Question 1

The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them, savers would have to provide funds directly to borrowers, which would be a much costlier process.

Accepted Answer

Financial intermediaries such as banks, investment companies, and mutual funds act as middlemen between savers and borrowers, allowing for a more efficient allocation of funds and reducing transaction costs. Without them, savers would have to conduct their own credit analysis and directly provide funds to borrowers, which would be more expensive and time-consuming.

Question 2

One of the benefits from financial intermediation is risk diversification in that the pool of funds collected can be spread across a variety of investments.

Accepted Answer

Financial intermediaries such as banks and mutual funds collect funds from multiple individuals and institutions and then use those funds to invest in a variety of assets such as stocks, bonds, and real estate. This diversifies the risk for individual investors as their money is spread across multiple investments rather than being tied to just one.

Question 3

Money markets are markets for

Accepted Answer

Money markets are markets for short-term debt securities such as Treasury bills, commercial paper, and certificates of deposit. Foreign currency exchange, consumer automobile loans, corporate stocks, and long-term bonds are not characteristic of money markets.

Question 4

A corporate share that was issued last year would now trade in the __________ market.

Accepted Answer

A corporate share that was issued last year would now trade in the secondary market, where investors buy and sell securities from other investors rather than directly from the issuing company. The primary market is where new securities are issued and sold to the public for the first time. The money market is where short-term debt securities are traded, while the debt market is where longer-term debt securities, such as bonds, are traded. Government securities refer to bonds, bills, or notes issued by the government to finance its operations. These are traded in both the primary and secondary markets.

Question 5

The over-the-counter market is a network of dealers that provides for trading securities not listed on organized exchanges.

Accepted Answer

The statement is true. The OTC market allows for trading of securities that are not listed on organized exchanges such as the NYSE or NASDAQ.

Question 6

The debt markets are segmented based on the maturity of the debt instruments, the type of debt instruments, and the participants in the market.

Accepted Answer

The statement is true. Debt markets can be segmented based on the maturity of the debt instruments, such as short-term or long-term debt, the type of debt instruments, such as bonds or loans, and the participants in the market, such as individuals, corporations, and governments.

Question 7

The OTC market is a physical exchange, much like the Johannesburg Securities Exchange, where securities dealers provide trading in unlisted securities.

Accepted Answer

The OTC market is not a physical exchange, but rather a decentralized market where securities are traded through a network of dealers rather than on a centralized exchange.

Question 8

Because foreign banks are less regulated and have fewer restrictions concerning the types of business activities they can pursue than their U.S.counterparts, such banks often engage in numerous aspects of multi-layer financial deals.

Accepted Answer

This statement is true as foreign banks often have more lenient laws and regulations regarding business activities, allowing them to engage in a wider range of financial deals.

Question 9

One advantage of ordinary shares as a source of funds is that the underwriting and distribution costs of ordinary shares are usually much lower than those for debt.

Accepted Answer

This statement is false. The underwriting and distribution costs for ordinary shares are typically higher than those for debt. This is because shares involve the issuance of ownership in the company, while debt is simply a loan that must be repaid with interest. Additionally, shares may require more marketing and promotion to attract investors, while debt can often be sold directly to institutional investors.

Question 10

A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions.

Accepted Answer

A publicly owned corporation, also known as a public company, is a company whose shares are available for purchase by the general public on a stock exchange. This is different from a privately owned corporation, where the shares are owned by a limited number of individuals or institutions.

Question 11

Financial asset markets deal with shares, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows.

Accepted Answer

Financial asset markets involve trading of securities such as stocks, bonds, mortgages, and other claims on real assets that generate future cash flows.

Question 12

Treasury bills, which represent debt of the S.A.government, have maturities less than one year.As a result, in which type of financial market do outstanding, or already issued, Treasury bills trade?

Accepted Answer

Treasury bills, with maturities less than one year, trade in the money market. This is a short-term debt market where financial instruments with maturities of less than one year, such as commercial paper, certificates of deposit, and Treasury bills are traded.

Question 13

If a corporation that has been in business for many years (for example Vodacom) wants to raise funds by issuing new ordinary shares, its shares will be sold in the __________ market.

Accepted Answer

The primary market is where securities (such as stocks) are sold for the first time by the issuer (in this case, Vodacom) to raise capital. Therefore, if Vodacom wants to issue new ordinary shares and raise funds, it would do so in the primary market. The secondary market, on the other hand, is where previously issued securities (such as stocks) are bought and sold by investors amongst each other. The debt market is for buying and selling debt securities such as bonds, and the money market is for short-term borrowing and lending. While a company could potentially sell its shares in more than one market, the primary market would be the most relevant for this scenario.

Question 14

If an individual investor buys and sells existing shares through a broker, these are primary market transactions.

Accepted Answer

Primary market transactions refer to the buying and selling of new securities issued by companies, whereas buying and selling existing shares through a broker happens in the secondary market.

Question 15

One advantage of using ordinary shares as a source of funds is that ordinary shares does not legally obligate the firm to make payments to shareholders.

Accepted Answer

Ordinary shares do not have a fixed maturity date and the company is not legally required to pay dividends to shareholders. The payment of dividends is at the discretion of the company's management and is dependent on the company's financial performance. This makes ordinary shares less risky than debt financing as the company is not obligated to make fixed payments to shareholders.

Question 16

When a corporation wants to raise funds by issuing new shares or bonds, it generally uses the services of

Accepted Answer

When a corporation wants to raise funds by issuing new shares or bonds, it generally uses the services of an investment banker who can help the corporation with the process of underwriting, pricing, and distributing the new securities. Commercial lenders provide loans and financing, but they do not assist with issuing new securities. The SEC is a regulatory agency that oversees securities markets, but it does not help corporations raise funds. The Johannesburg Securities Exchange is a specific stock exchange and does not offer services to individual corporations.

Question 17

American depository receipts are foreign shares that sell in American security exchanges and are denominated in dollar prices.

Accepted Answer

The answer of American depository receipts are foreign shares that...

Question 18

Under a best efforts arrangement, the investment bank purchases all of the shares from the firm and then resells the share to the public.Under this arrangement the investment banks assumes significant risk.

Accepted Answer

The answer of Under a best efforts arrangement, the investment...

Question 19

The money market is the market for securities with maturities over one year and includes such financial assets as shares and long-term corporate bonds.

Accepted Answer

The statement is false. The money market is actually the market for short-term, highly liquid financial assets with maturities of one year or less, such as treasury bills, commercial paper, and certificates of deposit. Shares and long-term corporate bonds belong to the capital market.

Question 20

The securities exchange commission is the U.S.government agency that regulates the issuance and trading of shares and bonds.

Accepted Answer

The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for regulating the issuance and trading of securities such as stocks and bonds.

Quiz 3: The Financial Environment: Markets, Institutions, and Investment Banking