AFM 121 MIDTERM WITH CORRECT
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 (facilitati...
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
Private equity
What makes a market efficient? ANSWER Fast
Cheap
Liquid
What are primary markets? ANSWER Securities are sold by
issuers for the first time
Issuer receives money from this sale
What are secondary markets? ANSWER Where securities
previously issued are bought and sold
Funds do not go to issuer
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