgan Stanley
Facebook IPO
3 - ANSWER 1. IPO was May 18, 2012
2. Morgan Stanley was lead investment bank, $38 was ultimate underwritten value, after
one week $41, in August, worth $20
3. People accused MS of setting IPO price too high
